ANNUAL REPORT
2023
Encompass Health Corporation
Who we are
161
Inpatient
rehabilitation
hospitals
#1 Owner and operator of inpatient rehabilitation
hospitals in terms of patients treated,
revenues and number of hospitals
Number of states in
which we operate
37
and Puerto Rico
~33%
Share of Medicare patients
receiving inpatient rehabilitation
services from Encompass Health
FINANCIAL HIGHLIGHTS 2023
Strong financial performance
$971.1
million in adjusted EBITDA –
up 18.5% from 2022
2.7x
net leverage ratio,
down from 3.4x in 2022
$4,801.2
million in net operating
revenues – up 10.4%
from 2022
$525.7
million in adjusted free
cash flow for 2023
We are well positioned
for future growth
6 to 10
de novos per year
80 to 120
bed additions per year
6% to 8%
discharge CAGR
2023-2027
Growth
targets
Data disclosed for 2022 reflect results for Encompass Health. Enhabit Home Health and Hospice results are included in discontinued
operations. Disclosures, including reconciliations to the most comparable GAAP financial measure, for non-GAAP financial information
can be found in Appendix A to the Proxy Statement herein and at the end of the letter from the Chairman and CEO in this Annual Report.
OPERATIONAL HIGHLIGHTS 2023
Key accomplishments
Capacity expansion
Quality
• Opened 8 de novo hospitals,
adding 395 beds
• Added 46 beds to existing hospitals
• A 4.1% net increase in licensed beds
Total discharge growth
We operate 137 hospitals that hold one or
more of the following Joint Commission
Disease-Specific Care Certifications
in rehabilitation: stroke, hip fracture,
cardiac, pulmonary, brain injury, amputee,
Parkinson’s disease and spinal cord injury.
• Total discharge growth of 8.7% with
Clinical innovation
In 2021, we initiated our fall prevention
model which combines predictive
modeling with our core clinical practice
protocols. Since then we have seen our
fall rates per 1,000 patient days improve
24%.
4.8% same store growth
• Treated approximately 7% of
patients recovering from strokes
in the United States
Advanced technology
We expanded in-house hemodialysis
service to a total of 83 hospitals. Providing
our patients dialysis on site without
interrupting therapy or requiring travel
improves patient satisfaction and lowers
our cost of treatment.
SUPERIOR OUTCOMES 2023
We continued to provide
high-quality care by
placing our patients first.
Discharge to
community
Discharge
to SNF
Discharge
to acute
82.7% 80.3%
6.6% 9.1%
9.8% 9.7%
Higher is better
Lower is better
Lower is better
Encompass Health
Benchmark
Forward-looking statements
All such estimates, projections and forward-looking
statements speak only as of the date hereof.
The information contained here includes certain
Encompass Health undertakes no duty to publicly
estimates, projections and other forward-looking
update or revise the information contained herein.
statements that reflect Encompass Health’s current
outlook, views and plans with respect to future events,
You are cautioned not to place undue reliance on
including the business outlook and growth targets. These
the estimates, projections and other forward-looking
forward-looking statements are based on assumptions
statements here as they are based on current
the Company believes, as of the date hereof, are
expectations and general assumptions and are
reasonable. Inevitably, there will be differences between
subject to various risks, uncertainties and other factors,
such estimates and actual events or results, and those
including those set forth in the Form 10-K for the year
differences may be material. There can be no assurance
ended December 31, 2023, many of which are beyond
any estimates, projections or forward-looking statements
Encompass Health’s control, that may cause actual
will be realized.
events or results to differ materially from the views,
beliefs and estimates expressed herein.
care hospitals that are discharged with a diagnostic category presumptively eligible
for inpatient rehabilitation care are admitted to a rehabilitation hospital.
Encompass Health is uniquely positioned to meet the growing rehabilitative care
needs of our country’s aging population. Our numerous competitive advantages
include our significant investments in capacity and industry-leading clinical
information systems, and our highly competent and engaged skilled workforce.
Thank you for your continued support of our Company.
Sincerely,
INSERT SIGNATURE
INSERT SIGNATURE
Donald L. Correll
Chairman – Board of Directors
Mark Tarr
President and Chief Executive Officer
Dear fellow shareholders,
Encompass Health produced strong financial results in 2023, generating revenue growth of 10.4% and
Adjusted EBITDA growth of 18.5%. We opened eight new hospitals, expanding our capacity to produce high-
quality outcomes for medically complex, high-acuity patients in need of inpatient rehabilitative care. These
results derive from our highly competent and dedicated workforce and reflect our investments and strategic
initiatives over many years. We believe these efforts have established important and sustainable competitive
advantages.
Our value proposition continues to resonate with referral sources, payors and patients. In 2023, we cared for
more than 229,000 patients, resulting in total discharge growth of 8.7%, inclusive of 4.8% same-store growth.
Our focus on recruiting and retention yielded significant benefits. Compared to 2022, we increased net
same-store nursing hires by 20%. We reduced nursing turnover by 500 basis points and therapy turnover
by 130 basis points. Our improvements in hiring and retention facilitated a substantial reduction in premium
labor expenses evidenced by a 32.9% reduction in the aggregate of contract labor expense and sign-on and
shift bonuses.
Prudent expense management and increasing economies of scale drove the 18.5% increase in Adjusted
EBITDA. We continued to generate significant levels of Adjusted free cash flow. In 2023, our Adjusted free
cash flow of approximately $526 million was sufficient to fund capital expenditures and our cash dividend on
common stock. Our year-end net leverage declined to 2.7x from 3.4x at the end of 2022.
Our investment in new hospitals and bed additions exceeded $350 million in 2023. We opened eight new
hospitals with a total of 395 beds and added 46 beds to existing hospitals, for a net increase of 4.1% in
licensed beds. In 2024, we expect to open six new hospitals and add approximately 150 beds to existing
hospitals.
(Millions)
We remain focused on providing best-in-class inpatient rehabilitative care and continue to invest in facility-
based technology through initiatives such as on-site dialysis services. Our on-site dialysis program is now
available in 83 of our hospitals, and we will continue to roll out additional locations throughout 2024. We
continue to further our clinical innovations such as the use of predictive models that combine with our core
clinical practice protocols to consistently produce high-quality patient outcomes. As an example, our fall
prediction model has resulted in a 24% reduction in fall rates per 1,000 patient days since its implementation
in 2021.
There is a significant unmet need for inpatient rehabilitation services in the United States. This demand
continues to grow with the aging demographics of our country. In 2010, 39 million Americans were aged
65 or older. That increased to 55 million in 2020 and is expected to reach 73 million by 2030. Despite the
growing demand for inpatient rehabilitation services, inpatient rehabilitation capacity across the industry
has been relatively static. Currently, only approximately 13% of the patients in acute care hospitals that are
1 Adjusted EBITDA and Adjusted free cash flow are non-GAAP financial measures, and the net leverage ratio referenced is defined
as the ratio of consolidated total debt, net of cash on hand, to Adjusted EBITDA for the trailing four quarters. The corresponding
GAAP financial measures, including reconciliations to those financial measures, can be found in Appendix A to the Proxy
Statement herein and below.
Net cash provided by operating activities
Impact of discontinued operations
Net cash provided by operating activities of continuing operations
Capital expenditures for maintenance
Distributions paid to noncontrolling interests of consolidated affiliates
Items not indicative of ongoing operating performance:
Transaction costs and related assumed liabilities
Adjusted free cash flow
2023
$ 850.8
16.0
866.8
(216.9)
(114.7)
(9.5)
$ 525.7
discharged with a diagnostic category presumptively eligible for inpatient rehabilitation care are admitted to
a rehabilitation hospital.
care hospitals that are discharged with a diagnostic category presumptively eligible
for inpatient rehabilitation care are admitted to a rehabilitation hospital.
Encompass Health is uniquely positioned to meet the growing rehabilitative care needs of our country’s
aging population. Our numerous competitive advantages include our significant investments in capacity and
industry-leading clinical information systems, and our highly competent and engaged skilled workforce.
Encompass Health is uniquely positioned to meet the growing rehabilitative care
needs of our country’s aging population. Our numerous competitive advantages
include our significant investments in capacity and industry-leading clinical
information systems, and our highly competent and engaged skilled workforce.
Thank you for your continued support of our Company.
Thank you for your continued support of our Company.
Sincerely,
Sincerely,
INSERT SIGNATURE
Donald L. Correll
Chairman – Board of Directors
Donald L. Correll
Chairman – Board of Directors
INSERT SIGNATURE
Mark Tarr
President and Chief Executive Officer
Mark Tarr
President and Chief Executive Officer
1 Adjusted EBITDA and Adjusted free cash flow are non-GAAP financial measures, and the net leverage ratio referenced is defined
as the ratio of consolidated total debt, net of cash on hand, to Adjusted EBITDA for the trailing four quarters. The corresponding
GAAP financial measures, including reconciliations to those financial measures, can be found in Appendix A to the Proxy
Statement herein and below.
(Millions)
Net cash provided by operating activities
Impact of discontinued operations
Net cash provided by operating activities of continuing operations
Capital expenditures for maintenance
Distributions paid to noncontrolling interests of consolidated affiliates
Items not indicative of ongoing operating performance:
Transaction costs and related assumed liabilities
Adjusted free cash flow
2023
$ 850.8
16.0
866.8
(216.9)
(114.7)
(9.5)
$ 525.7
April 2, 2024
Dear fellow stockholder:
I am pleased to invite you to attend our 2024 Annual Meeting of Stockholders of Encompass Health
Corporation, to be held on Thursday, May 2, 2024, at 11:00 a.m., central time, at our corporate headquarters at 9001
Liberty Parkway, Birmingham, Alabama 35242. Please visit our “Investors Relations” website at https://
investor.encompasshealth.com for updates relating to attending the annual meeting.
We will consider the items of business described in the Proxy Statement accompanying this letter and
respond to any questions you may have. The Proxy Statement contains important information about the matters to be
voted on and the process for voting, along with information about Encompass Health, its management and its
directors.
Every stockholder’s vote is important to us. Even if you plan to attend the annual meeting in person,
please promptly vote by submitting your proxy by phone, by internet or by mail. The “Commonly Asked Questions”
section of the Proxy Statement and the enclosed proxy card contain detailed instructions for submitting your proxy.
If you plan to attend the annual meeting in person, you must provide proof of share ownership, such as an account
statement, and a form of personal identification in order to be admitted to the meeting.
On behalf of the directors, management and employees of Encompass Health, thank you for your continued
support of and ownership in our company.
Sincerely,
Donald L. Correll
Chairman of the Board of Directors
ENCOMPASS HEALTH CORPORATION
Notice of Annual Meeting of Stockholders
TIME
PLACE
11:00 a.m., central time, on Thursday, May 2, 2024
ENCOMPASS HEALTH CORPORATION
Corporate Headquarters
9001 Liberty Parkway
Birmingham, Alabama 35242
Directions to the annual meeting are available by calling Investor Relations at 1-205-969-4600.
ITEMS OF
BUSINESS
• To elect 10 directors to the board of directors to serve until our 2025 annual meeting of
stockholders.
Ø The board of directors recommends a vote FOR each nominee.
• To ratify the appointment by Encompass Health’s Audit Committee of
PricewaterhouseCoopers LLP as Encompass Health’s independent registered public
accounting firm.
Ø The board of directors recommends a vote FOR ratification.
• To approve, on an advisory basis, the compensation of the named executive officers as
disclosed in Encompass Health’s Definitive Proxy Statement for the 2024 annual meeting.
Ø The board of directors recommends a vote FOR the approval of the compensation
of our named executive officers.
• To vote on a stockholder proposal requesting a report on the effectiveness of the Company’s
diversity, equity, and inclusion efforts.
Ø The board of directors recommends a vote AGAINST the stockholder proposal.
• To transact such other business as may properly come before the annual meeting and any
adjournment or postponement.
You can vote if you are a holder of record of Encompass Health common stock on March 8, 2024.
Your vote is important. Please vote in one of these ways:
• Via internet: Go to http://www.proxyvote.com and follow the instructions. You will need to
enter the control number printed on your proxy card;
• By telephone: Call toll-free 1-800-690-6903 and follow the instructions. You will need to
enter the control number printed on your proxy card;
•
In writing: Complete, sign, date and promptly return your proxy card in the enclosed
envelope; or
• Submit a ballot in person at the annual meeting of stockholders.
Important Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Stockholders to be Held on May 2, 2024
RECORD
DATE
PROXY
VOTING
Encompass Health’s Proxy Statement on Schedule 14A, form of proxy card, and 2023 Annual Report
(including the 2023 Annual Report on Form 10-K) are available at http://www.proxyvote.com after entering
the control number printed on your proxy card.
Birmingham, Alabama
April 2, 2024
Patrick Darby
Secretary
ENCOMPASS HEALTH CORPORATION
PROXY STATEMENT
TABLE OF CONTENTS
PROXY SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMMONLY ASKED QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEMS OF BUSINESS REQUIRING YOUR VOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposal 1 – Election of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm . . . . . . . . . .
Proposal 3 – Advisory Vote on Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposal 4 – Stockholder Proposal Requesting a Report on Diversity, Equity, and Inclusion Efforts . . . . . .
CORPORATE GOVERNANCE AND BOARD STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Governance Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insider Trading Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Oversight of the Company’s Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Oversight of Sustainability Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Evaluation of the Performance of the Board and Its Committees . . . . . . . . . . . . . . . . . . . . . . . .
Stockholder Engagement and Communications to Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Structure and Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Structure and Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and Human Capital Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compliance and Quality of Care Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nominating/Corporate Governance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Composition and Director Nomination Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Criteria for Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Process for Identifying and Evaluating Candidates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Succession Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Nominees Proposed by Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AUDIT COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMPENSATION AND HUMAN CAPITAL COMMITTEE MATTERS . . . . . . . . . . . . . . . . . . . . . . .
Scope of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and Human Capital Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Philosophy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Determination of Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elements of Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Compensation Policies & Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of Plan-Based Awards During 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Potential Payments upon Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding Equity Awards at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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i
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R
O
X
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Options Exercised and Stock Vested in 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 Amended and Restated Director Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 Equity Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 Omnibus Performance Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement Investment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonqualified Deferred Compensation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CEO Pay Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pay vs. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review and Approval of Transactions with Related Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transactions with Related Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . .
EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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APPENDIX A - NOTE REGARDING PRESENTATION OF NON-GAAP FINANCIAL
MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
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. 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.
This proxy statement and the accompanying form of proxy are first being sent to our stockholders on
April 2, 2024.
ii
ENCOMPASS HEALTH CORPORATION
PROXY STATEMENT
PROXY SUMMARY
This summary highlights selected information about the items to be voted on at our annual meeting and
information contained elsewhere in this proxy statement. This summary does not contain all of the information that you
should consider in deciding how to vote, so you should read the entire proxy statement carefully before voting.
Proposals That Require Your Vote
Proposals
Board
Recommendation
Votes Required for
Approval
More
Information
1. Election of 10 directors to serve until our 2025
annual meeting
FOR each
nominee
2. Ratification of the appointment of our independent
registered public accounting firm
3. Approval, on an advisory basis, of our executive
compensation
FOR
FOR
Votes for the director
exceed the votes against
the director
Votes for the proposal
exceed the votes against
the proposal
Votes for the proposal
exceed the votes against
the proposal
4. Vote on a stockholder proposal requesting a report
on the effectiveness of the Company’s diversity,
equity, and inclusion efforts
AGAINST
Votes for represent the
majority of our shares
present and entitled to vote
Page 8
Page 15
Page 17
Page 18
Say-on-Pay Highlights
We have received a say-on-pay approval vote of greater than 93% every year. We believe our stockholders have
overwhelmingly endorsed our pay-for-performance track record, strong corporate governance, and compensation risk
mitigation practices, including the following best practices related to executive compensation:
ü Annual and long-term incentive plans have maximum award opportunities
ü Annual and long-term incentive plans are designed with multiple measures of performance
ü Annual incentive plan includes financial and sustainability metrics (human capital and quality of care)
ü Long-term incentive plan has 3-year performance period and relative total shareholder return component
ü Compensation “claw-back” policy applies to all officers, covers misconduct in some cases where a financial
ü Equity ownership guidelines for executives require retention of 50% of net shares at the time of exercise/
vesting until the ownership multiple is met. Non-employee directors must hold awards until departure
restatement has not occurred, and otherwise complies with NYSE claw-back requirements
ü Insider trading policy expressly prohibits hedging or pledging of our stock by executives and directors
ü Change-of-control compensation arrangements include “double triggers” and do not gross-up for taxes
Our pay-for-performance and other compensation best practices are discussed further beginning on page 38.
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Governance Highlights
ü Independent, non-executive chairman of the board
ü 9 of 10 of our directors are independent
ü All standing board committees are fully independent
ü Heightened board independence requirement (75% of directors must be independent)
ü Independent sessions are scheduled at every regular meeting of our board and its committees (no members
of management are present at these independent sessions)
ü Average tenure of director nominees is approximately 5.5 years (see page 8 for individual tenures)
ü All directors attended at least 75% of the meetings of the board and the respective committees in 2023
ü Robust stock ownership requirements for directors and officers
ü Majority voting in uncontested director elections, combined with contingent resignations of directors
ü Declassified board with annual elections
ü None of our directors serve on more than 2 outside public company boards
ü Gender diversity (women comprise 40% of our director nominees, 26% of SVPs and above and 50% of
hospital CEOs)
ü Focus on board diversity in succession planning (20% of our director nominees are racially/ethnically
diverse and 50% are female or racially/ethnically diverse) (see pages 29-30)
ü No poison pill in place
ü Annual board and committee performance evaluations and periodic involvement of outside advisors in such
evaluations
ü Active stockholder engagement program
ü Regular reviews of succession plans for CEO and other senior executives
ü Stockholders may amend our bylaws by simple majority vote
ü Proxy reimbursement bylaw for stockholder proxy solicitation expenses (see pages 30-31)
ü Stockholder-adopted exclusive forum bylaw for internal corporate claims
ü Stockholders may act by written consent
ü Stockholders representing 20% of outstanding shares may call a special meeting
ü Term limit for directors of 15 years, subject to exceptions at the board’s discretion
ü Mandatory retirement age for directors of 75, subject to exceptions at the board’s discretion
ü Limitations on directorships for executive officers
ü Enterprise risk management, including cybersecurity, oversight by full board and designated committees on
regular schedule (see pages 23-24)
ü ESG oversight by full board and designated committees on regular schedule (see pages 23-24)
ü ESG/Sustainability targets in the executive compensation program (quality of care and employee turnover
ü Organizational focus on a strong culture that values diversity, equity, and inclusion and employee
development and engagement (see the discussion in our 2023 Annual Report on Form 10-K)
metrics)(see pages 43-44)
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COMMONLY ASKED QUESTIONS
Why did I receive these proxy materials?
We are furnishing this proxy statement in connection with the solicitation by our board of directors of proxies to
be voted at our 2024 annual meeting of stockholders and at any adjournment or postponement. At our annual meeting,
stockholders will act upon the following proposals:
(1) to elect 10 directors to the board of directors to serve until our 2025 annual meeting of stockholders;
(2) to ratify the appointment by the Audit Committee of our board of directors of PricewaterhouseCoopers LLP
as our independent registered public accounting firm;
(3) to approve, on an advisory basis, the compensation of the named executive officers, as disclosed in this
proxy statement for the 2024 annual meeting;
(4) to vote on a stockholder proposal requesting a report on the effectiveness of the Company’s diversity,
equity, and inclusion efforts; and
(5) to transact such other business as may properly come before the 2024 annual meeting of stockholders and
any adjournment or postponement.
These proxy solicitation materials are being sent to our stockholders on or about April 2, 2024 and summarize
the purposes of the meeting and the information you need to know to vote at the annual meeting.
What do I need to attend the meeting?
Attendance at the 2024 annual meeting of stockholders is limited to stockholders. Registration will begin at
10:30 a.m. central time, and each stockholder will be asked to present a valid form of photo identification. If you are a
beneficial owner, to be admitted you will need proof of beneficial ownership in the form of a statement from the
brokerage firm, bank or nominee or a legal proxy from that institution indicating you are a beneficial owner of our
common stock or the sole legal proxy of a beneficial owner. All stockholders must check in at the registration desk at the
meeting. Cameras, recording devices and other electronic devices will not be permitted at the meeting. Additional rules
of conduct regarding the meeting will be provided at the meeting.
Who is entitled to vote at the meeting?
The board of directors has determined that those stockholders who are recorded in the books of our transfer
agent as owning shares of our common stock as of the close of business on March 8, 2024, are entitled to receive notice
of and to vote at the annual meeting of stockholders. As of February 14, 2024, there were 100,140,031 shares of our
common stock issued and outstanding. Your shares may be (1) held directly in your name as the stockholder of record or
(2) held for you as the beneficial owner through a stockbroker, bank or other nominee, or both. Our common stock is our
only class of outstanding voting securities. Each share of common stock owned as of the close of business on March 8,
2024 is entitled to one vote on each matter properly brought before the annual meeting.
What is the difference between holding shares as a stockholder of record and as a beneficial owner?
Most of our stockholders hold their shares through a stockbroker, bank or other nominee rather than directly in
their own name. As summarized below, there are some distinctions between shares held of record and those owned
beneficially.
Stockholder of Record. If your shares are registered directly in your name with our transfer agent,
Computershare Trust Company, N.A., you are considered, with respect to those shares, the stockholder of record, and
these proxy materials are being sent directly to you by us. As the stockholder of record, you have the right to grant your
voting proxy directly to us or to vote in person at the meeting. If you requested a paper copy of the proxy materials, we
have enclosed a proxy card for you to use.
Beneficial Owner. If your shares are held in a stock brokerage account or by a bank or other nominee, you are
considered the beneficial owner of shares held in street name, and these proxy materials are being forwarded to you by
your broker, bank, or nominee which is considered, with respect to those shares, the stockholder of record. As the
beneficial owner, you have the right to direct your broker on how to vote and are also invited to attend the meeting.
However, because you are not the stockholder of record, you may not vote these shares in person at the meeting unless
you obtain a signed proxy from the record holder giving you the right to vote the shares. Your broker, bank, or nominee
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has enclosed or provided a voting instruction card for you to use in directing the broker or nominee how to vote your
shares. If you do not provide the stockholder of record with voting instructions, your shares may constitute broker non-
votes. The effect of broker non-votes is more specifically described in “What vote is required to approve each item?”
below.
How can I vote my shares at the annual meeting?
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Shares held directly in your name as the stockholder of record may be voted in person at the annual meeting.
Submitting your proxy by telephone, by internet or by mail will in no way limit your right to vote at the annual meeting
if you later decide to attend in person.
Shares held beneficially in street name may be voted by you during the annual meeting only if you obtain a
signed proxy from the record holder giving you the right to vote the shares. Owners of shares held in street name that
expect to attend and vote at the meeting should contact their broker, bank or nominee as soon as possible to obtain the
necessary proxy.
Even if you currently plan to attend the annual meeting, we recommend that you also submit your proxy as
described below so your vote will be counted if you later decide not to attend the meeting.
How can I vote my shares without attending the meeting?
Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct
your vote without attending the meeting. You may vote by granting a proxy or, for shares held in street name, by
submitting voting instructions to your broker, bank, or nominee.
Please refer to the summary instructions below and those included on your proxy card or, for shares held in
street name, the voting instruction form provided by your broker, bank, or nominee. The internet and telephone voting
procedures established for our stockholders of record are designed to authenticate your identity, to allow you to give your
voting instructions, and to confirm those instructions have been properly recorded. Internet and telephone voting for
stockholders of record will be available 24 hours a day, and will close at 11:59 p.m. eastern time on May 1, 2024. The
availability of internet and telephone voting for beneficial owners will depend on the voting processes of your broker,
bank or other holder of record. Therefore, we recommend that you follow the voting instructions you receive.
•
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•
BY INTERNET – If you have internet access, you may submit your proxy from any location in the world
by following the “internet” instructions on the proxy card . Please have one of those documents in hand
when accessing the website as you will need the control number found there.
BY TELEPHONE – If you live in the United States, Puerto Rico, or Canada, you may submit your proxy
by following the “telephone” instructions on your proxy card. Please have one of those documents in hand
when you call as you will need the control number found there.
BY MAIL – If you requested a paper copy of the proxy materials, you may vote by mail by marking,
signing, and dating your proxy card or, for shares held in street name, the voting instruction card included
by your broker, bank, or nominee and mailing it in the accompanying enclosed, pre-addressed envelope. If
you provide specific voting instructions, your shares will be voted as you instruct. If you do not have the
pre-addressed envelope available, please mail your completed proxy card to: Vote Processing, c/o
Broadridge, 51 Mercedes Way, Edgewood, NY 11717. Mailed proxy cards must be received no later than
May 1, 2024 in order to be counted.
If you cast your vote in any of the ways set forth above, your shares will be voted in accordance with your
voting instructions unless you validly revoke your proxy. We do not currently anticipate that any other matters will be
presented for action at the annual meeting. If any other matters are properly presented for action, the persons named as
your proxies will vote your shares on these other matters in their discretion, under the discretionary authority you have
granted to them in your proxy.
Can I access the proxy statement and annual report on the internet?
Yes. This proxy statement, the form of proxy card and our Annual Report on Form 10-K for the year ended
December 31, 2023 (the “2023 Form 10-K”) are available at http://www.proxyvote.com after entering the control
number printed on your proxy card. If you received a paper copy of the proxy materials, you have made a previous
election to that effect. If you are a stockholder of record and would like to access future proxy materials electronically
instead of receiving paper copies in the mail, there are several ways to do this. You can mark the appropriate box on your
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proxy card or follow the instructions if you vote by telephone or the internet. If you have internet access, we hope you
make this choice. Receiving future annual reports and proxy statements via the internet will be simpler for you, will save
the Company money and is friendlier to the environment.
A copy of our 2023 Form 10-K and the proxy materials are also available without charge from the “Investors”
section of our website at https://investor.encompasshealth.com. The 2023 Form 10-K and the proxy materials are also
available in print to stockholders without charge and upon request, addressed to Encompass Health Corporation,
9001 Liberty Parkway, Birmingham, Alabama 35242, Attention: Corporate Secretary.
Are you planning on making the proxy materials only available by internet this year, unless paper copies are
requested?
No. Although many public companies mail a notice to their shareholders so they can provide proxy materials
through the internet, we have elected to use the “full set delivery” option and are providing paper copies of proxy
materials to all of our shareholders, unless otherwise previously requested by the shareholder. Our proxy materials and
2023 Form 10-K comprising our Annual Report are also available via the internet. See “Can I access the proxy statement
and report on the internet?” directly above. We may decide not to use the “full set delivery” option in the future;
however, you will still have the right to request a free set of proxy materials by mail.
Can I change my vote after I submit my proxy?
Yes. Even after you have submitted your proxy, you may change your vote by:
•
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filing with our corporate secretary at 9001 Liberty Parkway, Birmingham, Alabama 35242, a signed,
original written notice of revocation dated later than the proxy you submitted, provided such notice is
received on or before May 1, 2024;
submitting a duly executed proxy bearing a later date that is received on or before May 1, 2024;
voting by telephone or internet on a later date; or
attending the annual meeting and voting in person.
If you grant a proxy, you are not prevented from attending the annual meeting and voting in person. However,
your attendance at the annual meeting will not by itself revoke a proxy you have previously granted; you must vote in
person at the annual meeting to revoke your proxy.
If your shares are held by a broker, bank or other nominee, you may revoke your proxy by following the
instructions provided by your broker, bank, or nominee. All valid proxies not revoked will be voted at the annual
meeting.
What is “householding” and how does it affect me?
We are delivering the proxy materials addressed to all stockholders who share a single address unless they have
notified us they wish to “opt out” of the program known as “householding.” Under the householding procedure,
stockholders of record who have the same address and last name receive only one copy of the proxy materials.
Householding is intended to reduce our printing and postage costs and material waste. WE WILL DELIVER A
SEPARATE COPY OF THE ANNUAL REPORT OR PROXY STATEMENT PROMPTLY UPON WRITTEN OR
ORAL REQUEST. You may request a separate copy by contacting our corporate secretary at 9001 Liberty Parkway,
Birmingham, Alabama 35242, or by calling 1-205-967-7116.
If you are a stockholder of record and you choose not to have these disclosure documents sent to a single
household address as described above, you must “opt-out” by writing to: Broadridge Financial Solutions, Inc.,
Householding Department, 51 Mercedes Way, Edgewood, New York 11717, or by calling 1-866-540-7095, and we will
cease householding disclosure documents within 30 days. If we do not receive instructions to remove your account(s)
from this service, your account(s) will continue to be householded. Conversely, if you are receiving multiple copies of
these disclosure documents and wish to receive only one copy, you should contact your bank or broker for information
regarding householding of disclosure documents and to request a change in delivery status.
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Is there a list of stockholders entitled to vote at the meeting?
A complete list of stockholders entitled to vote at the meeting will be open for examination by our stockholders
for any purpose germane to the meeting, during regular business hours at the meeting place, for ten days prior to the
meeting.
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What constitutes a quorum to transact business at the meeting?
Before any business may be transacted at the annual meeting, a quorum must be present. The presence at the
annual meeting, in person or by proxy, of the holders of a majority of the shares of all of our capital stock outstanding
and entitled to vote on the record date will constitute a quorum. At the close of business on February 14, 2024,
100,140,031 shares of our common stock were issued and outstanding. Proxies received but marked as withholds,
abstentions, and broker non-votes will be included in the calculation of the number of shares considered to be present at
the annual meeting for purposes of a quorum.
If a quorum is not present or if we decide that more time is necessary for the solicitation of proxies, we may
adjourn the annual meeting. We may do this with or without a stockholder vote. If the stockholders vote to adjourn the
annual meeting in accordance with our Bylaws, the named proxies will vote all shares of common stock for which they
have voting authority in favor of adjournment.
What is the recommendation of the board of directors?
Our board of directors unanimously recommends a vote:
1.
2.
3.
4.
“FOR” the election of each of our 10 nominees to the board of directors;
“FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as Encompass Health’s
independent registered public accounting firm;
“FOR” the approval of the compensation of our named executive officers, as disclosed in this proxy
statement pursuant to the compensation disclosure rules of the Securities and Exchange Commission;
and
“AGAINST” the stockholder proposal requesting a report on the effectiveness of the Company’s
diversity, equity, and inclusion efforts.
With respect to any other matter that properly comes before the annual meeting, the proxy holders will vote in
accordance with their judgment on such matter.
What vote is required to approve each item?
The vote requirements for Proposals 1 and 2 are as follows:
•
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Each nominee for director named in Proposal 1 will be elected if the votes for the nominee exceed the
number of votes against with respect to such nominee. Votes cast with respect to a nominee will exclude
abstentions and broker non-votes.
The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm will be approved if the votes cast for the proposal exceed those cast against the proposal.
Broker non-votes will not be counted as votes cast for or against.
Please note that “say-on-pay,” Proposal 3, is only advisory in nature and has no binding effect on the Company
or our board of directors. For Proposal 3, our board of directors will consider the proposal approved if the votes cast in
favor of the proposal exceed the votes cast against it.
For Proposal 4, the affirmative vote of at least a majority of our shares present, in person or by proxy, and
entitled to vote on the proposal will be required to approve if the stockholder proposal is validly presented at a meeting
of stockholders. Under applicable Delaware law, in determining whether any stockholder proposal has received the
requisite number of affirmative votes, abstentions will have the same effect as a vote against any stockholder proposal.
Broker non-votes will be ignored.
A “broker non-vote” occurs when a bank, broker or other holder of record holding shares for a beneficial owner
does not vote on a particular proposal because that holder does not have discretionary voting power for that particular
item and has not received instructions from the beneficial owner. If you are a beneficial owner, your bank, broker or
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other holder of record is permitted to vote your shares on the ratification of the independent registered public accounting
firm even if the record holder does not receive voting instructions from you. Absent instructions from you, the record
holder may not vote on any “nondiscretionary” matter including a director election, an equity compensation plan, a
matter relating to executive compensation, certain corporate governance changes, or any stockholder proposal. In that
case, without your voting instructions, a broker non-vote will occur. An “abstention” will occur at the annual meeting if
your shares are deemed to be present at the annual meeting because you attend the annual meeting but you do not vote on
any proposal or other matter which is required to be voted on at the annual meeting. You should consult your broker if
you have questions about this.
There are no dissenters’ rights of appraisal in connection with any stockholder vote to be taken at the annual
meeting.
What does it mean if I receive more than one proxy or voting instruction card?
It means your shares of common stock are registered differently or are in more than one account. Please return
each proxy and voting instruction card you receive. Please submit your vote for each control number you have been
assigned.
Where can I find the voting results of the meeting?
We will announce preliminary voting results at the meeting. We will publish the voting results in a Current
Report on Form 8-K to be filed with the SEC no later than four business days following the end of the annual meeting. If
preliminary results are reported initially, we will update the filing when final, certified results are available.
Who will count the votes?
A representative of Broadridge Financial Solutions, Inc., acting as the inspector of election, will tabulate and
certify the votes.
Who will pay for the cost of this proxy solicitation?
We are making this solicitation and will pay the entire cost of preparing, assembling, printing, mailing, and
distributing these proxy materials. If you choose to access the proxy materials or vote over the internet, however, you are
responsible for internet access charges you may incur. In addition to the mailing of these proxy materials, the solicitation
of proxies or votes may be made in person, by telephone, or by electronic communication by our directors, officers and
employees, who will not receive any additional compensation for such solicitation activities. We will request banks,
brokers, nominees, custodians, and other fiduciaries who hold shares of our stock in street name, to forward these proxy
solicitation materials to the beneficial owners of those shares and we will reimburse the reasonable out-of-pocket
expenses they incur in doing so.
We have also retained Alliance Advisors, LLC to assist us in the solicitation of proxies. Alliance Advisors, LLC
will solicit proxies on our behalf from individuals, brokers, bank nominees and other institutional holders in the same
manner described above for a fee of $10,000, plus reasonable out of pocket expenses. We have also agreed to indemnify
Alliance Advisors, LLC against certain claims.
Who should I contact if I have questions?
If you hold our common stock through a brokerage account and you have any questions or need assistance in
voting your shares, you should contact the broker or bank where you hold the account. If you are a registered holder of
our common stock and you have any questions or need assistance in voting your shares, please call our Investor
Relations department at 1-205-969-4600. As an additional resource, the SEC website has a variety of information about
the proxy voting process at www.sec.gov/spotlight/proxymatters.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THE DELIVERY OF THIS PROXY STATEMENT WILL, UNDER NO CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE OF THIS PROXY STATEMENT.
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ITEMS OF BUSINESS REQUIRING YOUR VOTE
Proposal 1 – Election of Directors
Director Nominees
The board of directors of Encompass Health currently consists of 12 members. At the end of this year’s term,
two directors, Messrs. Correll and Chidsey, will be retiring from the Encompass Health board and will not stand for re-
election. In conjunction with the retirement of these directors, our board has approved a reduction in the size of the board
from 12 to 10 members effective as of the end of this year’s annual meeting of stockholders. Based on the
recommendation of the Nominating/Corporate Governance Committee, our board proposes that each of the 10 nominees
listed below be elected as directors at this annual meeting and serve until our 2025 annual meeting of stockholders.
Following this annual meeting, the elected members of the board will elect a new independent chairman of the board in
accordance with the requirement of the Corporate Governance Guidelines.
Each director nominee named in this Proposal 1 will be elected if the votes for that nominee exceed the number
of votes cast against that nominee. Votes cast with respect to a nominee will exclude abstentions and broker non-votes. If
a nominee becomes unable or unwilling to accept the nomination or election, the persons designated as proxies will be
entitled to vote for any other person designated as a substitute nominee by our board of directors. We have no reason to
believe that any of the following nominees will be unable to serve. Below we have provided information relating to each
of the director nominees proposed for election by our board, including a brief description of why he or she was
nominated.
Name of Nominee
Greg D. Carmichael*
Age
62
Current Roles
Member of Compensation and Human Capital Committee
(Chair) and Nominating/Corporate Governance Committee
Edward M. Christie III*
53 Member of Audit Committee
Joan E. Herman*
Leslye G. Katz*
Patricia A. Maryland*
Kevin J. O’Connor*
Christopher R. Reidy*
Nancy M. Schlichting*
Mark J. Tarr
70
69
70
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Member of Audit Committee and Compliance and Quality of
Care Committee (Chair)
Member of Finance Committee and Nominating/Corporate
Governance Committee (Chair)
Member of Compensation and Human Capital Committee and
Compliance and Quality of Care Committee
Member of Compliance and Quality of Care Committee and
Nominating/Corporate Governance Committee
67 Member of Audit Committee (Chair) and Finance Committee
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Member of Compensation and Human Capital Committee and
Compliance and Quality of Care Committee
President and Chief Executive Officer
Date Became
Director
1/1/2020
11/27/2023
1/25/2013
1/25/2013
1/1/2020
3/30/2022
10/1/2021
12/11/2017
12/29/2016
Terrance Williams*
55 Member of Audit Committee and Finance Committee (Chair)
1/1/2020
* Denotes independent director.
There are no arrangements or understandings known to us between any of the nominees listed above and any other
person pursuant to which that person was or is to be selected as a director or nominee, other than any arrangements or
understandings with persons acting solely as directors or officers of Encompass Health.
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All of the director nominees have public company, senior leadership and strategic planning experience and
financial literacy. The following matrix is intended to summarize the other primary experience, skills, and qualifications
of the nominees. Each nominee’s individual experiences and qualifications are described in more detail in the
biographies below.
Greg D. Carmichael
Mr. Carmichael has served as executive chair of the board of directors of
City National Bank, a subsidiary of Royal Bank of Canada, since October 2, 2023.
Mr. Carmichael retired as the executive chairman of Fifth Third Bancorp in April
2023. In July 2022, he retired as president and chief executive officer of Fifth Third.
He originally joined Fifth Third in 2003 and served in various other executive roles,
including chief operating officer and chief information officer. From 2000 to 2003,
Mr. Carmichael was vice president and chief information officer for Emerson
Electric, a worldwide provider of technology and energy solutions. From 1996 to
2000, he served in the same roles for a subsidiary of Emerson, and from 1986 to
1996, he served in several information technology and leadership roles at General
Electric. On March 12, 2023, the Federal Deposit Insurance Corporation (the
“FDIC”) appointed Mr. Carmichael as chief executive officer of Signature Bridge
Bank, N.A., the successor to Signature Bank, which went into FDIC receivership that
same date.
Mr. Carmichael has extensive experience in matters of information
technology, finance, corporate strategy and senior leadership relevant to large public companies. His extensive
experience with IT matters includes cybersecurity oversight as a result of his leadership roles in multiple IT
departments.
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Edward M. Christie III
Mr. Christie has served as president and chief executive officer of Spirit
Airlines, Inc. since January 2019. In his tenure with Spirit, which began in April
2012, Mr. Christie has held a number of leadership roles and responsibilities,
including as Chief Financial Officer. Prior to joining Spirit, he served as Vice
President and Chief Financial Officer of Pinnacle Airlines Corp. from July 2011 to
March 2012. Prior to that, Mr. Christie was a partner in the management consulting
firm of Vista Strategic Group LLC from May 2010 to July 2011. From 2002 to 2010,
Mr. Christie served in various positions, including Chief Financial Officer, at Frontier
Airlines. Mr. Christie has served on the board of directors of Spirit since January
2018.
Mr. Christie has significant experience in finance, strategic and public
company leadership, operations, and governmental relations and regulation.
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Joan E. Herman
Ms. Herman has served as the president and chief executive officer of
Herman & Associates, LLC, a healthcare and management consulting firm, since
2008. Herman & Associates provides services to healthcare providers, pharmacy
benefit managers, managed care organizations, and private equity firms. From 1998
to 2008, she served in a number of senior management positions, including president
and chief executive officer for two corporate divisions, at Elevance, Inc. (f/k/a
Anthem, Inc. and WellPoint, Inc.), a leading managed healthcare company that offers
network-based managed care plans. Prior to joining Elevance, she served in a number
of senior positions at Phoenix Life Insurance Company for 16 years, lastly as senior
vice president of strategic development. She currently serves as a director and a
member of the audit, compensation, and compliance committees of Ionis
Pharmaceuticals, Inc., an RNA-targeted drug discovery and development firm. She
also serves on the board of Fifth Avenue Private Equity 17 Fund.
Ms. Herman has extensive experience leading large complex businesses,
including in the healthcare and insurance industries. With Elevance, she gained experience dealing with government
reimbursement issues as well as state and federal healthcare and insurance regulators. Additionally, she has completed
the National Association of Corporate Directors’ Cyber-Risk Oversight Program, which is designed to enhance
cybersecurity literacy and strengthen cyber-risk oversight practices, and holds a CERT Certificate in Cybersecurity
Oversight. Her senior involvement and board service with various community and charity organizations evidences her
leadership skills and character.
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Leslye G. Katz
From January 2007 to December 2010, Ms. Katz served as senior vice
president and chief financial officer of IMS Health, Inc., a provider of information,
services, and technology for clients in the pharmaceutical and healthcare industries.
Prior to that, she served as vice president and controller for five years. From July
1998 to July 2001, Ms. Katz served as senior vice president and chief financial officer
of American Lawyer Media, Inc., a privately held legal media and publishing
company. Prior to joining American Lawyer Media, Ms. Katz held a number of
financial management positions with The Dun & Bradstreet Corporation, followed by
two years as vice president and treasurer of Cognizant Corporation, a spin off from
D&B. She currently serves as vice-chair of the board of directors of My Sisters’
Place, a not-for-profit provider of shelter, advocacy, and support services to victims
of domestic violence.
Ms. Katz has extensive experience in financial management at companies
serving the healthcare and pharmaceutical industries, as well as expertise in mergers
and acquisitions, treasury, financial planning and analysis, SEC reporting, investor relations, real estate, and
procurement. She has further demonstrated her leadership and character in her board service with community charities.
Patricia A. Maryland
Ms. Maryland has 40 years of healthcare administration experience. In 2019,
she retired as an executive vice president for Ascension and president and chief
executive officer at Ascension Healthcare, a leading non-profit health system
operating more than 2,600 sites of care including 150 hospitals and more than 50
senior living facilities in 20 states and the District of Columbia. Prior to that,
Ms. Maryland held other executive and management positions in the Ascension
organization for 13 years, including president and chief executive of the St. John
Providence Health System and president of the Indianapolis Hospital, St. Vincent’s
Health System. Prior to joining Ascension, Ms. Maryland worked in administrative
roles with Detroit Medical Center, North Oakland Medical Centers, Cleveland Clinic
Foundation and Mercy Hospital. Ms. Maryland also serves as a director on the board
of Surgery Partners, Inc., an operator of surgical facilities and provider of ancillary
services, and Privia Health Group, Inc., a national physician platform for the
healthcare delivery experience.
Ms. Maryland has extensive senior management and strategy planning experience with large healthcare
provider organizations as described above and as a result brings a wealth of knowledge and understanding of the
healthcare industry. She has demonstrated leadership and character through involvement, including board roles, over
many years in numerous community and healthcare related non-profit organizations.
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Kevin J. O’Connor
Mr. O’Connor is the Senior Vice President, Chief Legal Officer of Carrier
Global Corporation, a leading global provider of healthy, safe and sustainable
building and cold chain solutions, where he oversees the company’s legal,
governance, compliance and government affairs worldwide. Prior to joining Carrier in
2020, he was Chief Legal Officer of Point72 Asset Management from 2015 through
early 2020. Prior to that, he served as Vice President, Global Ethics and Compliance
for United Technologies Corporation from 2012 to 2015. Prior to his corporate
leadership roles, Mr. O’Connor practiced law for 20 years in both private and public
practice, including serving in various roles at the United States Department of Justice,
including Associate Attorney General and United States Attorney for the District of
Connecticut, and at the United States Securities and Exchange Commission, Division
of Enforcement. He previously served on the strategic advisory council of Vencore,
Inc., a private defense contractor serving intelligence, defense, and other agencies,
and currently serves on the board of trustees for the University of Connecticut.
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Mr. O’Connor has extensive senior leadership, legal, compliance, and regulatory/risk management experience
as described above. He also has healthcare provider experience having served as the chair of the board of directors of
Trinity Health of New England, a large integrated health system.
Christopher R. Reidy
On March 31, 2022, Mr. Reidy retired as Executive Vice President, Strategic
Advisor of Becton, Dickinson and Company (“BD”), one of the largest global
medical technology companies in the world. Prior to that role, he served as BD’s
executive vice president, chief financial officer and chief administrative officer where
he managed strategic transactions and oversaw many functions, including finance,
information technology and security, business development, and enterprise risk
management. Prior to joining BD in 2013, he served in many senior finance and
accounting roles, including corporate vice president and chief financial officer for
ADP Corporation; vice president, controller & chief accounting officer and division
CFO roles at AT&T Corporation; and audit partner at Deloitte & Touche. He
currently serves on the board of directors of Embecta Corp., one of the largest pure-
play diabetes management companies in the world, where he serves as chair of the
technology committee. He also sits on the board of Atlantic Health System and is a
member of the executive committee and chair of the finance and investment
committee.
Mr. Reidy has extensive senior management and administrative experience with a vendor for a wide range
healthcare providers as described above and as a result brings a wealth of knowledge and understanding of the
healthcare industry. He also has significant experience in finance, accounting, strategic planning, risk management, and
information technology and security. He qualifies as an “audit committee financial expert” within the meaning of SEC
regulations. He also has extensive cybersecurity oversight experience as a result of his roles at both BD and ADP where
the chief information security officers reported directly to him and he was heavily involved in the respective
cybersecurity programs. At BD, the information technology department reported to him.
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Nancy M. Schlichting
In December 2016, Ms. Schlichting retired as the president and chief
executive officer at Henry Ford Health System, Inc., a position she held from June
2003. Prior to that, Ms. Schlichting served as HFHS’s executive vice president and
chief operating officer from 1998 to 2003. She also served as president and chief
executive officer of HFHS’s Henry Ford Hospital from 2001 to 2003. During her time
at HFHS, the company garnered significant national recognition, including the
Malcolm Baldrige National Quality Award and the John M. Eisenberg Patient Safety
and Quality Award. Prior to joining HFHS in 1998, Ms. Schlichting served as the
president of the Eastern Region of Catholic Health Initiatives, president and chief
executive officer of Riverside Methodist Hospitals and executive vice president and
chief operating officer of Akron City Hospital and Summa Health System.
Ms. Schlichting currently serves as a director of Walgreens Boots Alliance, Inc.,
where she serves on the audit committee and chairs the compensation and leadership
performance committee, and Baxter International Inc., where she serves on the
quality, compliance and technology committee and chairs the compensation and
human capital committee. She recently served on the boards of Hill-Rom Holdings, Inc. and Pear Therapeutics, Inc.
Ms. Schlichting has extensive senior management and administrative experience with large healthcare
provider organizations as described above and as a result brings a wealth of knowledge and understanding of the
healthcare industry. She has demonstrated leadership and character through involvement, including board roles, over
many years in numerous community and healthcare related non-profit organizations.
Mark J. Tarr
Mr. Tarr became our President and Chief Executive Officer on December
29, 2016. Previously, he served as executive vice president of our operations since
October 1, 2007, to which the chief operating officer designation was added on
February 24, 2011. Mr. Tarr joined us in 1993 and has held various management
positions with us, including serving as president of our inpatient division from 2004
to 2007, as senior vice president with responsibility for all inpatient operations in
Texas, Louisiana, Arkansas, Oklahoma, and Kansas from 1997 to 2004, as director of
operations of our 80-bed rehabilitation hospital in Nashville, Tennessee from 1994 to
1997, and as chief executive officer/administrator of our 70-bed rehabilitation
hospital in Vero Beach, Florida from 1992 to 1994. Mr. Tarr serves on the board of
directors of Protective Life Corp.
Mr. Tarr, as our president and chief executive officer, directs the strategic,
financial and operational management of the Company and, in this capacity, provides
unique insights into its detailed operations. He also has the benefit of more than 30
years of experience in the operation and management of inpatient rehabilitation hospitals.
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Terrance Williams
On June 26, 2023, Mr. Williams became President and Chief Executive
Officer-elect at TruStage Financial Group, Inc., a large provider of insurance,
investments, and financial technology solutions. Prior to that, he served as the
executive vice president and president of protection products and services at Allstate
Corporation, where he had accountability for a portfolio of businesses outside of the
core insurance market with nearly $5 billion in revenues and over 3,800 employees
globally. Before joining Allstate in January 2020, he served as executive vice
president and chief marketing officer for Nationwide Mutual Insurance Company, as
well as the president of the Nationwide’s emerging businesses group, which included
legacy niche and emerging businesses, innovation teams, and a venture capital fund.
During 24 years with Nationwide, he advanced through leadership roles touching
almost every aspect of the business, including underwriting, claims, operations, sales
and various profit and loss management roles.
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regulated-industry experience. He also brings extensive experience in managing every aspect of business from sales,
marketing, and operations to enterprise strategy across a large geographic platform. He qualifies as an “audit committee
financial expert” within the meaning of SEC regulations.
Mr. Williams has a deep and broad base of marketing, insurance (payor), and
Board Recommendation
The board of directors unanimously recommends that you vote “FOR” the election of all 10 director
nominees.
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Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm
Appointment of PricewaterhouseCoopers LLP
In accordance with its charter, the Audit Committee of our board of directors selected the firm of
PricewaterhouseCoopers LLP to be our independent registered public accounting firm for the 2024 audit period, and with
the endorsement of the board of directors, recommends to our stockholders that they ratify that appointment. The Audit
Committee will reconsider the appointment of PricewaterhouseCoopers LLP for the next audit period if such
appointment is not ratified. Representatives of PricewaterhouseCoopers LLP are expected to attend the annual meeting
and will have the opportunity to make a statement if they desire, and are expected to be available to respond to
appropriate questions.
The Audit Committee recognizes the importance of maintaining the independence of our independent registered
public accounting firm, both in fact and appearance. Consistent with its charter, the Audit Committee has evaluated
PricewaterhouseCoopers LLP’s qualifications, performance, and independence, including that of the lead audit partner.
The Audit Committee reviews and approves, in advance, the audit scope, the types of non-audit services, if any, and the
estimated fees for each category for the coming year. For each category of proposed service, PricewaterhouseCoopers
LLP is required to confirm that the provision of such services does not impair their independence. Before selecting
PricewaterhouseCoopers LLP, the Audit Committee carefully considered that firm’s qualifications as an independent
registered public accounting firm for the Company. This included a review of its performance in prior years, as well as
its reputation for integrity and competence in the fields of accounting and auditing. The Audit Committee has expressed
its satisfaction with PricewaterhouseCoopers LLP in all of these respects. The Audit Committee’s review included
inquiry concerning any litigation involving PricewaterhouseCoopers LLP and any proceedings by the SEC against the
firm. The Audit Committee concluded that the ability of PricewaterhouseCoopers LLP to perform services for us is in no
way adversely affected by any such investigation or litigation.
Pre-Approval of Principal Accountant Services
The Audit Committee is responsible for the appointment, oversight, and evaluation of our independent
registered public accounting firm. In accordance with our Audit Committee’s charter, our Audit Committee must
approve, in advance of the service, all audit and permissible non-audit services provided by our independent registered
public accounting firm. Our independent registered public accounting firm may not be retained to perform the non-audit
services specified in Section 10A(g) of the Securities Exchange Act of 1934, as amended. The Audit Committee has
concluded that provision of the non-audit services described in that section is not compatible with maintaining the
independence of PricewaterhouseCoopers LLP.
The Audit Committee has established a policy regarding pre-approval of audit and permissible non-audit
services provided by our independent registered public accounting firm, as well as all engagement fees and terms for our
independent registered public accounting firm. Under the policy, the Audit Committee must approve the services to be
rendered and fees to be charged by our independent registered public accounting firm. Typically, the Audit Committee
approves services up to a specific amount of fees. The Audit Committee must then approve, in advance, any services or
fees exceeding those pre-approved levels, provided that the chair may approve any excess fees up to 5% of previously
approved amounts. To the extent permitted by applicable regulations and the rules of the New York Stock Exchange, the
Audit Committee may delegate general pre-approval authority to a subcommittee of one or more of its members.
15
Principal Accountant Fees and Services
With respect to the audits for the years ended December 31, 2023 and 2022, the Audit Committee approved the
audit services to be performed by PricewaterhouseCoopers LLP, as well as certain categories and types of audit-related
and permitted non-audit services. In 2023 and 2022, the Audit Committee approved all audit, audit-related, and other
fees in accordance with SEC pre-approval rules. The following table shows the aggregate fees paid or accrued for
professional services rendered by PricewaterhouseCoopers LLP for the years ended December 31, 2023 and 2022, with
respect to various services provided to us and our subsidiaries.
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Audit fees(1)
Audit-related fees(2)
Total audit and audit-related fees
Tax fees(3)
All other fees(4)
Total fees
For the Year Ended
December 31,
2023
2022
(In Millions)
$
$
3.27
0.01
3.28
0.02
0.14
3.44
$
$
4.16
0.54
4.70
0.02
0.02
4.74
(1)
(2)
(3)
(4)
Audit fees – Represents aggregate fees paid or accrued for professional services rendered for the audit of our consolidated financial statements
and internal control over financial reporting for each year presented and the carve-out audit of our home health & hospice business in
connection with its separation as an independent publicly traded company; fees for professional services rendered for the review of financial
statements included in our Form 10-Q filings, and fees for professional services normally provided by our independent registered public
accounting firm in connection with statutory and regulatory engagements required by various partnership agreements or state and local laws in
the jurisdictions in which we operate or manage hospitals.
Audit-related fees – Represents aggregate fees paid or accrued for assurance and related services that are reasonably related to the performance
of audit services and traditionally are performed by our independent auditor, including fees related to work associated with registration of
securities for our home health & hospice business in connection with its separation as an independent publicly traded company.
Tax fees – Represents fees for all professional tax services provided by our independent auditor’s tax professionals, such as preparation of
Puerto Rico tax returns and other tax compliance matters, but not including any services related to the audit of our financial statements.
All other fees – Represents fees paid or due to our independent auditor for (i) costs incurred related to the Company’s suit against various third
parties in Delaware, (ii) an automated disclosure checklist, and (iii) other subscription fees.
Board Recommendation
The board of directors and the Audit Committee unanimously recommend that you vote “FOR”
ratifying the appointment of PricewaterhouseCoopers LLP as Encompass Health’s independent registered public
accounting firm for the 2024 audit period.
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Proposal 3 – Advisory Vote on Executive Compensation
We seek your advisory vote on our executive compensation programs and ask that you support the
compensation of our named executive officers as disclosed under the heading “Executive Compensation,” including the
“Executive Summary” section, beginning on page 36 and the accompanying tables and related narrative disclosure. This
proposal, commonly referred to as a “say-on-pay” proposal, gives stockholders the opportunity to express their views on
the named executive officers’ compensation. This vote is not intended to address any specific item of compensation, but
rather the overall compensation of the named executive officers and the philosophy, policies, and practices described in
this proxy statement.
As described under the heading “Compensation Discussion and Analysis,” the Company provides annual and
long-term compensation programs, as well as other benefit plans, to attract, motivate, and retain the named executive
officers, each of whom is critical to the Company’s success, and to create a remuneration and incentive program that
aligns the interests of the named executive officers with those of stockholders. The board of directors believes the
program strikes the appropriate balance between utilizing responsible, measured pay practices and effectively
incentivizing the named executive officers to dedicate themselves fully to value creation for our stockholders. At the
2023 annual meeting, 94.0% of stockholders voting on the say-on-pay proposal approved of our executive compensation
programs.
You are encouraged to read the information detailed under the heading “Executive Compensation” beginning on
page 36 for additional details about the Company’s executive compensation programs.
The board of directors strongly endorses the Company’s executive compensation programs and recommends
that the stockholders vote in favor of the following resolution:
“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the named
executive officers, as disclosed in the Encompass Health Corporation Definitive Proxy Statement for the 2024 annual
meeting of stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission,
including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and
disclosure.”
This say-on-pay vote is advisory, and therefore not binding on the Company, the Compensation and Human
Capital Committee or the board of directors. Our board of directors and its Compensation and Human Capital Committee
value the opinions of our stockholders and to the extent there is any significant vote against the named executive officer
compensation as disclosed in this proxy statement, we will consider stockholders’ concerns and the Compensation and
Human Capital Committee will evaluate whether any actions are necessary to address those concerns. The board has
elected to hold the say-on-pay advisory vote annually until further notice, so the next advisory vote is expected to be in
connection with the 2025 annual meeting of stockholders.
Board Recommendation
The board of directors unanimously recommends a vote “FOR” the approval of the compensation of our
named executive officers, as disclosed in this proxy statement pursuant to the compensation disclosure rules of the
Securities and Exchange Commission.
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Proposal 4 – Stockholder Proposal Requesting a Report on the Effectiveness of the Company’s
Diversity, Equity, and Inclusion Efforts
We have been informed that As You Sow, on behalf of Marguerite Casey Foundation,1 a beneficial owner
of 1,619 shares of our common stock, intends to present the proposal set forth below at our Annual Meeting of
Stockholders. In accordance with SEC rules, we are including this stockholder proposal, along with the supporting
statement of the proponent. The Company is not responsible for any inaccuracies in this stockholder proposal and
supporting statement.
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Our board of directors recommends that you vote AGAINST this proposal for the reasons set forth in the
Company’s Statements in Opposition, which follows this proposal.
RESOLVED: Shareholders request that Encompass Health Corp. (“Encompass Health”) report to
shareholders on the effectiveness of the Company's diversity, equity, and inclusion efforts. The report should be
done at reasonable expense, exclude proprietary information, and provide transparency on outcomes, using
quantitative metrics for workforce diversity, hiring, promotion, and retention of employees, including data by
gender, race, and ethnicity.
SUPPORTING STATEMENT: Quantitative data is sought so that investors can assess and compare the
effectiveness of companies’ diversity, equity, and inclusion programs.
It is advised that this content be provided through Encompass Health’s existing sustainability reporting
infrastructure. An independent report specific to this topic is not requested.
WHEREAS: More than half of the S&P 500 and over one-third of the Russell 1000 have released, or have
committed to release, their consolidated EEO-1 forms, a best practice in diversity data reporting. Companies that
release, or have committed to release, more inclusion data than Encompass Health include Baxter International,
Biogen, CVS Health, Gilead Sciences, Pfizer, and UnitedHealth Group.
As You Sow and Whistle Stop Capital released research in November 2023 that reviewed the EEO-1 reports
of 1,641 companies against financial performance metrics from 2016-2021.2 Within the healthcare sector,
statistically significant positive correlations were found between increased manager diversity and free cash flow per
share, income after tax, and ten-year revenue compound annual growth rate.
As of the date of the filing of this proposal, Encompass Health had not yet released its consolidated EEO-1
form, nor had it shared sufficient hiring, retention, or promotion data to allow investors to determine the
effectiveness of its diversity and inclusion programs.
As detailed below, inclusion indicators are also important in assessing Encompass Health’s workplace
equity efforts and if the Company will be able to successfully build, utilize, and maintain a diverse management
team.
Hiring: Studies conducted by economists at the University of Chicago and UC Berkeley found that
“discriminating companies tend to be less profitable,” stating “it is costly for firms to discriminate against
productive workers.”3
Promotion: Without equitable promotional practices, companies will be unable to build the necessary
employee pipelines for diverse management. Women and employees of color experience “a broken rung” in their
careers; for every 100 men who are promoted, only 87 women are. Whereas women of color comprise 18 percent of
the entry-level workforce and only 6 percent of executives.4
1 The only address provided was for As You Sow: 2020 Milvia St., Suite 500, Berkeley, CA 94704.
2 https://www.asyousow.org/report-page/2023-positive-relationships-linking-workforce-diversity-and-financial-
performance
3 https://www.nytimes.com/2021/07/29/business/economy/hiring-racial-discrimination.html
4 https://www.mckinsey.com/featured-insights/diversity-and-inclusion/women-in-the-workplace
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Retention: Retention rates indicate if employees believe a company represents their best opportunity.
Morgan Stanley has found that employee retention above industry average can indicate a competitive advantage and
higher levels of future profitability.5
Investors have reason to be concerned as Encompass Health is facing serious allegations of sexual
harassment and assault.6
Statement in Opposition to the Stockholder Proposal Requesting a Report on the Effectiveness of
the Company’s Diversity, Equity, and Inclusion Efforts
Our board of directors, after review and input from its Nominating/Corporate Governance Committee,
recommends a vote AGAINST this proposal for the following reasons:
•
The requested report is unnecessary and not meaningful to investors and will impose an undue burden
on the Company.
• We already provide extensive and meaningful disclosure with respect to our workforce diversity,
equity and inclusion (“DEI”) efforts, including diversity and inclusion data related to gender, ethnicity
and race in our Diversity, Equity, and Inclusion Annual Report (the “Annual DEI Report”) published
on our website. Additionally, we plan to release our consolidated EEO-1 workplace demographic data
in the first half of this year and annually thereafter.
•
•
•
The most informed and relevant assessment of our DEI efforts is the opinion of our employees who
consistently rate us very favorably, and higher than the healthcare industry benchmarks, for each of the
DEI-related questions in our employee engagement survey.
Our disclosures also provide investors with a detailed portrait of our top-down commitment to creating
a culture where career development and professional advancement opportunities are equitable and
accessible to everyone at every level and employing talent management strategies and professional
development resources to that end.
As reflected in our disclosures, we have demonstrated the strategic importance of a diverse and
inclusive workplace to both our board of directors and senior management.
We met with representatives of the proponent to discuss the proposal and our DEI efforts, as well as our
public disclosures. We appreciate the opportunity to learn more of the proponent’s perspective on DEI issues. Our
DEI staff as well as our leadership will continue to take into consideration that perspective as well as the views of
our other stockholders.
The requested additional disclosure is unnecessary and not meaningful to investors and represents an undue
burden to the Company.
We understand the desire of investors to assess the material risks and opportunities associated with human
capital management, and, as discussed below, we believe our current and upcoming additional disclosures provide
the necessary information to assess the DEI related component of our human capital management strategy.
Conversely, we believe the requested additional demographic data would provide an incomplete picture lacking in
context and otherwise not be meaningful, in part because there are no other public companies engaged exclusively or
even primarily in the same business – inpatient rehabilitation. The subjective judgments inherent to the requested
data, such as what constitutes a promotion, would make data collection difficult and comparability to other
companies likely unproductive. Raw gender/race/ethnicity data, without context, has its limitations. A company’s
culture and its DEI efforts cannot be reduced solely to numbers, which is a concept consistent with the law.
We believe that the proposal would cause us to incur undue cost and administrative burden without
commensurate benefit to our stockholders. The proponent asserts the benefit is the ability to “assess and compare the
effectiveness of companies’ [DEI] programs,” but we are not aware of any of specialty hospital companies or other
5 https://www.morganstanley.com/im/publication/insights/articles/article_culturequantframework_us.pdf, p.2
6 https://www.fox21news.com/news/nine-women-say-doctor-sexually-harassed-them-at-encompass-health-colorado-
springs/
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healthcare provider peers publishing the requested inclusion indicator data that the proponent is requesting. Thus, we
do not believe the requested data would serve a useful comparative function. Again, raw data is not well suited to
representing a complex topic such as human capital, and the lack of industry comparators or other context
diminishes any perceived benefit.
In addition to being unnecessary and lacking benefit to stockholders, we believe, based on publicized
experiences of other companies, the report requested by the proponent could pose legal and employee relations
challenges from parties of all perspectives who wish to apply raw data in the context that they choose and impede
our efforts to achieve substantive improvements in diversity and inclusion.
Encompass Health already provides extensive and meaningful diversity data and information on its DEI
efforts.
We believe our existing DEI and human capital disclosures provide meaningful information for
stockholders interested in our long-term financial performance to determine the effectiveness of our policies and
practices related to workplace diversity. We already disclose our DEI efforts and quantitative diversity data on our
workforce and hospital leadership in the Annual DEI Report and human capital management disclosures found in
our Annual Report on Form 10-K. We also compare the demographics of our workforce to those of the broader
communities that we serve. Furthermore, as we communicated to the proponent, we have committed to disclosing
our consolidated EEO-1 workforce demographic data annually beginning this year.
We believe the most important data for stockholders relying on the Company’s board of directors to
oversee our human capital risks and opportunities are the annual employee engagement survey results which we
discuss in the Annual DEI Report and our Annual Report on Form 10-K. Ultimately, the employees who experience
a DEI program and a company’s culture on a daily basis are the best judge of whether a DEI program is serving to
strengthen the human capital, improving its sustainability, and creating a culture where career development and
professional advancement opportunities are equitable and accessible to everyone at every level. Our most recent
annual employee engagement survey included the following DEI-related questions, and the favorable (either agree
or strongly agree) response rate for both us and the healthcare industry benchmark are set out below.
Question
Diversity is embraced as a strength by the company.
My immediate manager supports diversity, equity and inclusion in the workplace.
There is an equal opportunity for people to have a successful career at the company.
My immediate manager cares about me as a person.
Our company equips staff with the resources to deliver culturally competent care to
our patients.
Encompass
Favorable
83.2%
88.4%
Industry
Favorable
77.7%
64.7%
80.0%
85.5%
84.4%
60.9%
74.8%
74.8%
The engagement survey elicited opinions from a broad segment of our workforce (89% of full-time employees
responded), and favorable response rates for the DEI questions were similar across gender and racial/ethnic
categories.
Encompass Health is committed to DEI.
Encompass Health is committed to creating a culture where career development and professional
advancement opportunities are equitable and accessible to everyone at every level. We carry out this commitment by
continually ensuring DEI is engrained into our talent management strategies and our professional development
resources.
Our DEI efforts are guided by our Chief Human Resources Officer and our National Director of DEI and
her staff. Our President and CEO, the Compensation and Human Capital Committee and the board of directors
actively monitor those efforts and outcomes. Our President and CEO plays a prominent role in promoting a culture
that values an open, inclusive, and respectable work environment that encourages collaboration and fosters
creativity, innovation, and employee engagement. He also participates in the CEO Action for Diversity and
Inclusion Pledge. Our national DEI staff works closely with our hospital diversity committees. Together, they design
and execute initiatives, including in recruiting, mentoring and professional development, to further our DEI strategy.
We provide extensive DEI programming and training to our managers throughout the year. Every three to four
years, we engage a third-party consulting agency to help us evaluate our DEI program and explore possible
enhancements. Our Developing Future CEOs, or DFCEO, program provides training and mentorship for emerging
20
leaders. Since its inception, 42 individuals have completed the program and been placed as hospital CEOs. Of those
placed, 24% have been people of color, and 38% have been women. In 2023, the number of people of color in
hospital leadership roles increased 11.2%.
There is robust board oversight of our DEI efforts.
Our Compensation and Human Capital Committee is responsible for overseeing our human capital
management strategy and its implementation, including our DEI efforts. Both that committee and the full board
receive regular reports on DEI initiatives and data that support our human capital strategy. The Compensation and
Human Capital Committee and the full board actively engage management and the DEI leadership on those
initiatives and the associated results and provide feedback as to the effectiveness of our programs. In light of our
existing initiatives, policies, and disclosures with respect to DEI, our board of directors believes the current scope of
our reporting provides our stockholders with visibility into our DEI efforts and an effective means to evaluate these
efforts over time.
Board Recommendation
The board of directors unanimously recommends a vote “AGAINST” the stockholder proposal
requesting a report on the effectiveness of the Company’s diversity, equity, and inclusion efforts.
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CORPORATE GOVERNANCE AND BOARD STRUCTURE
Corporate Governance Guidelines
Corporate Governance
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Our board of directors has developed corporate governance policies and practices in order to help fulfill its
responsibilities to stockholders and provide a flexible framework for it to review, evaluate, and oversee the Company’s
business operations and management. The board-adopted Corporate Governance Guidelines provide, among other things,
that each member of the board will:
•
•
•
•
dedicate sufficient time, energy, and attention to ensure the diligent performance of his or her duties;
comply with the duties and responsibilities set forth in the guidelines and in our Bylaws;
comply with all duties of care, loyalty, and confidentiality applicable to directors of publicly traded
Delaware corporations; and
adhere to our Standards of Business Ethics and Conduct, including the policies on conflicts of interest.
Our Nominating/Corporate Governance Committee oversees and periodically reviews the Guidelines, and
recommends any proposed changes to the board for approval.
Code of Ethics
We have adopted the Standards of Business Ethics and Conduct, our “code of ethics,” that applies to all
employees, directors and officers, including our principal executive officer, principal financial officer, and principal
accounting officer or controller, or persons performing similar functions. The purpose of the code of ethics is to promote:
•
•
•
•
•
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between
personal and professional relationships;
full, fair, accurate, timely, and understandable disclosure in periodic reports required to be filed by us;
compliance with all applicable rules and regulations that apply to us and our employees, officers, and
directors;
prompt internal reporting of violations of the code to an appropriate person or persons identified in the
code; and
accountability for adherence to the code.
We disclose any amendments to, or waivers from, the code of ethics for executive officers and directors on our
website promptly following the date of the amendment or waiver. Upon written request to our corporate secretary, we
will also provide a copy of the code of ethics free of charge.
Insider Trading Policy
We have adopted an Insider Trading Policy that applies to all employees, directors and officers, including when
acting on behalf the Company, and is designed to promote compliance with insider trading laws, rules and regulations
and the New York Stock Exchange listing standards. The policy also applies to any of our vendors, consultants and
contractors with access to material nonpublic information. The policy is available on our website and filed as Exhibit 19
to our Annual Report on Form 10-K for the year ended December 31, 2023.
Corporate Website
We maintain a “Corporate Governance” section on our website at https://investor.encompasshealth.com where
you can find copies of our principal governance documents, including:
•
•
•
•
•
Certificate of Incorporation and Bylaws;
Charters of each of the standing committees of its board of directors;
Standards of Business Ethics and Conduct;
Corporate Governance Guidelines; and
Insider Trading Policy.
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Board Oversight of the Company’s Risks
We maintain a comprehensive enterprise risk management program designed to identify potential events and
conditions that may affect the Company and to manage risks to avoid materially adverse effects on the Company. Our
management, including an executive risk committee, is responsible for the design and implementation of the enterprise
risk management, or ERM, program. The Audit Committee of the board of directors, pursuant to its charter, is
responsible for reviewing and evaluating our policies and procedures relating to risk assessment and management. The
full board of directors monitors the ERM program by way of regular reports from our senior executives on
management’s risk assessments and risk status as well as our risk response and mitigation activities. Individual
committees monitor, by way of regular reports, the material risks that relate to the responsibilities of that committee and
report to the full board appropriate information. For example, the Compliance and Quality of Care Committee oversees
assessment and management of several risk-related topics, such as cybersecurity, privacy, Medicare claims audits,
patient satisfaction data, quality of care data, and compliance program administration. For further discussion of the
committee and board oversight of our cybersecurity program, see Item 1C, Cybersecurity, of our Annual Report on
Form 10-K for the year ended December 31, 2023.
The Compensation and Human Capital Committee reviews and considers our compensation policies and
programs in light of the board of directors’ risk assessment and management responsibilities on an annual basis. In 2023,
Mercer (US) Inc. in consultation with our human resources department prepared and presented to the Compensation and
Human Capital Committee a risk assessment report that addressed the incentive compensation structure, programs, and
processes at the corporate and field operation levels. The assessment included, among other things, a review of pay mix
(fixed v. variable, cash v. equity and short v. long-term), performance metrics, target setting, performance measurement
practices, pay determination, mitigation practices such as the Compensation Recoupment Policy, and overall governance
and administration of pay programs. After reviewing this report and making inquiries of management, the Compensation
and Human Capital Committee determined we have no compensation policies and programs that give rise to risks
reasonably likely to have a material adverse effect on us. Additionally, the Compensation and Human Capital Committee
oversees assessment and management of human capital-related risks, such as those involving recruitment, retention,
inclusion and diversity, employee engagement, and employment litigation. For further discussion of our human capital
management, see Item 1, Business, of our Annual Report on Form 10-K for the year ended December 31, 2023.
Board Oversight of Sustainability Matters
As a healthcare provider, our business model by definition promotes sustainable ends. As our corporate purpose
states, “We serve our patients and communities through customized rehabilitation that exceeds expectations. Our care
teams are committed to achieving the best possible outcomes and getting patients back to what matters most.” In other
words, our goal is to treat our patients’ medical conditions so that they can resume their lives to the greatest extent
possible. That commitment we have to caring for our patients extends to our employees, as well as the communities in
which we serve. For further detail on our sustainability story, please visit https://investor.encompasshealth.com/investor-
resources/sustainability. Our website is not and shall not be deemed to be a part of this proxy statement by reference or
otherwise incorporated into any other filings we make with the SEC.
In the context of our ERM program, our board has historically overseen those matters commonly referred to as
environmental, social and governance, or ESG, matters that are reasonably likely to be material to the Company. Much
of that oversight has been delegated to the board’s committees. The board formalized and approved an ESG reporting
structure, set out in the table below, and schedule based in large part on the Sustainability Accounting Standards Board,
or SASB, standards for healthcare delivery. Given our business model, not all topics below are material to us. Therefore,
those topics are not reviewed by the board on a regular basis. However, we monitor changes in our operations, business
model, regulatory requirements, and the broader business environment to assess the materiality of the ESG topics over
time. The board is committed to monitoring our business as well as the broader concerns of our stockholders to identify
changes in the importance of issues we face.
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Board Committee
Compliance and Quality of Care
Audit
Compensation and Human Capital
Nominating/Corporate Governance
ESG Topic
Quality of Care and Patient Satisfaction*
Patient Privacy and Electronic Health Records*
Employee Health and Safety*
Pricing and Billing Transparency*
Climate Change Impacts on Human Health and Infrastructure*
Fraud and Unnecessary Procedures*
Access for Low-Income Patients*
Energy and Waste Management*
Management of Controlled Substances*
Water Usage
Supply Chain Risks
Employee Recruitment, Development, and Retention*
Inclusion and Diversity
Gender Pay Equality
Employee Relations Matters (including discrimination and
harassment allegations)
Political Spending
Anti-competitive Practices
Stockholder Engagement
* Topics from SASB’s Health Care Delivery SAS.
Annual Evaluation of the Performance of the Board and Its Committees
On an annual basis, members of our board complete an evaluation of the performance of the board as well as
each committee on which they serve, as required by the Corporate Governance Guidelines. The evaluations are intended
assist in determining whether the board and its committees are functioning effectively and fulfilling the requirements set
forth in the Corporate Governance Guidelines and the committee charters, as applicable. The evaluations provide the
members of the board and its committees with an opportunity to reflect upon and improve processes and effectiveness.
Specific questions also elicit feedback on topics reviewed by the board, including the substance of materials on the
subjects, the time dedicated to various topics, and access to management and external advisors. The board may, and does
on occasion, obtain the advice and assistance of outside advisors in performing the evaluation, including conducting
private interviews to provide for unattributed feedback. Results are reviewed by the Nominating/Corporate Governance
Committee which then shares those results and any follow up recommendations with all members of the board.
24
Stockholder Engagement and Communications to Directors
We believe that thoughtful stockholder engagement is important, and we have an active engagement program in
which we meet regularly with stockholders to discuss our business, strategy, operational initiatives, and corporate
governance, as well as other topics of interest to them. Our stockholder engagement efforts allow us to better understand
our stockholders’ priorities, perspectives, and concerns, and enable the Company to effectively address issues that matter
most to our stockholders. Members of management attend several investor conferences throughout the year. We have
attended and participated in meetings of the Council of Institutional Investors and other investor groups in order to
engage with members of the institutional shareholder community more generally. From time to time, we have hosted
investor days in New York City, including in September 2023, to give a broad base of our stockholders the opportunity
to engage in person with members of our senior management. Our board of directors receives regular reports on feedback
given by investors to management.
Stockholders and other parties interested in communicating directly to the board of directors, any committee, or
any non-employee director or group of directors may do so by writing to:
ENCOMPASS HEALTH CORPORATION
BOARD OF DIRECTORS
9001 LIBERTY PARKWAY
BIRMINGHAM, ALABAMA 35242
ATTENTION: [Addressee*]
* Including the name of the specific addressee(s) will allow
us to direct the communication to the intended recipient.
Stockholders and other interested parties may also submit a message electronically via a web-based form at
https://investor.encompasshealth.com/corporate-governance/board-of-directors/contact-the-board/default.aspx, which
generates an email that is sent to the office of our general counsel. All written and electronic communications will be
opened by the office of our general counsel for the sole purpose of determining whether the contents represent a message
to our directors. Correspondence appropriately directed to the board that is not in the nature of advertising, promotions of
a product or service, or offensive material will be forwarded promptly to the addressee(s). In the case of communications
to the board of directors or any group or committee of directors, sufficient copies of the contents will be made for all of
the addressees.
Board Structure and Meetings
Board Structure and Committees
Our business, property, and affairs are managed under the direction of our board of directors. Our Corporate
Governance Guidelines provide for an independent director to serve as the non-executive chairman of the board who sets
the agenda for, and presides over, board meetings, coordinates the work of the committees of our board of directors, and
performs other duties delegated to the chairman by the board. The non-executive chairman also presides over
independent sessions generally held at each board meeting. The board adopted this structure to promote decision-making
and governance independent of that of our management and to better perform the board’s monitoring and evaluation
functions. Members of the board are kept informed of our business through discussions with our Chief Executive Officer
and other officers, by reviewing materials provided to them, by visiting our offices and facilities, and by participating in
meetings of the board and its committees.
Our board met five times during 2023. Each member of the board attended 75% or more of the meetings of the
board and the committees on which he or she served during the year. In addition, it is our expectation that each director
attend the annual meeting of stockholders. All members of our board attended the annual meeting in 2023.
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The board has the five standing committees set out in the table below, each of which is governed by a charter
and reports its actions and recommendations to the full board. Each committee has the authority to retain, at the expense
of the Company, outside advisors, including consultants and legal and accounting advisors. The following table shows
the number of meetings and the membership of each board committee as of December 31, 2023.
Compensation
and Human
Capital
Compliance/
Quality of
Care
Audit
Finance
Nominating/
Corporate
Governance
Number of Meetings in 2023:
Greg D. Carmichael
Edward M. Christie III
John W. Chidsey*
Donald L. Correll*
Joan E. Herman
Leslye G. Katz
Patricia A. Maryland
Kevin J. O’Connor
Christopher R. Reidy
Nancy M. Schlichting
Mark J. Tarr
Terrance Williams
8
X
X
X
Chair
X
6
Chair
5
X
X
X
Chair
X
X
X
4
X
X
Chair
X
5
X
X
X
Chair
* Retiring as of the 2024 annual meeting of stockholders.
Audit Committee
The Audit Committee’s purpose, per the terms of its charter, is to assist the board of directors in fulfilling its
responsibilities to the Company and its stockholders, particularly with respect to the oversight of the accounting,
auditing, financial reporting, and internal control and compliance practices of the Company. The specific responsibilities
of the Audit Committee are, among others, to:
•
•
•
•
•
•
•
•
assist the board in the oversight of the integrity of our financial statements and compliance with legal and
regulatory requirements, the qualifications and independence of our independent auditor, and the
performance of our internal audit function and our independent auditor;
appoint, compensate, replace, retain, and oversee the work of our independent auditor;
at least annually, review a report by our independent auditor regarding its internal quality control
procedures, material issues raised by certain reviews, inquiries or investigations relating to independent
audits within the last five years, and relationships between the independent auditor and the Company;
review and evaluate our quarterly and annual financial statements with management and our independent
auditor, including management’s assessment of and the independent auditor’s opinion regarding the
effectiveness of our internal control over financial reporting;
discuss earnings press releases as well as financial information and earnings guidance provided to analysts
and rating agencies with management;
review annually risk exposure topics assigned by the board as well as management’s efforts to monitor and
mitigate those exposures;
discuss policies with respect to risk assessment and risk management; and
appoint and oversee the activities of our Inspector General who has the responsibility to identify violations
of Company policy and law relating to accounting or public financial reporting.
The Audit Committee Report appears on page 34 of this proxy statement.
Compensation and Human Capital Committee
The Compensation and Human Capital Committee’s purpose and objectives are to attract and retain high-quality
personnel to better ensure the long-term success of the Company and the creation of long-term shareholder value.
Accordingly, this committee oversees our compensation and employee benefit objectives, plans and policies and
approves, or recommends to the independent members of the board of directors for approval, the individual
compensation of our executive officers. This committee also reviews our human capital strategy and management
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activities, such as employee and management recruiting, retention and development initiatives as well as diversity, equity
and inclusion initiatives For further discussion of our human capital management, see Item 1, Business, of our Annual
Report on Form 10-K for the year ended December 31, 2023.
The specific responsibilities of this committee are, among others, to:
•
•
•
•
•
•
•
•
•
review and approve our compensation programs and policies, including our benefit plans, incentive
compensation plans and equity-based plans and administer those plans as may be required;
review and approve (or recommend to the board in the case of the Chief Executive Officer) goals and
objectives relevant to the compensation of the executive officers and evaluate their performances in light of
those goals and objectives;
determine and approve (together with the other independent directors in the case of the Chief Executive
Officer) the compensation levels for the executive officers;
review and discuss with management the Compensation Discussion and Analysis and recommend inclusion
thereof in our annual report or proxy statement;
review and approve (or recommend to the board in the case of the Chief Executive Officer) employment
arrangements, severance arrangements and termination arrangements and change in control arrangements to
be made with any executive officer;
review at least annually our management succession plan as it relates to compensation and benefits;
oversee long-term succession plans for senior management;
review at least annually compensation and human capital related risk exposures as well as management’s
efforts to monitor and mitigate those exposures; and
review and recommend to the board the compensation for the non-employee members of the board.
The Compensation and Human Capital Committee Report appears on page 35 of this proxy statement.
In July 2021, the Compensation and Human Capital Committee conducted a request for proposal process and
sought proposals from several national compensation consultants. The committee then engaged Pay Governance as its
independent compensation consultant to assist it in its review and evaluation of executive compensation practices. The
committee has reviewed the independence of Pay Governance and of each individual employee of the firm with whom it
works. Pay Governance does not perform other services for the Company. The committee has determined Pay
Governance has no conflict of interest in providing advisory services.
Compliance and Quality of Care Committee
The Compliance and Quality of Care Committee’s function is to assist our board of directors in fulfilling its
fiduciary responsibilities relating to our regulatory compliance and cyber risk management activities and to ensure we
deliver quality care to our patients. The committee is primarily responsible for overseeing, monitoring, and evaluating
our compliance with all of its regulatory obligations other than tax and securities law-related obligations and reviewing
the quality of services provided to patients. The specific responsibilities of the Compliance and Quality of Care
Committee are, among others, to:
•
•
•
•
•
•
ensure the establishment and maintenance of a regulatory compliance program and the development of a
comprehensive quality of care program designed to measure and improve the quality of care and safety
furnished to patients;
appoint and oversee the activities of a chief compliance officer and compliance office with responsibility
for developing and implementing our regulatory compliance program;
oversee the cyber risk management program designed to monitor, mitigate and respond to cyber risks,
threats, and incidents, and review periodic reports from the chief information officer, including
developments in cyber threat environment and cyber risk mitigation efforts;
review annually compliance and quality of care related risk exposures as well as management’s efforts to
monitor and mitigate those exposures;
review periodic reports from the chief compliance officer, including an annual regulatory compliance report
summarizing compliance-related activities undertaken by us during the year, and the results of all
regulatory compliance audits conducted during the year; and
review and approve annually the quality of care program and review periodic reports from the chief
medical officer regarding our efforts to advance patient safety and quality of care.
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Finance Committee
The purpose and objectives of the Finance Committee are to assist our board of directors in the oversight of the
use and development of our financial resources, including our financial structure, investment policies and objectives, and
other matters of a financial and investment nature. The specific responsibilities of the Finance Committee are, among
others, to:
P
R
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Y
•
•
review and approve certain expenditures, contractual obligations and financial commitments per delegated
authority from our board; and
review, evaluate, and make recommendations to the board regarding (i) capital structure and proposed
changes thereto, including significant new issuances, purchases, or redemptions of our securities, (ii) plans
for allocation and disbursement of capital expenditures, (iii) credit rating, activities with credit rating
agencies, and key financial ratios, (iv) long-term financial strategy and financial needs, (v) major activities
with respect to mergers, acquisition and divestitures, and (vi) plans to manage insurance and asset risk.
Nominating/Corporate Governance Committee
The purposes and objectives of the Nominating/Corporate Governance Committee are to assist our board of
directors in fulfilling its duties and responsibilities to us and our stockholders, and its specific responsibilities include,
among others, to:
•
•
•
•
•
•
•
•
oversee the emergency succession plans for the Chief Executive Officer;
recommend nominees for board membership to be submitted for stockholder vote at each annual meeting,
and to recommend to the board candidates to fill vacancies on the board and newly-created positions on the
board;
review and make recommendations on the size and composition of the board and assist the board in
determining the appropriate characteristics, skills and experience for the individual directors and the board
as a whole and create a process to allow the committee to identify and evaluate individuals qualified to
become board members;
evaluate annually and make recommendations to the board regarding the composition of each standing
committee of the board, the policy with respect to rotation of committee memberships and chairs, and the
functioning of the committees;
review the suitability for each board member’s continued service as a director when his or her term expires,
and recommend whether or not the director should be re-nominated, including review of each director’s
outside commitments as an employee or director;
assist the board in considering whether a transaction between a board member and the Company presents
an inappropriate conflict of interest and/or impairs the independence of any board member and conduct a
prior review of any such transaction;
review annually risk exposure topics assigned by the board as well as management’s efforts to monitor and
mitigate those exposures; and
develop Corporate Governance Guidelines that are consistent with applicable laws and listing standards,
periodically review those guidelines, and recommend to the board any changes the committee deems
necessary or advisable.
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Board Composition and Director Nomination Process
Board Composition
Our board of directors is comprised of skilled directors who represent a diverse set of experiences, expertise and
attributes. The board is almost entirely independent, with Mr. Tarr being the only non-independent member.
Additionally, we maintain a beneficial mix of short- and long-tenured directors in order to ensure that fresh perspectives
are provided and that experience, continuity and stability exist on the board. The average tenure of the directors is
approximately 5.5 years. Both the board of directors and the Nominating/Corporate Governance Committee believe
diversity of skills, perspectives and experiences as represented on the board as a whole, in addition to the primary
factors, attributes or qualities discussed below, promote improved monitoring and evaluation of management on behalf
of the stockholders and produces more creative thinking and solutions. The Nominating/Corporate Governance
Committee considers the distinctive skills, perspectives and experiences that candidates diverse in race, gender, ethnic
background, geographic origin and professional experience offer in the broader context of the primary evaluation
described below. Four of our directors are female, and three of our directors identify as members of underrepresented
groups. For a discussion of the individual experiences and qualifications of our board members, please refer to the
section entitled “Items of Business Requiring Your Vote - Proposal 1: Election of Directors” in this proxy statement.
Criteria for Board Members
In evaluating the suitability of individual candidates and nominees, the Nominating/Corporate Governance
Committee and our board of directors consider relevant factors, including, but not limited to: a general understanding of
marketing, finance, information technology and cybersecurity, corporate strategy and other elements relevant to the
operation of a large publicly-traded company in today’s business environment, senior leadership experience, an
understanding of our business, educational and professional background, diversity of skills, perspectives and
experiences, character, and whether the candidate would satisfy the independence standards of the New York Stock
Exchange (the “NYSE”). The Nominating/Corporate Governance Committee also considers the following attributes or
qualities in evaluating the suitability of candidates and nominees to the board:
•
•
•
•
•
•
•
•
Integrity: Candidates should demonstrate high ethical standards and integrity in their personal and
professional dealings.
Accountability: Candidates should be willing to be accountable for their decisions as directors.
Judgment: Candidates should possess the ability to provide wise and thoughtful counsel on a broad range of
issues.
Responsibility: Candidates should interact with each other in a manner which encourages responsible, open,
challenging and inspired discussion. Directors must be able to comply with all duties of care, loyalty, and
confidentiality.
High Performance Standards: Candidates should have a history of achievements which reflects high
standards for themselves and others.
Commitment and Enthusiasm: Candidates should be committed to, and enthusiastic about, their
performance for the Company as directors, both in absolute terms and relative to their peers. Directors
should be free from conflicts of interest and be able to devote sufficient time to satisfy their board
responsibilities.
Financial Literacy: Candidates should be able to read and understand fundamental financial statements and
understand the use of financial ratios and information in evaluating financial performance.
Courage: Candidates should possess the courage to express views openly, even in the face of opposition.
The Nominating/Corporate Governance Committee and our board of directors also consider whether each
candidate is able to dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties.
The Corporate Governance Guidelines set out the standards, including a policy on over-boarding, for assessing the
ability of each candidate to fulfill his or her duties and responsibilities to the Company. Those standards include specific
limitations that (i) directors should not hold more than four outside directorships with publicly-traded companies,
provided, if he or she is employed on a full-time basis, then he or she should hold no more than two outside directorships
with publicly traded companies; and (ii) members of the Audit Committee should serve on the audit committee of no
more than three publicly-traded companies.
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Process for Identifying and Evaluating Candidates
The Nominating/Corporate Governance Committee has two primary methods for identifying director nominees.
First, on a periodic basis, the committee solicits ideas for possible candidates from members of the board of directors,
senior level executives, and individuals personally known to the members of the board of directors. Second, the
committee may from time to time use its authority under its charter to retain, at the Company’s expense, one or more
search firms to identify candidates.
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The Nominating/Corporate Governance Committee will consider all candidates duly identified and will evaluate
each of them based on the same criteria. The process that will be followed by the committee will include meetings from
time to time to evaluate biographical information and background material relating to potential candidates and interviews
of selected candidates by members of the Nominating/Corporate Governance Committee, other members of the board
and senior management. The committee emphasizes creating a pool of candidates diverse in race, gender and ethnicity.
The candidates recommended for the board’s consideration will be those individuals from that pool who the committee
believes will create a board of directors that is, as a whole, strong in its collective knowledge of, and diverse in skills,
perspectives, and experience with respect to, accounting and finance, management and leadership, vision and strategy,
business operations, business judgment, crisis management, risk assessment, information technology and cybersecurity,
industry knowledge, and corporate governance.
Board Succession Planning
The Nominating/Corporate Governance Committee oversees and plans for director succession and refreshment
of our board of directors to ensure a mix of skills, perspectives, experience, tenure, and diversity that promote and
support our long-term strategy. As previously disclosed, for some time, the Nominating/Corporate Governance
Committee has been focused on succession planning issues associated with longer-termed directors. Specifically, the
committee has attempted to craft an orderly and gradual transition by extending the terms of those directors to facilitate
onboarding and integration of a new director or directors prior to the departures. The board believes the temporary
expansion of the board has allowed for an orderly transition from the legacy board composition to the newly constituted
board and for each longer-tenured director to contribute his or her extensive knowledge of, and experience with, the
Company to each new director. In that transition period over the last four years, seven directors have retired and six new
directors have been elected. In connection with director succession planning, the committee engages, from time to time, a
search firm to identify director candidates for consideration by the board.
Director Nominees Proposed by Stockholders
The Nominating/Corporate Governance Committee will consider written proposals from stockholders for
director nominees. In considering candidates submitted by stockholders, the Nominating/Corporate Governance
Committee will take into consideration the needs of the board of directors and the qualifications of the candidate. In
accordance with our Bylaws, any such nominations must be received by the Nominating/Corporate Governance
Committee, c/o the corporate secretary, not less than 90 days nor more than 120 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided, however, that in the event the annual meeting is called
for a date that is not within 30 days before or after such anniversary date, a nomination, in order to be timely, must be
received not later than the close of business on the tenth day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs.
The Nominating/Corporate Governance Committee received no nominee recommendations from stockholders for the
2024 annual meeting. Pursuant to our Bylaws, stockholder nominations for our 2025 annual meeting of stockholders
must be received at our principal executive offices on or after January 2, 2025 and not later than February 1, 2025. All
stockholder nominations must be sent by mail or courier service and addressed to Encompass Health Corporation, 9001
Liberty Parkway, Birmingham, Alabama 35242, Attention: Corporate Secretary. Other electronic mail and facsimile
delivery are not monitored routinely for stockholder submissions or may change from time to time, so timely delivery
cannot be ensured.
Stockholder nominations must include the information set forth in Section 3.4 of our Bylaws and be
accompanied by a written consent of each proposed nominee to being named as a nominee and to serving as a director if
elected. A stockholder providing notice of a nomination must update and supplement the notice so that the information in
the notice is true and correct as of the record date(s) for determining the stockholders entitled to receive notice of and to
vote at the annual meeting. Any stockholder that intends to submit a nomination for the board of directors should read
the entirety of the requirements in Section 3.4 of our Bylaws which can be found in the “Corporate Governance” section
of our website at https://investor.encompasshealth.com. Shareholders who intend to solicit proxies in support of director
nominees other than our board’s nominees must comply with the additional requirement of Rule 14a-19(b) under the
30
Securities Exchange Act of 1934, as amended. The chairperson of the meeting shall have the power to determine and
declare to the meeting whether or not a nomination was made in accordance with the procedures set forth in our Bylaws
and, if the chairman determines that a nomination is not in accordance with the procedures set forth in the Bylaws, to
declare to the meeting that the defective nomination will be disregarded.
Finally, our Bylaws provide for reimbursement of certain reasonable expenses incurred by a stockholder or a
group of stockholders in connection with a proxy solicitation campaign for the election of one nominee to the board of
directors. This reimbursement right is subject to conditions including the board’s determination that reimbursement is
consistent with its fiduciary duties. We will reimburse certain expenses that a nominating stockholder, or group of
nominating stockholders, has incurred in connection with nominating a candidate for election to our board if the
conditions set out in Section 3.4(c) of our Bylaws are met. If those conditions are met and the proponent’s nominee is
elected, we will reimburse the actual costs of printing and mailing the proxy materials and the fees and expenses of one
law firm for reviewing the proxy materials and one proxy solicitor for conducting the related proxy solicitation. If those
conditions are met and the proponent’s nominee is not elected but receives 40% or more of all votes cast, we will
reimburse the proportion of those qualified expenses equal to the proportion of votes that the nominee received in favor
of his or her election to the total votes cast. For additional detail including the conditions to which any potential
reimbursement is subject, please read Section 3.4(c) of our Bylaws which can be found in the “Corporate Governance”
section of our website at https://investor.encompasshealth.com.
Director Independence
The NYSE listing standards require that the Company have a majority of independent directors and provide that
no director will qualify as “independent” for these purposes unless the board of directors affirmatively determines that
the director has no material relationship with the Company. Additionally, the listing standards set forth a list of
relationships and transactions that would prevent a finding of independence if a director or an immediate family member
of that director were a party.
On an annual basis, our board of directors undertakes a review of the independence of the nominees. In
accordance with the NYSE listing standards, we do not consider a director to be independent unless the board determines
(i) the director meets all NYSE independence requirements and (ii) the director has no material relationship with the
Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the
Company). Members of the Audit, Compensation and Human Capital, and Nominating/Corporate Governance
Committees must also meet applicable independence tests of the NYSE and the SEC. In connection with this
determination, each director and executive officer completes a questionnaire which requires disclosure of, among other
topics: any transactions or relationships between any director or any member of his or her immediate family and the
Company and its subsidiaries, affiliates, our independent registered public accounting firm or any advisors to the
Compensation and Human Capital Committee; any transactions or relationships between any director or any member of
his or her immediate family and members of the senior management of the Company or their affiliates; and any
charitable contributions to not-for-profit organizations for which our directors or immediate family members serve as
executive officers. There were no material director-related relationships, transactions or contributions in 2023.
Our board has determined that all nine of our non-employee director nominees are independent in accordance
with our Corporate Governance Guidelines and the NYSE listing standards. All of the members of the Audit,
Compensation and Human Capital, Nominating/Corporate Governance, Compliance and Quality of Care, and Finance
Committees satisfy those independence tests. Additionally, our board has determined that each of the members of the
Audit Committee qualifies as an “audit committee financial expert” under SEC regulations.
31
Compensation of Directors
Every year, pursuant to its charter, the Compensation and Human Capital Committee evaluates the
compensation of our non-employee directors, including the respective chairperson fees, and recommends any changes it
deems advisable to the full board of directors, which is responsible for adopting the final form and amount of non-
employee director compensation. As part of its annual review, the Compensation and Human Capital Committee receives
comparative peer and industry data and recommendations from its independent compensation consultant, Pay
Governance. This peer group is the same one used for executive compensation and discussed on page 41. Recognizing
there are timing differences in the data and variability year to year, the Compensation and Human Capital Committee and
the board attempt to ensure non-employee director compensation, including chairperson fees, is competitive with the
corresponding market median compensation levels. In 2023, based on the peer review, the board determined that no
change to base director compensation was needed. Additionally, the terms of our 2016 Omnibus Performance Incentive
Plan, approved by our stockholders in 2016, establish a maximum value ($300,000) for both the equity awards granted
and the cash fees paid to a non-employee director in a given year. The total of both cannot exceed $600,000.
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In 2023, we provided the following annual compensation to directors who are not employees:
Name
Greg D. Carmichael
John W. Chidsey
Edward M. Christie III*
Donald L. Correll
Joan E. Herman
Leslye G. Katz
Patricia A. Maryland
Kevin J. O’Connor
Christopher R. Reidy
Nancy M. Schlichting
Terrance Williams
_____________________________
Fees Earned
or Paid
in Cash ($)(1)
120,000
110,302
9,511
225,000
115,000
120,000
100,000
100,000
119,698
100,000
115,000
Stock
Awards
($)(2)
150,040
150,040
64,935
150,040
150,040
150,040
150,040
150,040
150,040
150,040
150,040
All Other
Compensation
($)(3)
5,965
55,486
—
57,895
24,764
24,764
5,965
2,500
3,237
9,750
5,965
Total ($)
276,005
315,828
74,446
432,935
289,804
294,804
256,005
252,540
272,975
259,790
271,005
* Appointed to the board of directors effective November 27, 2023. Accordingly, Mr. Christie received pro rated retainer fees and
stock awards.
(1) The amounts reflected in this column are the retainer and chairperson fees earned for service as a director for 2023, regardless of
when such fees are paid.
(2) Each non-employee director received an award of restricted stock units, or RSUs, with a grant date fair value, computed in
accordance with Accounting Standards Codification 718, Compensation – Stock Compensation, of $150,040 (2,385 units). These
awards are fully vested in that they are not subject to forfeiture; however, no shares underlying a particular award will be issued
until after the date the director ends his or her service on the board. As of December 31, 2023, each director held the following
aggregate RSU awards: Mr. Carmichael - 11,197, Mr. Chidsey - 94,216, Mr. Christie - 997, Mr. Correll - 98,253, Ms. Herman -
42,712, Ms. Katz - 42,712, Ms. Maryland - 11,197, Mr. O’Connor - 5,387, Mr. Reidy - 6,623, Ms. Schlichting - 17,541, and
Mr. Williams - 11,197. There were no other outstanding stock awards.
(3) The amounts reflected in this column represent the value of additional RSUs granted as dividend equivalents in connection with
the payment of dividends on our common stock during 2023 as required by the terms of the original grants.
Our non-employee directors received an annual base cash retainer of $100,000. We also paid the following
chairperson fees to compensate for the enhanced responsibilities and time commitments associated with those positions:
Chair Position
Chairman of the Board
Audit Committee
Compensation and Human Capital Committee
Compliance and Quality of Care Committee
Finance Committee
Nominating/Corporate Governance Committee
Fees Earned or
Paid in Cash ($)
125,000
30,000
20,000
15,000
15,000
20,000
Our non-employee directors may elect to defer all or part of their cash fees under our Directors’ Deferred Stock
Investment Plan. Elections must be made prior to the beginning of the applicable year. Under the plan, amounts deferred
by non-employee directors are promptly invested in our common stock by the plan trustee at the market price at the time
of the payment of the fees. Stock held in the deferred accounts is entitled to any dividends paid on our common stock,
32
which dividends are promptly invested in our common stock by the plan trustee at the market price. Fees deferred under
the plan and/or the acquired stock are held in a “rabbi trust” by the plan trustee. Accordingly, the plan is treated as
unfunded for federal tax purposes. Amounts deferred and any dividends reinvested under the plan are distributed in the
form of our common stock upon termination from board service for any reason. Distributions generally will commence
within 30 days of leaving the board. As of December 31, 2023, the number of shares held in the plan were:
Mr. Chidsey’s 67,506 shares and Mr. Reidy’s 1,917 shares.
In addition, each non-employee member of the board of directors receives a grant of restricted stock units
valued at approximately $150,000. When dividends are paid on our common stock, the directors receive the equivalent in
restricted stock units based on the number of restricted stock units held and the value of the stock. The restricted stock
units held by each director will be settled in shares of our common stock following the director’s departure from the
board.
In furtherance of the goal to align the interests of our management with those of our stockholders, we have
equity ownership guidelines for senior management and members of the board of directors. Each non-employee director
should own equity equal in value to $500,000 within five years of appointment or election to the board. As of
February 14, 2024, all of our non-employee directors with five or more years of service have attained the ownership
levels under the guidelines.
Mr. Tarr received no additional compensation for serving on the board.
33
P
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AUDIT COMMITTEE REPORT
The board of directors has the ultimate authority for effective corporate governance, including the role of
oversight of the management of the Company. The Audit Committee’s purpose is to assist the board of directors in
fulfilling its responsibilities to the Company and its stockholders by overseeing the accounting and financial reporting
processes, the qualifications and selection of the independent registered public accounting firm engaged by the
Company, and the performance of the Company’s Inspector General, internal auditors and independent registered public
accounting firm. The Audit Committee members’ functions are not intended to duplicate or to certify the activities of
management or the Company’s independent registered public accounting firm.
In its oversight role, the Audit Committee relies on the expertise, knowledge and assurances of management, the
internal auditors, and the independent registered public accounting firm. Management has the primary responsibility for
establishing and maintaining effective systems of internal and disclosure controls (including internal control over
financial reporting), for preparing financial statements, and for the public reporting process. PricewaterhouseCoopers
LLP, the Company’s independent registered public accounting firm, is responsible for performing an independent audit
of the Company’s consolidated financial statements, for expressing an opinion on the conformity of the Company’s
audited financial statements with generally accepted accounting principles in the United States, and for expressing its
own opinion on the effectiveness of the Company’s internal control over financial reporting as required by Section 404
of the Sarbanes-Oxley Act of 2002. In this context, the Audit Committee:
•
•
•
reviewed and discussed with management and PricewaterhouseCoopers LLP the fair and complete
presentation of the Company’s consolidated financial statements and related periodic reports filed with the
SEC (including the audited consolidated financial statements for the year ended December 31, 2023, and
PricewaterhouseCoopers LLP’s audit of the Company’s internal control over financial reporting);
discussed with PricewaterhouseCoopers LLP the matters required to be discussed by the applicable
requirements of the Public Company Accounting Oversight Board (the “PCAOB”) and the Securities and
Exchange Commission; and
received the written disclosures and the letter from PricewaterhouseCoopers LLP required by PCAOB Rule
3526 (Communication with Audit Committees Concerning Independence) and discussed with
PricewaterhouseCoopers LLP its independence from the Company and its management.
The Audit Committee also discussed with the Company’s internal auditors and PricewaterhouseCoopers LLP
the overall scope and plans for their respective audits; reviewed and discussed with management, the internal auditors,
and PricewaterhouseCoopers LLP the significant accounting policies applied by the Company in its financial statements,
as well as alternative treatments and risk assessment; and met periodically in executive sessions with each of
management, the internal auditors, and PricewaterhouseCoopers LLP.
The Audit Committee was kept apprised of the progress of management’s assessment of the Company’s internal
control over financial reporting and provided oversight to management during the process.
Based on the reviews and discussions described above, the Audit Committee recommended to the board of
directors, and the board of directors approved, that the audited consolidated financial statements for the year ended
December 31, 2023, and management’s assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2023, be included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2023 for filing with the SEC. The Audit Committee has selected PricewaterhouseCoopers LLP as the
Company’s independent registered public accounting firm for 2024.
Audit Committee
Christopher R. Reidy (Chair)
John W. Chidsey
Edward M. Christie III
Joan E. Herman
Terrance Williams
34
COMPENSATION AND HUMAN CAPITAL COMMITTEE MATTERS
Scope of Authority
The Compensation and Human Capital Committee acts on behalf of our board of directors to establish the
compensation of our executive officers, other than the Chief Executive Officer, and provides oversight of the Company’s
compensation philosophy for senior management. The Compensation and Human Capital Committee reviews and
recommends to the board for final approval the compensation of the Chief Executive Officer and the non-employee
directors. The Compensation and Human Capital Committee also acts as the oversight committee and administrator with
respect to our equity compensation, bonus and other compensation plans covering executive officers and other senior
management. In overseeing those plans, the Compensation and Human Capital Committee may delegate authority for
day-to-day administration and interpretation of the plans, including selection of participants, determination of award
levels within plan parameters, and approval of award documents, to officers of the Company. However, the
Compensation and Human Capital Committee may not delegate any authority under those plans for matters affecting the
compensation and benefits of the executive officers. The Compensation and Human Capital Committee may also
delegate other responsibilities to a subcommittee comprised of no fewer than two of its members, provided that it may
not delegate any power or authority required by any applicable law or listing standard to be exercised by the committee
as a whole. In addition to its compensation oversight authority, the Compensation and Human Capital Committee
reviews our human capital strategy and management activities and oversees assessment and management of human
capital-related risks, such as those involving recruitment, retention, inclusion and diversity, employee engagement, and
employment litigation.
Compensation Committee Interlocks and Insider Participation
No member of our Compensation and Human Capital Committee is an officer or employee of the Company.
None of our current executive officers serves or has served as a member of the board of directors or compensation
committee of any other company that had one or more executive officers serving as a member of our board of directors
or Compensation and Human Capital Committee.
Compensation and Human Capital Committee Report
The Compensation and Human Capital Committee reviewed and discussed with management the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K, and, based upon such review and discussions, the
Compensation and Human Capital Committee recommended to the board of directors that the Compensation Discussion
and Analysis be included in this proxy statement and incorporated by reference in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2023.
Compensation and Human Capital Committee
Greg D. Carmichael (Chair)
Donald L. Correll
Patricia A. Maryland
Nancy Schlichting
35
P
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EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This section presents the key components of our executive compensation program. We explain why we compensate
our executives in the manner we do and how these philosophies guide the individual compensation decisions for our named
executive officers, or “NEOs.” Our 2023 compensation decisions were directed by our board of directors and its
Compensation and Human Capital Committee, which we refer to as the “Committee” in this section only. Our NEOs for
2023, whose compensation arrangements are discussed in this proxy statement, are:
Name
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Title
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President, General Counsel and Secretary
Chief Medical Officer
Chief Accounting Officer
EXECUTIVE SUMMARY
Strategy and Business Overview
Encompass Health is a leading provider of inpatient rehabilitation healthcare services, offering facility-based
patient care through our network of inpatient rehabilitation hospitals. As of March 1, 2024, our national footprint spans 37
states and Puerto Rico and includes 160 hospitals. We are committed to delivering high-quality, cost effective patient care.
Our inpatient rehabilitation hospitals offer specialized rehabilitative care across a wide array of diagnoses and deliver
comprehensive, high-quality, cost-effective patient care services. The majority of our patients have experienced significant
physical and cognitive disabilities or injuries due to medical conditions, such as strokes, hip fractures, and a variety of
debilitating neurological conditions, that are generally nondiscretionary in nature and require rehabilitative healthcare
services in an inpatient setting. Our teams of highly skilled nurses and physical, occupational, and speech therapists utilize
proven technology and clinical protocols with the objective of returning patients to home and work. Patient care is provided
by nursing and therapy staff as directed by physician orders while case managers monitor each patient’s progress and
provide documentation and oversight of patient status, achievement of goals, discharge planning, and functional outcomes.
Our hospitals provide a comprehensive interdisciplinary clinical approach to treatment that leads to a higher level of care
and superior outcomes.
We believe we differentiate ourselves from our competitors based on our broad platform of clinical expertise, the
quality of our clinical outcomes, the sustainability of best practices, our financial strength, and the application of
rehabilitative technology. For additional information regarding our business, refer to Item 1, Business, in our Annual Report
on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).
2023 Business Highlights and Recent Track Record
Our clinicians have consistently provided high quality, compassionate care to patients in need of our services. The
dedication of our team members allowed us to make significant operational and strategic progress and to generate strong
financial results in 2023:
Operational Achievements
ü Our overall patient discharges and “same store” discharges increased by 8.7% and 4.8%, respectively.
ü Inpatient net operating revenues increased 10.4% over 2022.
ü Our hospital teams delivered high-quality outcomes in a cost-effective manner.
ü We entered new markets and enhanced our geographic coverage in existing markets in 2023 by adding
eight new hospitals (395 beds). We also expanded existing hospitals by 46 beds.
36
Quality of Care and Outcomes for Our Patients
ü We continued to outperform the industry averages in the inpatient rehabilitation quality of care measures
of discharge to community and discharge to skilled nursing.
ü 137 of our hospitals hold one or more Joint Commission specialty accreditations in rehabilitation.
ü We improved our ability to deliver quality care to more patients as a result of 513 net same-store RN hires
in a challenging labor market.
ü We reduced first year RN turnover by 174 basis points.
ü We continued roll out of in-house hemodialysis capabilities (83 hospitals at year-end).
Operating Performance and Executive Compensation
We utilize performance objectives in our compensation plans which we believe will, over time, lead to enhanced
stockholder value. Over the past several years, we established a track record of delivering strong results from operations,
and we are proud of our 2023 financial performance in light of the unprecedented challenges posed by the pandemic and the
labor market.
Healthcare is a highly regulated industry. 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.
Overview of Executive Compensation Actions in 2023
For 2023, our board of directors (for actions related to our President and Chief Executive Officer) and the
Committee (for all other NEOs) considered the total compensation packages, both in whole and by component, of our NEOs
to determine appropriateness in light of our executive compensation philosophy and 2023 anticipated challenges. We took
the following actions:
2023 Executive Compensation Actions Summary
Compensation
Component
Base Salary
Senior
Management
Bonus Plan
(“SMBP”)
Long-Term
Incentive Plan
(“LTIP”)
Actions Related to Plans
from Prior Years
Not applicable.
Approved payout of
2022 SMBP awards at 95.8% of
target performance.
Approved 2021 PSU award
payouts based on performance
compared to targets for 2021-22
performance period; awards
equaled a weighted average of
134.4% of target opportunity.
Response to 2023 Say-on-Pay Vote
Actions Related to 2023 Plans
• Kept base salaries flat for all NEOs
• Added “First Year RN Turnover” as a fifth metric to Quality/
Strategic Objectives Scorecard
• Added three-year “relative total shareholder return (“rTSR”)” as a
+/-25% modifier to both existing performance metrics for SVPs and
above (including all NEOs)
• Added “Good Leaver” language to all equity awards for all SVPs
and above
• Awarded supplemental equity awards to Messrs. Coltharp, Darby
and Price in connection with board’s succession planning review
The Committee believes the 94.0% affirmative vote on our 2023 “say-on-pay” vote indicates that our
stockholders support our current executive compensation program’s alignment with our business strategy in the evolving
healthcare industry. In 2023, we underscored our emphasis on performance-based compensation with the addition of a First
Year RN Turnover metric to our SMBP and an rTSR modifier to our performance-based equity awards.
37
EXECUTIVE COMPENSATION PHILOSOPHY
Our
Compensation
Philosophy
•
•
•
•
•
Provide a competitive rewards program for our senior management that aligns management’s
interests with those of our long-term stockholders
Correlate compensation with corporate, regional and business unit outcomes by recognizing
performance with appropriate levels and forms of awards
P
R
O
X
Y
Establish financial and operational goals to sustain strong performance over time
Place 100% of annual cash incentives and a majority of equity incentive awards at risk by
directly linking those incentive payments and awards to the Company’s performance
Provide limited executive benefits to members of senior management
We believe this philosophy will enable us to attract, motivate, and retain talented and engaged executives who will
enhance long-term stockholder value.
Pay and Performance
Our executive
compensation program is
designed to provide a
strong correlation
between pay and
performance. Pay refers
to the value of an
executive’s total direct
compensation, or “TDC.”
Base Salary
+
Annual Cash Incentives
+
Long-Term Equity Incentives
Total Direct
Compensation
NEO Target Total Direct Compensation
Named
Executive
Officer
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Base Salary
$1,050,000
700,000
550,000
415,000
335,000
Target Annual
Cash Incentive
(% of Base)
Target Long-
Term Equity
Incentive
Target Total
Direct
Compensation
120%
85%
75%
50%
50%
$5,170,000
1,925,000
907,500
456,500
368,500
$7,480,000
3,220,000
1,870,000
1,079,000
871,000
In 2023, all cash incentive target amounts and a substantial majority of NEO equity award values were dependent
on performance measured against predetermined, board- or committee-approved objectives. The graphs below
approximately reflect: (i) the portion of our NEOs’ 2023 target TDC that is performance-based and (ii) the time frame (i.e.,
annual vs. long-term) for our NEOs to realize the value of the various TDC components.
President & Chief Executive Officer (Tarr)
72.1% Performance Based
Base Pay
Annual Cash Incentive
14.0%
16.8%
Options
13.8%
PSU
41.5%
69.1% Long-Term
RSA
13.8%
38
Average for Coltharp and Darby
64.3% Performance Based
Base Pay
24.6%
Annual Cash Incentive
19.8%
Options
11.1%
PSU
33.4%
RSA
11.1%
55.6% Long-Term
Average for Charbonneau and Price
44.6% Performance Based
Base Pay
38.5%
Annual Cash Incentive
19.2%
PSU
25.4%
RSA
16.9%
42.3% Long-Term
Note: Numbers may not sum to 100% due to rounding.
Other Best Practices
To ensure the Company has strong corporate governance and risk mitigation, the board of directors also adopted
the following best practices related to executive compensation:
ü Annual and long-term incentive plans have capped,
ü Equity ownership guidelines for senior executives
maximum award opportunities.
require retention of 50% of net shares at the time of
exercise/vest until ownership multiple is met.
ü Annual and long-term incentive plans are designed
with multiple measures of performance.
ü Insider trading policy expressly prohibits hedging or
pledging of our stock by executives and directors.
ü Annual incentive plan includes financial, quality of
care, and workforce retention metrics in support of a
sustainable business model.
ü Supplemental executive benefits or perquisites are
substantially limited to a nonqualified 401(k) plan,
optional executive physical examinations, and a small
amount of personal use of corporate aircraft by CEO.
ü Performance-based long-term incentive awards
include relative Total Shareholder Return modifier.
ü The Committee’s independent consultant, Pay
Governance, is retained directly by the Committee and
performs no other work for the Company.
ü Long-term equity awards for senior vice presidents
and above provide for continued vesting post-
retirement in support of longer range decision making.
ü Independent sessions are scheduled at every regular
meeting of our board and the Committee (no members
of management are present at these independent
sessions).
ü Compensation recoupment, or “claw-back,” policy
applies to all officers, covers misconduct in some
cases where a financial restatement has not occurred,
and otherwise complies with NYSE claw-back
requirements
ü Change-of-control compensation arrangements
include a “double trigger” requiring generally both a
change in control and termination of employment to
receive cash benefits and accelerated vesting of equity
and do not provide tax gross-ups.
39
DETERMINATION OF COMPENSATION
Key
Participants
Compensation
and Human
Capital
Committee
Roles and Responsibilities
Oversees our compensation and employee benefit and human capital objectives, plans, and policies. Reviews
and approves (or recommends for approval of the independent directors of our board in the case of the Chief
Executive Officer) the individual compensation of the executive officers. The Committee is comprised solely
of four independent directors. Its responsibilities related to the compensation of our NEOs, include:
•
review and approve the Company’s compensation programs and policies, including incentive
compensation plans and equity-based plans;
review and approve corporate goals and objectives relevant to the compensation of our NEOs, then (i)
evaluate their performance and (ii) determine and approve their base compensation levels and incentive
compensation based on this evaluation; and, in the case of our Chief Executive Officer, recommend such
compensation to the board for approval.
•
P
R
O
X
Y
The Committee receives support from the Chief Human Resources Officer and the human resources staff and
also engages its own executive compensation consultant as described below.
Chief Executive
Officer
Makes recommendations to the Committee regarding our executive compensation plans and, for all other
NEOs, proposes adjustments to base salaries and awards under our annual incentive compensation and long-
term equity-based plans, establishes individual objectives, and reviews with the Committee the performance
of the other NEOs on their individual objectives.
The Chief Executive and Chief Human Resources Officers regularly attend meetings of the Committee.
Compensation
Consultant
The Committee relies on Pay Governance for independent executive compensation advice and support. Pay
Governance is retained by, and works directly for, the Committee and attends meetings of the Committee, as
requested by the Committee chair. Pay Governance has no decision making authority regarding our executive
compensation. Services provided include, among others:
•
updates and advice to the Committee on the regulatory environment as it relates to executive
compensation matters;
advice on trends and best practices in executive compensation and executive compensation plan design;
•
• market data, analysis, evaluation, and advice in support of the Committee’s role; and
•
commentary on our executive compensation decisions and disclosures.
Management has separately engaged Mercer (US) Inc. The scope of that engagement includes providing data
and analysis on competitive executive and non-executive compensation practices. Mercer data on executive
compensation practices was provided to the Committee, subject to review by, and input from, Pay
Governance. Mercer also provides a diagnostic tool and support to our assessment of risk related to our
compensation practices. Mercer does not directly advise the Committee in determining or recommending the
amount or form of executive compensation.
Assessment of Competitive Compensation Practices
The Committee does not employ a strict formula in determining executive compensation. A number of factors are
considered in determining executive base salaries, annual incentive opportunities, and long-term incentive awards, including:
ü the executive’s responsibilities
ü the executive’s experience
ü the executive’s performance
ü internal equity within senior management
ü succession plans and business continuity
ü competitive market data
To assess our NEOs’ target TDC, the Committee reviews competitive data from two sources:
•
•
compensation survey data noted below, and
healthcare peer group data - Pay Governance, at the direction of the Committee, assembles data for a targeted
group of healthcare industry peers.
The survey data provides a significant sample size, includes information for management positions below senior
executives, and includes companies in healthcare and other industries from which we might recruit for executive positions.
Mercer Benchmark Database
Mercer Integrated Health Networks
Aon Hewitt Executive
Willis Towers Watson Executive
Survey Sources
40
For decisions made in February 2023, the Committee used the previously adopted formulaic approach for
developing the healthcare peer group by filtering the Russell 3000 index by Global Industry Classification Standard sub-
industry codes to include only healthcare services, healthcare facilities, and managed healthcare, with revenues between 33%
and 300% of Encompass Health’s and predominately operating in the continental United States.
s
s
s
s
s
s
s
Acadia Healthcare
Agilon health
Amedisys
AMN Healthcare
Aveanna Healthcare Holdings
Brookdale Senior Living
Cano Health
2023 Healthcare Peer Group
Chemed
Clover Health Investments
Community Health Systems
Cross Country Healthcare
DaVita
Ensign Group
s
s
s
s
s
s
s ModivCare
s
s
s
s
s
s
s
Oak Street Health
Option Care Health
Pediatrix Medical Group
Quest Diagnostics
R1 RCM
Select Medical Holdings
Surgery Partners
Note: LHC Group, Magellan Health, Mednax, Premier, and Universal Health Services were removed from the prior year’s group. Agilon
Health, Cross Country Healthcare, Cano Health, Clover Health Investments, Oak Street Health, Pediatrix Medical Group, and R1 RCM were
added for 2023.
The Committee reviews competitive data on base salary levels, annual incentives, and long-term incentives for each
executive and the NEO group as a whole. In preparation for 2023 compensation decisions, the Committee reviewed total
direct compensation opportunities for our NEOs. Referencing the 50th percentile of the Mercer survey data and the healthcare
peer group data, as well as the assessment factors discussed above, aggregate target TDC for the NEOs was within a
competitive range. It is important to note the Committee, with input from its advisor, recognizes the benchmark data changes
from year to year, so the comparison against those benchmarks places emphasis on sustained compensation trends to avoid
short-term anomalies. In general, the Committee views compensation 15% above or below the 50th percentile to be within a
competitive range given year to year variability in the data and also considers our size relative to the companies in the
healthcare peer group and implications for compensation (Encompass Health’s revenues were at the 76th percentile at the
time of the Committee’s review).
The Committee has considered the appropriate competitive target range to attract and retain the kind of executive
talent necessary to successfully achieve our strategic objectives. The Committee’s objective is to establish target performance
goals that will result in strong performance by the Company. Executives may achieve higher actual compensation for
exceptional performance relative to these target performance goals and below-median levels of compensation for
performance that is not as strong as expected.
41
ELEMENTS OF EXECUTIVE COMPENSATION
Elements of Annual Total Rewards at a Glance
Total Reward
Component
Base Salary
Purpose
2023 Actions
Provide our executives with a competitive
level of regular income.
No changes.
Annual Incentives
Intended to drive Company performance while
focusing on annual objectives.
Modified Quality/Strategic Objectives
Scorecard to include first year RN
turnover.
Long-Term
Incentives
Intended to focus executive attention on
longer-term strength of the business and align
their interests with our stockholders.
For SVPs and above, added rTSR
modifier and implemented the “Good
Leaver” provision (see page 57).
P
R
O
X
Y
Health and Welfare
Benefits
Provide our executives with programs that
promote health and financial security.
Other Benefits and
Perquisites
Encourage supplemental tax deferral savings
beyond 401(k) limitations and promote health
awareness.
No changes.
No changes.
Change in Control
and Severance
Provide business continuity during periods of
transition.
No changes.
The primary elements of our executive compensation program are:
Base Salary + Annual Cash Incentives + Long-Term Equity Incentives
Base Salary
We provide executives and other employees with base salaries to compensate them with regular income at
competitive levels. Base salary considerations include the factors listed under “Assessment of Competitive Compensation
Practices” above.
The base salaries of our NEOs are reviewed annually. As a result of the 2023 review, the salaries for the NEOs were
determined to be appropriate and competitive and maintained at 2022 levels to manage fixed expenses.
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Annual Base Salaries as of 12/31/2023
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President, General Counsel and Secretary
Chief Medical Officer
Chief Accounting Officer
$1,050,000
700,000
550,000
415,000
335,000
Annual Incentives
Plan Objectives and Structure
The 2023 Senior Management Bonus Plan, or “SMBP,” was designed to incentivize and reward our NEOs and
others for annual performance as measured against predetermined corporate quantitative objectives intended to improve the
Company’s performance and promote stockholder value. For 2023, the Committee retained the corporate quantitative
42
objectives of Adjusted EBITDA1 and the Quality/Strategic Objectives Scorecard2. The Quality/Strategic Objectives Scorecard
approach provides the flexibility to adjust the non-financial metrics year over year as our business and the healthcare
operating environment change. The Home Health and Hospice Quality Scorecard component for Mr. Tarr was removed for
2023 due to the spin off of that business unit in 2022. Achievement of each of the Quality/Strategic Objectives Scorecard
metrics is measured by the percentage of hospitals meeting or exceeding their goals. Hospital-specific goals are established
for each metric based on prior performance and relative performance to other hospitals. The Committee added First Year RN
Turnover as a sub-metric to the Quality/Strategic Objectives Scorecard to incentivize actions to reduce registered nurse
turnover, which in turn reduces expenses and improves quality of care.
Objective
Adjusted EBITDA
Quality/Strategic Objectives
Scorecard Sub-Objective
Discharge to Community
Acute Transfer
Discharge to Skilled Nursing Facility
Patient Satisfaction
First Year RN Turnover
2023 SMBP Quantitative Objectives
Award Range
Not Eligible
0%
Threshold
50%
Target
100%
Maximum
200%
< $823,411,000
$823,411,000
$890,174,000
> $956,937,000
Sub-Weight
% of Hospitals Meeting or Beating Hospital-Specific Goal
30%
15%
15%
25%
15%
<60%
<60%
<60%
<60%
<50%
60%
60%
60%
60%
50%
70%
70%
70%
70%
60%
80%
80%
80%
80%
70%
To reward exceptional performance, the NEOs have the opportunity to receive a maximum payout in the event
actual results reach a predetermined level for each objective. Conversely, if attained results are less than threshold for a
component of the corporate or regional quantitative objectives, then no payout for that component of the quantitative
objectives occurs. It is important to note the following:
•
•
performance measures can be achieved independently of each other; and
as results increase above the threshold, a corresponding percentage of the target cash incentive will be awarded.
In other words, levels listed are on a continuum, and straight-line interpolation is used to determine the payout
multiple between two payout levels shown in the table above.
Base
Salary
X
Annual
Target Cash
Incentive
Opportunity
X
Sum of the products of
(weighting %) X (performance as % of target)
for each applicable metric
=
SMBP
Payout
The structure of the 2023 SMBP emphasizes company performance. The Committee, and the board of directors in
the case of our President and Chief Executive Officer, has the authority to recognize significant individual achievement or
underperformance by modifying a final SMBP award up or down; however, no SMBP payout may exceed 200% of target.
There were no modifications to the final awards under the 2023 SMBP.
1 For purposes of the 2023 SMBP, Adjusted EBITDA on a consolidated basis is the same as the measure described in the 2023 Form 10-K, and the results
for SMBP purposes may be adjusted further for certain unusual or nonrecurring unbudgeted items. The Committee has established in advance the following
five categories of adjustments for these unusual or nonrecurring unbudgeted items: acquisitions and divestitures, capital structure changes, litigation
expenses and settlements, material legislative changes, and public health emergencies. The Committee believes these pre-approved categories, along with the
application of the same GAAP standards to the calculation of a metric during the life of the award, help the metric to more accurately reflect items within
management’s control while also minimizing unintended incentives and disincentives associated with the accounting treatment for or impacts of unbudgeted,
discretionary transactions. For 2023, the only adjustment for an unbudgeted item was the financial impact of a hospital lease buyout (capital structure
change). Adjusted EBITDA is discussed in more detail, including reconciliations to corresponding GAAP financial measures, in Appendix A to this proxy
statement.
2 The Quality/Strategic Objectives Scorecard is a compilation of quality and strategic metrics that track patient satisfaction, patient discharge status, and first
year registered nurse (RN) turnover by hospital. Patient Satisfaction results are derived by NRC Health through their Customer Intelligence Platform, a
standardized survey of hospital patients. Patient discharge statuses and first year RN turnover are tracked via internal systems.
43
Establishing the Target Cash Incentive Opportunity
Under the SMBP, the Committee approves a target cash incentive opportunity for each NEO, based upon a
percentage of his or her base salary, “Target Cash Incentive Opportunity as a % of Salary” in the table below. This target cash
incentive opportunity is established as a result of the Committee’s “Assessment of Competitive Compensation Practices”
described above. The Committee also assigns relative weightings (as a percentage of total cash incentive opportunity) to the
objectives as noted below.
P
R
O
X
Y
2023 Senior Management Bonus Plan Weightings
Named Executive
Officer
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Target Cash
Incentive
Opportunity
as a % of
Salary
120%
85%
75%
50%
50%
Consolidated
Adjusted
EBITDA
70%
70%
70%
70%
70%
Quality/
Strategic
Objectives
Scorecard
30%
30%
30%
30%
30%
Assessing and Rewarding 2023 Achievement of Objectives
After the close of the year, the Committee assesses performance against the quantitative objectives to determine a
weighted average result, or the percentage of each NEO’s target incentive that has been achieved, for each objective. Actual
2023 Plan results for the quantitative objectives were as follows:
2023 Adjusted EBITDA Results
Objective
Target
Adjusted EBITDA
$890,174,000
Result
$970,709,0003
% of Target
Metric
Achievement
200.0%
2023 Quality/Strategic Objectives Scorecard Results
Objective
Achievement Weight
% of Target
Metric
Weighted
Metric
Achievement
Discharge to Community
Acute Transfer
Discharge to Skilled Nursing Facility
Patient Satisfaction
First Year RN Turnover
Combined
200.0%
86.5%
200.0%
119.0%
84.5%
30.0%
15.0%
15.0%
25.0%
15.0%
100%
60.00%
12.98%
30.00%
29.75%
12.68%
145.4%
2023 Senior Management Bonus Plan Awards - Calculated Actual
Named Executive Officer
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Quality/
Strategic
Objectives
Adjusted
EBITDA
Scorecard
$ 1,764,000 $ 549,612
259,539
179,933
90,512
73,064
833,000
577,500
290,500
234,500
Total
Payout
$ 2,313,612
1,092,539
757,433
381,012
307,564
Result as
% of
Target
183.6%
183.6%
183.6%
183.6%
183.6%
3 Publicly reported financial results included Adjusted EBITDA of $971.1 million for 2023.
44
Long-Term Incentives
Plan Objectives and Structure
To further align the interests of management and stockholders, a significant portion of each NEO’s total direct
compensation is in the form of long-term equity awards. We believe such awards promote strategic and operational decisions
that align the long-term interests of management and the stockholders and help retain executives. In support of our
performance-driven total compensation philosophy, earned equity values are driven by stock price and financial and
operational performance.
For 2023, our equity incentive plan provided participants at all officer levels with the opportunity to earn
performance-based restricted stock, or “PSUs,” time-based restricted stock, or “RSAs,” and, for the Chief Executive Officer
and the Executive Vice Presidents, stock options. The Committee believes these awards align all levels of management with
stockholders and place a significant portion of TDC at risk. RSAs are included to enhance retention incentives.
The following table summarizes the 2023 target equity award opportunity levels and forms of equity compensation
for each of our NEOs as approved by the Committee and board. These amounts differ from the equity award values reported
in the Summary Compensation Table on page 52 due to the utilization of a 20-day average stock price to determine the
number of shares granted as opposed to the grant date values used for accounting and reporting purposes.
2023 Equity Incentive Plan Structure
Named Executive Officer
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Total Target
Equity Award
Opportunity
$5,170,000
1,925,000
907,500
456,500
368,500
Options as
% of the
Award
20%
20%
20%
—%
—%
PSUs as a
% of the
Award
60%
60%
60%
60%
60%
RSAs as a
% of the
Award
20%
20%
20%
40%
40%
PSU Awards in 2023
The Committee determined that performance-based vesting conditions for the majority of restricted stock granted to
NEOs are appropriate to further align executives with the interests of stockholders and promote specific performance
objectives while facilitating executive stock ownership. Under our equity incentive plan, NEOs may be awarded PSUs, which
entitle them to receive a predetermined range of restricted shares upon achievement of specified performance objectives. PSU
awards do not provide for voting rights unless and until restricted shares are earned and issued after the measurement period.
Dividends accrue when paid on unvested shares that are issued after completion of the applicable PSU measurement period,
but the holders of such restricted shares will not receive the cash payments related to these accrued dividends until the
restricted shares fully vest.
45
2023 PSU Objective WeightingsNormalized Earnings Per Share:60.0%Return on Invested Capital:40.0% For the 2023 awards, the initial number of restricted shares earned will be determined at the end of a two-year
performance period based on the level of achievement of Normalized Earnings Per Share4 (“EPS”) and Return on Invested
Capital5 (“ROIC”). The weighting of these metrics are outlined above. The Committee chose these metrics because the
Committee believes they are directly aligned with our stockholders’ interests.
The 2023 PSU awards to senior vice presidents and above (including all NEOs) have a three-year relative total
shareholder return modifier applied to both the EPS and ROIC performance metrics. For this modifier, our total shareholder
return (“TSR”) is ranked within a group of companies that are included in both the S&P Health Care Services Select Industry
Index and the S&P 1500 Index. If our TSR is at the 75th percentile or above of the TSRs of the companies in that group, the
number of shares earned from the achievement of the financial metrics will be multiplied by 1.25, not to exceed the existing
200% of target achievement cap. Conversely, if our TSR is at the 25th percentile or lower of the TSRs of the companies in
that group, the number of shares earned from the achievement of the financial metrics will be multiplied by 0.75. If the
Company’s TSR is at the 50th percentile, there is no change in the number of shares earned. Other TSRs falling between the
25th and 75th percentiles will result in an interpolated modifier.
P
R
O
X
Y
It is important to note:
• Management provides a report to the Committee that sets out the calculations of the actual results and engages
an accounting firm to produce a report on the accuracy of the calculations;
•
•
if results attained are less than the threshold, then no restricted shares are earned for that performance measure
in that performance period; and
as results increase above the threshold, a corresponding percentage of target equity value will be awarded. In
other words, levels are on a continuum, and straight-line interpolation is used to determine the payout multiple
between two payout levels.
Summary of 2022 PSU Award Results
The 2022 PSU awards completed their performance period on December 31, 2023. The EPS and ROIC objectives
had the following achievement levels:
Objective
EPS
ROIC
Combined
Target
$8.76
9.51%
Result6
$9.09
9.94%
Target Metric
Achievement Weight
Weighted Metric
Achievement
115.1%
145.3%
60%
40%
100%
69.1 %
58.1 %
127.2 %
Participants must remain employed until December 31, 2024, at which time the shares fully vest.
4 For purposes of 2023 PSUs, normalized EPS is calculated on a weighted-average diluted shares outstanding basis by adjusting net income from continuing
operations attributable to Encompass Health for the normalization of income tax expense, fair value adjustments to the value of marketable securities, and
certain unusual or nonrecurring unbudgeted items. The Committee has established in advance the following five categories for these unusual or nonrecurring
unbudgeted items for Committee consideration: acquisitions and divestitures, changes in capital structure, litigation expenses and settlements, material
legislative changes, and public health emergencies. The Committee believes these pre-approved categories, along with the application of the same GAAP
standards to the calculation of a metric during the life of the award, help the metric to more accurately reflect items within management’s control while also
minimizing unintended incentives or disincentives associated with the accounting treatment for unbudgeted, discretionary transactions. For the 2022 EPS
performance period ended December 31, 2023, those unbudgeted items included the impacts of: joint venture transactions, the spin off of our home health
and hospice business, debt refinancing transactions, a hospital lease buyout, CON accelerated amortization, and changes in the 2023 LTIP grants (“good
leaver” and relative TSR modifier). The diluted share count for LTIP purposes includes, as is the case in our 2023 Form 10-K, the shares associated with
restricted stock awards, performance share units, restricted stock units, and dilutive stock options but does not include the impact of stock repurchases, if
any. The calculation of normalized earnings per share differs from that of basic and diluted earnings per share and adjusted earnings per share used in our
earnings releases and publicly available financial guidance. We believe the calculation for compensation purposes for the associated performance period
more accurately represents those matters within the control of management compared to that used in communications with the market.
5 For purposes of 2023 PSUs, ROIC is defined as the two-year average net operating profit after taxes (“NOPAT”) divided by the average invested capital as
of December 31, 2023, 2024, and 2025. Invested capital is calculated as total assets less deferred tax assets, assets from discontinued operations, current
liabilities, long-term operating lease liabilities, noncontrolling interests and redeemable noncontrolling interests plus current portion of long-term debt.
NOPAT is defined as income from continuing operations attributable to Encompass Health common shareholders, excluding interest expense, fair value
adjustments to the value of marketable securities, and loss on early extinguishment of debt, as adjusted for a normalized income tax expense. Both the
numerator and the denominator are adjusted based on applicable items from the five categories for these unusual or nonrecurring unbudgeted items described
above. For the 2022 ROIC performance period ended December 31, 2023, those unbudgeted items included the impacts of: joint venture transactions, the
spin off of our home health and hospice business, a hospital lease buyout, CON accelerated amortization, and changes in the 2023 LTIP grants (“good
leaver” and relative TSR modifier).
6 Publicly reported financial results do not otherwise include the normalized EPS or ROIC metrics.
46
Time-Based Restricted Stock Awards in 2023
The Committee believes the portion of the 2023 award value denominated in RSAs provides retention incentives to
our executives and facilitate stock ownership, which further links executives to our stockholders. Under our equity incentive
plan, NEOs may be granted RSAs which entitle them to receive a predetermined number of restricted shares upon completion
of a specified service period. The recipients of RSA awards have voting rights and rights to receive dividends. Dividends
accrue when paid on outstanding shares, but the holders of RSAs will not receive the cash payments related to these accrued
dividends until the restricted shares fully vest.
For the 2023 RSA award, one-third of the shares awarded vest on the first anniversary of the grant date of the award,
one-third of the shares vest on the second anniversary of the grant date of the award, and the final third vest on the third
anniversary of the grant date of the award, subject in each case to the recipient’s continued employment on the applicable
vesting date.
Stock Option Awards in 2023
The Committee believes nonqualified stock options also are an appropriate means to align the interests of our most
senior executives with our stockholders since they provide an incentive to grow stock price. Each stock option permits the
holder, for a period of ten years, to purchase one share of our common stock at the exercise price, which is the closing market
price on the date of issuance. Options generally vest ratably in equal annual increments over three years from the award date.
In 2023, the number of options awarded equaled 20% of the total target equity award opportunity approved for the related
officer divided by the individual option value determined using the Black-Scholes valuation model.
Supplemental Equity Awards
The Committee granted additional RSAs to Messrs. Coltharp and Darby to promote retention in connection with the
board’s succession planning review. These awards, granted on February 23, 2023, were equal to their annual LTIP award
values ($1,925,000 and $908,000, respectively), have a three-year cliff vesting schedule, and exclude the good leaver clause
discussed page 57.
Mr. Price received a one-time $50,250 increase to his 2023 LTIP award value to recognize his contributions to the
strategic review related to the home health and hospice subsidiary and the services he continued to provide post-spin off to
that entity under the transition services agreement.
Equity Award Timing
Our long-standing practice is to have the independent members on our board of directors approve, based on
recommendations of the Committee, equity awards at the February board meeting which is the first scheduled meeting each
year and allows time to review and consider our prior year’s performance. The number of shares of common stock underlying
the PSU, RSA, and stock option awards is determined using the average closing price for our common stock over the 20-day
trading period preceding the February board meeting at which the awards are approved. The averaging of prices mitigates the
risk of unintended consequences of using a single closing price that may reflect an anomalous price swing on that day. The
strike price for the stock option awards is set at the closing price on the second trading day after the filing of our Form 10-K,
which is also the date of issuance. This timing for the pricing and issuance of stock options allows for the exercise price to
reflect a broad dissemination of our financial results from the prior year and other material nonpublic information commonly
included in the Form 10-K. Other than timing the establishment of the strike price for options to follow the release of our
Form 10-K, our board of directors and the Committee do not take material nonpublic information into account in the pre-
established schedule for granting awards. Of note, we customarily issue our fourth quarter earnings release well before the
annual stock award grant at the February meeting of the board.
Executive Compensation Program Changes for 2024
For decisions made in February 2024, the Committee used a modification of the previously adopted formulaic
approach for developing the healthcare peer group by filtering the Russell 3000 index by Global Industry Classification
Standard sub-industry codes to include only healthcare services, healthcare facilities, and managed healthcare, with revenues
between 40% (formerly 33%) and 300% of Encompass Health’s and predominately operating in the continental United
States. This change in threshold revenue limits the number of companies smaller than EHC although our revenue remains at
the 76th percentile in this peer group.
47
Our board of directors approved, at the recommendation of the Committee and in recognition of his performance, an
increase from $5,170,000 to $5,425,000 in the target long-term incentive opportunity of Mr. Tarr. The board also approved a
limited annual allowance (estimated at approximately $75,000) for personal aircraft usage.
The Committee approved an increase in Mr. Darby’s base salary from $550,000 to $625,000 to recognize his
contributions to strategic leadership and his expanded responsibility for additional departments. The Committee also
approved an increase in Mr. Price’s base salary from $335,000 to $345,000 to recognize his performance and promote
retention. These are the only changes to the individual compensation components for our NEOs.
The 2024 SMBP Quality/Strategic Objectives Scorecard was modified by raising the target for First Year RN
Turnover to 70% of hospitals meeting or exceeding their goal, removing Discharge to Skilled Nursing Facility, and
redistributing the weights as follows:
P
R
O
X
Y
Sub-Metric
Discharge to Community
Acute Transfer
Discharge to Skilled Nursing Facility
Patient Satisfaction
First Year RN Turnover
2023 Weight 2024 Weight
30%
15%
15%
25%
15%
35%
15%
—%
30%
20%
PSU awards for 2024 have a three-year performance period (a change from the prior two-year period), in alignment
with our existing relative TSR modifier, to emphasize the long-term nature of our business strategy and the equity
compensation component.
Benefits
In 2023, our NEOs were eligible for the same benefits offered to other employees, including medical and dental
coverage. NEOs are also eligible to participate in a qualified 401(k) plan, subject to the limits on contributions imposed by
the Internal Revenue Service. In order to allow deferrals above the amounts provided by the IRS, executives and certain other
officers are eligible to participate in a nonqualified deferred 401(k) plan that closely mirrors the current qualified 401(k) plan.
Other than the nonqualified deferred 401(k) plan referenced here, we did not provide our executives with compensation in the
form of a pension plan or a retirement plan.
Perquisite Practices
In general, we do not believe significant personal benefits are necessary for us to attract and retain executive talent.
We do not provide tax payment reimbursements, gross ups, or any other tax payments to any of our executive officers. We do
offer to pay for optional executive physical examinations (historically at a cost of less than $3,000 each) that we believe
encourage proactive health management by our executives, which in turn benefits the business. We also offer reimbursement
of relocation expenses when a senior officer is asked to move for business purposes. On occasion, there may be incidental
perquisites arising from important business activities that have, in part, a direct or indirect personal benefit for the executives
involved, such as entertainment associated with stockholder engagement or employee retreat functions. Additionally, from
time to time, officers and directors may be allowed, if space permits, to have family members accompany them on business
flights on our aircraft, at no material incremental cost to us. As noted above, for 2024, Mr. Tarr has a limited annual
allowance (estimated at approximately $75,000) for personal aircraft usage.
48
OTHER COMPENSATION POLICIES & PRACTICES
Equity Ownership Guidelines for Management and Non-Employee Directors
To further align the interests of our management with those of our stockholders, we have adopted equity ownership
guidelines for senior management and members of our board of directors. Executive officers and outside directors have five
years to reach their ownership level and upon each tax recognition or option exercise event, a covered officer must hold at
least 50% of the after-tax value of the related equity award until ownership levels are achieved. Equity grants to our non-
employee directors must be held until the director leaves the board. All of our NEOs and non-employee directors with five or
more years of service have attained the ownership levels under the guidelines and all of our NEOs and non-employee
directors with less than five years of tenure are on track to meet the guidelines. Outlined in the table below were the
ownership guidelines for 2023:
Position
Chief Executive Officer
Executive Vice President
other executive officer
outside director
Required Value of Equity Owned
5 times annual base salary
3 times annual base salary
1.5 times annual base salary
$500,000
Compensation Recoupment Policy
In July 2023, our board of directors amended and supplemented our existing compensation recoupment policy,
which is an exhibit to our 2023 Form 10-K. The amended policy includes new provisions described below that are
specifically applicable to current and former executive officers. The amended policy also delegates administration of the
policy to the Compensation and Human Capital Committee.
The policy still provides that if it is determined that any fraud, illegal conduct, intentional misconduct, or gross
neglect by any officer was a significant contributing factor to our having to restate all or a portion of our financial statements,
the Company may:
•
•
•
require reimbursement of any incentive compensation paid to that officer,
cause the cancellation of that officer’s restricted or deferred stock awards and outstanding stock options, and
require reimbursement of any gains realized on the exercise of stock options attributable to incentive awards,
if and to the extent (i) the amount of that compensation was calculated based upon the achievement of the financial results
that were subsequently reduced due to that restatement and (ii) the amount of the compensation that would have been
awarded to that officer had the financial results been properly reported would have been lower than the amount actually
awarded.
Additionally, if an officer is found to have committed fraud or engaged in intentional misconduct in the performance
of his or her duties, as determined by a final, non-appealable judgment of a court of competent jurisdiction, and the
Committee determines the action caused substantial harm to the Company, the Committee may, in its sole discretion, utilize
the remedies described above.
The 2023 amendments require, in the event of a financial restatement, recoupment of any incentive-based
compensation paid to current and former executive officers in the prior three fiscal years. The policy defines “financial
restatement” to include any required accounting restatement to correct an error in previously issued financial statements that
is material to those statements, or that would result in a material misstatement if the error were corrected in the current period
or left uncorrected in the current period. The required recoupment applies to incentive compensation relating to financial
report measures, such as EBITDA, EPS, ROIC and TSR, to the extent that such compensation exceeds the amount of the
compensation that would have been awarded to that executive officer had the financial measures been properly reported
initially. The Committee may only elect not to seek recoupment in very limited circumstances, including where there is a
determination that such recovery would be impracticable and the amounts paid to a third party to assist in enforcing the
policy would exceed the amount to be recovered.
49
Anti-Hedging Policy
The Company prohibits executive officers and directors from pledging our securities as collateral, including as part
of a margin account. The Company also prohibits the following transactions for all employees and directors:
•
•
•
short-term trading of our securities,
short sales of our securities, and
hedging or monetization transactions, such as zero-cost collars and forward sale contracts.
Severance Arrangements
P
R
O
X
Y
It is not our common practice to enter into individual employment agreements with our senior executives. To
provide our senior executives with competitive levels of certainty as a retention tool, potential benefits are provided to our
senior executives under our change of control and severance plans. The Committee determined the value of benefits were
reasonable, appropriate, and competitive with our healthcare provider peer group. As a condition to receipt of any payment or
benefits under either plan, participating employees must enter into a restrictive covenant agreement. The duration of the
restrictive covenants would be equal to the benefit continuation periods described below for each plan. Payments made under
either plan are explicitly subject to the Compensation Recoupment Policy described above. As a matter of policy, payments
under either plan do not include “gross ups” for taxes payable on amounts paid. Definitions of “cause,” “retirement,” “change
in control,” and “good reason” are provided on page 57.
Executive Severance Plan
The goal of the Executive Severance Plan is to help retain qualified, senior officers whose employment is subject to
termination under circumstances beyond their control. Our NEOs are participants in the plan, which is an exhibit to our 2023
Form 10-K. Under the plan, if a participant’s employment is terminated by the participant for good reason or by Encompass
Health other than for cause (as defined in the plan), then the participant is entitled to receive a cash severance payment, health
benefits, and the other benefits described below. Voluntary retirement, death, and disability are not payment triggering
events. The terms of the plan, including the payment triggering events, were determined by the Committee to be consistent
with healthcare industry market data from the Committee’s and management’s consultants.
The cash severance payment for participants is the multiple (shown in the table below) of annual base salary in
effect at the time of the event plus any accrued, but unused, paid time off, and accrued, but unpaid, salary. This amount is to
be paid in a lump sum within 60 days following the participant’s termination date. In addition, except in the event of
termination for cause or resignation for lack of good reason, the participants and their dependents continue to be covered by
all life, healthcare, medical and dental insurance plans and programs, excluding disability, for a period of time set forth in the
following table.
Position
Chief Executive Officer
Executive Vice Presidents
other executive officers
Severance as Multiple of
Annual Base Salary
Benefit Plan
Continuation Period
3x
2x
1x
36 months
24 months
12 months
Amounts paid under the plan are in lieu of, and not in addition to, any other severance or termination payments
under any other plan or agreement with Encompass Health. As a condition to receipt of any payment under the plan, the
participant must waive any entitlement to any other severance or termination payment by us, including any severance or
termination payment set forth in any employment arrangement with us.
Upon termination of a participant without cause, or his or her resignation for good reason, a prorated portion of any
equity award subject to time-based vesting only that is unvested as of the effective date of the termination or resignation will
automatically vest. If any restricted stock awards are performance-based, the Committee will determine the extent to which
the performance goals for such restricted stock have been met and what awards have been earned.
Change in Control Benefits Plan
The goal of the Change in Control Benefits Plan is to help retain certain qualified senior officers, maintain a stable
work environment, and encourage officers to act in the best interest of stockholders if presented with decisions regarding
change in control transactions. Our NEOs and other officers are participants in the plan, which is an exhibit to our 2023
Form 10-K. The terms of the plan, including the definition of a change in control event, were reviewed and determined to be
50
consistent with healthcare industry market data from the Committee’s and management’s consultants. The plan includes a
“double trigger” for the vesting of equity in the event of a change in control for all future awards to executives. The plan is
reviewed annually for market competitiveness but no material benefit changes have been made since 2014.
Under the Change in Control Benefits Plan, participants are divided into tiers as designated by the Committee. The
President and Chief Executive Officer and the current Executive Vice Presidents are Tier 1 participants; the Chief Medical
Officer and Chief Accounting Officer are Tier 2 participants. Any person named as an Executive Vice President in the future
will participate at the Tier 2 level.
If a participant’s employment is terminated within 24 months following a change in control or during a potential
change in control, either by the participant for good reason (as defined in the plan) or by Encompass Health without cause,
then the participant shall receive a lump sum severance payment. Voluntary retirement is not a payment triggering event. For
Tier 1 and 2 participants, the lump sum severance is 2.99 times and 2.0 times, respectively, the sum of the highest base salary
in the prior three years and the average of actual annual incentives for the prior three years for the participant, plus a prorated
annual incentive award for any incomplete performance period. In addition, except in the event of termination for cause or
resignation for lack of good reason, the participant and the participant’s dependents continue to be covered by all life,
healthcare, medical and dental insurance plans and programs, excluding disability, for a period of 36 months for Tier 1
participants and 24 months for Tier 2 participants.
If a change in control occurs as defined in the plan, outstanding equity awards vest as follows:
Stock Options
Restricted Stock
Outstanding options will only vest if the participant is
terminated for good reason or without cause within 24
months of a change in control or if not assumed or
substituted and, for Tier 1 and 2 participants, all options will
remain exercisable for three and two years, respectively.
Restricted stock will only vest if the participant is
terminated for good reason or without cause within 24
months of a change in control or if not assumed or
substituted.
Note: For performance-based restricted stock, the Committee will determine the extent to which the performance goals have been met
and vesting of the resulting restricted stock will only accelerate as provided above.
The Committee has the authority to cancel an award in exchange for a cash payment in an amount equal to the
excess of the fair market value of the same number of shares of the common stock subject to the award immediately prior to
the change in control over the aggregate exercise or base price (if any) of the award.
Tax Implications of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”), generally limits to $1
million per year income tax deductions available to publicly held corporations for compensation paid in years beginning after
December 31, 2017 to the corporation’s CEO, CFO, certain other NEOs, and certain former NEOs (each a “Covered
Executive”). As a result, most compensation in excess of $1 million paid to our Covered Executives is not deductible.
The Compensation Committee has considered the effect of Section 162(m) on the Company’s executive
compensation program. The Compensation Committee exercises discretion in setting base salaries, structuring incentive
compensation awards and in determining payments in relation to levels of achievement of performance goals. The
Compensation Committee believes that the total compensation program for Covered Executives should be managed in
accordance with the objectives outlined in the Company’s compensation philosophy and in the best overall interests of the
Company’s stockholders. Accordingly, compensation paid by the Company may not be deductible because such
compensation exceeds the limitations for deductibility under Section 162(m).
51
Summary Compensation Table
The table below shows the compensation of our named executive officers for services in all capacities in 2023, 2022,
and 2021. For a discussion of the various elements of compensation and the related compensation decisions and policies,
including the amount of salary and bonus in proportion to total compensation and the material terms of awards reported
below, see “Compensation Discussion and Analysis” beginning on page 36. The Company had no employment agreements or
other compensation arrangements in effect with its NEOs in 2023.
P
R
O
X
Y
Name and Principal
Position
Mark J. Tarr
President and Chief Executive
Officer
Douglas E. Coltharp
Executive Vice President and
Chief Financial Officer
Patrick Darby
Executive Vice President,
General Counsel and Secretary
Elissa J. Charbonneau
Chief Medical Officer
Andrew L. Price
Chief Accounting Officer
Year
2023
2022
2021
2023
2022
2021
2023
2022
2021
2023
2022
2021
2023
2022
—
Salary
($)
Bonus
($)
1,050,000
1,050,000
1,050,000
700,000
700,000
700,000
550,000
550,000
550,000
415,000
415,000
375,000
335,000
335,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Stock
Awards
($)(1)
4,453,885
4,357,861
4,188,878
3,565,288
1,622,714
1,559,712
1,681,318
764,986
735,343
483,789
481,065
417,846
443,806
388,323
—
Option
Awards
($)(2)
951,957
1,055,281
1,026,087
354,450
392,936
382,059
167,109
185,248
180,108
—
—
—
—
—
—
Non-Equity
Incentive Plan
Compensation
($)(3)
2,313,612
1,180,721
1,920,240
1,092,539
569,773
912,492
757,433
395,010
632,610
381,012
198,702
287,550
307,564
160,398
—
All Other
Compensation
($)(4)
66,922
92,106
66,923
38,093
48,375
37,492
11,250
10,250
887
18,411
16,763
13,910
14,862
20,755
—
Total
($)
8,836,376
7,735,969
8,252,128
5,750,370
3,333,798
3,591,755
3,167,110
1,905,494
2,098,948
1,298,212
1,111,530
1,094,306
1,101,232
904,476
—
(1)
(2)
(3)
The stock awards for each year consist of performance-based restricted stock, or “PSUs,” and time-based restricted stock, or “RSAs,” as part of
the long-term incentive plan for the given year. The amounts shown in this column are the grant date fair values computed in accordance with
Accounting Standards Codification Topic 718, Compensation - Stock Compensation (“ASC 718”), assuming the most probable outcome of the
performance conditions as of the grant dates (i.e., target performance). All of the values in this column are consistent with the estimate of
aggregate compensation expense to be recognized over the applicable vesting period, excluding any adjustment for forfeitures. The assumptions
used in the valuations are discussed in Note 14, Share-Based Payments, to the consolidated financial statements in our 2023 Form 10-K.
The values of the PSU awards at the varying performance levels for our current NEOs are set forth in the table below. The threshold number also
assumes relative TSR modifier, explained on page 46, at the lowest level (.75x based on a TSR at or below the 75th percentile).
Name
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Threshold
Performance
Value ($)
Target
Performance
Value ($)
Maximum
Performance
Value ($)
1,286,158
1,634,207
1,570,830
478,912
608,518
584,902
225,798
286,870
275,754
113,612
144,306
125,354
104,235
116,497
3,429,640
3,268,413
3,141,659
1,277,052
1,217,036
1,169,804
602,037
573,740
551,508
302,853
288,612
250,708
277,848
232,994
6,859,281
6,536,826
6,283,318
2,554,105
2,434,072
2,339,608
1,204,074
1,147,480
1,103,016
605,706
577,224
501,416
555,695
465,988
Year
2023
2022
2021
2023
2022
2021
2023
2022
2021
2023
2022
2021
2023
2022
The values of option awards listed in this column are the grant date fair values computed in accordance with ASC 718 as of the grant date. All of
the values in this column are consistent with the estimate of aggregate compensation expense to be recognized over the three-year vesting period,
excluding any adjustment for forfeitures. The assumptions used in the valuations are discussed in Note 14, Share-Based Payments, to the
consolidated financial statements in our 2023 Form 10-K.
The amounts shown in this column are bonuses earned under our senior management bonus plan in the corresponding year but paid in the first
quarter of the following year.
52
(4)
The items reported in this column for 2023 are described as set forth below.
Name
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Qualified
401(k)
Match ($)
Nonqualified
401(k)
Match ($)
—
9,096
11,250
9,206
7,431
66,922
28,997
—
9,205
7,431
For SEC purposes, the cost of personal use of the Company aircraft, if any, is calculated based on the incremental cost to us. To determine the
incremental cost, we calculate the variable costs based on usage which include fuel costs on a per hour basis, plus any direct trip expenses such as
on-board catering, landing/ramp fees, crew hotel and meal expenses, and other miscellaneous variable costs. Since Company-owned aircraft were
only used for a primary business purpose in 2023, the calculation method excludes the costs which do not change based on incremental non-
business usage, such as pilots’ salaries, aircraft leasing expenses and the cost of maintenance not related specifically to trips.
Occasionally, our executives are accompanied by guests on the corporate aircraft for personal reasons when there is available space on a flight
being made for business reasons. There is no incremental cost associated with that use of the aircraft when the guests do not comprise 50% or
more of the passengers, except for a pro rata portion of catering expenses and our portion of employment taxes attributable to the income imputed
to that executive for tax purposes.
53
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55
Potential Payments upon Termination of Employment
The following table describes the potential payments and benefits under the Company’s compensation and benefit
plans and arrangements to which the named executive officers currently employed with us would be entitled upon
termination of employment by us without “cause” or by the executive for “good reason” or “retirement,” as those terms are
defined below. There are no payments or benefits due in the event of a termination of employment by us for cause. As
previously discussed, our Change in Control Benefits Plan does not provide cash benefits unless there is an associated
termination of employment. Due to the numerous factors involved in estimating these amounts, the actual value of benefits
and amounts to be paid can only be determined upon termination of employment. In the event an NEO breaches or violates
the restrictive covenants contained in the awards under our 2008 Equity Incentive Plan, 2016 Omnibus Performance
Incentive Plan, Executive Severance Plan, or the Changes in Control Benefits Plan certain of the amounts described below
may be subject to forfeiture and/or repayment.
P
R
O
X
Y
For additional discussion of the material terms and conditions, including payment triggers, see “Severance
Arrangements” beginning on page 50. An executive cannot receive termination benefits under more than one of the plans
or arrangements identified below. Retirement benefits are governed by the terms of the awards under our 2008 Equity
Incentive and 2016 Omnibus Performance Incentive Plans. The following table assumes the listed triggering events
occurred on December 31, 2023.
Name/Triggering Event
Mark J. Tarr
Executive Severance Plan
Without Cause/For Good Reason
Disability or Death
Change in Control Benefits Plan
Douglas E. Coltharp
Executive Severance Plan
Without Cause/For Good Reason
Disability or Death
Change in Control Benefits Plan
Patrick Darby
Executive Severance Plan
Without Cause/For Good Reason
Disability or Death
Change in Control Benefits Plan
Elissa J. Charbonneau
Executive Severance Plan
Without Cause/For Good Reason
Disability or Death
Change in Control Benefits Plan
Andrew L. Price
Executive Severance Plan
Without Cause/For Good Reason
Disability or Death
Change in Control Benefits Plan
Lump Sum
Payments
($)(1)
Continuation
of Insurance
Benefits
($)
Accelerated
Vesting of
Equity Awards
($)(2)
Total
Termination
Benefits
($)
3,150,000
—
9,673,956
1,400,000
—
5,196,578
1,100,000
—
3,796,140
415,000
—
1,647,680
335,000
—
1,356,248
57,036
—
57,036
31,736
—
47,604
31,038
—
46,557
150
—
299
9,560
—
19,120
9,495,087
14,214,849
14,811,452
12,702,123
14,214,849
24,542,444
4,116,236
7,383,014
7,605,161
1,940,850
3,481,340
3,586,066
857,771
1,377,501
1,377,501
742,223
1,199,626
1,199,626
5,547,972
7,383,014
12,849,343
3,071,888
3,481,340
7,428,763
1,272,921
1,377,501
3,025,480
1,086,783
1,199,626
2,574,994
(1) The Company automatically reduces payments under the Change in Control Benefits Plan to the extent necessary to prevent such
payments being subject to “golden parachute” excise tax under Section 280G and Section 4999 of the Internal Revenue Code, but only to
the extent the after-tax benefit of the reduced payments exceeds the after-tax benefit if such reduction were not made (“best payment
method”). The lump sum payments shown may be subject to reduction under this best payment method.
(2) The amounts reported in this column reflect outstanding equity awards, the grant date values of which along with accrued dividends and
dividend equivalents have been reported as compensation in 2023 or prior years. The value of the accelerated vesting of equity awards
listed in this column has been determined based on the $66.72 closing price of our common stock on the last trading day of 2023. The
Committee may, in its discretion, provide that upon a change in control: (x) equity awards be canceled in exchange for a payment in an
amount equal to the fair market value of our stock immediately prior to the change in control over the exercise or base price (if any) per
share of the award, and (y) each award be canceled without payment therefore if the fair market value of our stock is less than the exercise
or purchase price (if any) of the award.
At that time, the amounts shown in the preceding table do not include payments and benefits to the extent they are
provided on a nondiscriminatory basis to salaried employees generally upon termination of employment. The “Lump Sum
Payments” column in the above table includes the estimated payments provided for under the plans described under
“Severance Arrangements” beginning on page 50. Additionally, the Executive Severance Plan and the Change in Control
56
Benefits Plan provide that as a condition to receipt of any payment or benefits all participants must enter into a restrictive
covenant and release agreement.
As of December 31, 2023, Messrs. Tarr and Coltharp are the only named executive officers eligible for retirement
as defined below. The table below provides the potential equity value accelerated upon retirement for Messrs. Tarr and
Coltharp and each other NEO had he or she been retirement eligible on December 31, 2023. Equity awards granted to
SVPs and above beginning in 2023 provide for “good leaver” treatment upon retirement.
Named Executive Officer
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Accelerated Vesting of Equity Awards Due to
Retirement (Assuming Retirement Eligible)($)
12,926,536
6,903,232
2,543,240
1,199,229
1,055,459
Definitions
“Cause” means, in general terms:
(i) evidence of fraud or similar offenses affecting the Company;
(ii) indictment for, conviction of, or plea of guilty or no contest to, any felony;
(iii) suspension or debarment from participation in any federal or state health care program;
(iv) an admission of liability, or finding, of a violation of any securities laws, excluding any that are noncriminal;
(v) a formal indication that the person is a target or the subject of any investigation or proceeding for a violation of
any securities laws in connection with his employment by the Company, excluding any that are noncriminal; and
(vi) breach of any material provision of any employment agreement or other duties.
“Change in Control” means, in general terms:
(i)
the acquisition of 30% or more of either the then-outstanding shares of common stock or the combined voting
power of the Company’s then-outstanding voting securities; or
(ii) the individuals who currently constitute the board of directors, or the “Incumbent Board,” cease for any reason to
constitute at least a majority of the board (any person becoming a director in the future whose election, or
nomination for election, was approved by a vote of at least a majority of the directors then constituting the
Incumbent Board shall be considered as though such person were a member of the Incumbent Board); or
(iii) a consummation of a reorganization, merger, consolidation or share exchange, where persons who were the
stockholders of the Company immediately prior to such reorganization, merger, consolidation or share exchange
do not own at least 50% of the combined voting power; or
(iv) a liquidation or dissolution of the Company or the sale of all or substantially all of its assets.
“Good leaver” means retirement eligible executives who provide at least six-months notice of retirement will receive the
entirety of any unvested awards, rather than the pro rata vesting otherwise provided, in accordance with the original
vesting schedule. Once notice is provided, no new awards may be made and this preferred treatment will not apply to
awards made within three months of the notice.
“Good Reason” means, in general terms:
(i) an assignment of a position that is of a lesser rank and that results in a material adverse change in reporting
position, duties or responsibilities or title or elected or appointed offices as in effect immediately prior to the
change, or in the case of a Change in Control ceasing to be an executive officer of a company with registered
securities;
(ii) a material reduction in compensation from that in effect immediately prior to the Change in Control; or
(iii) any change in benefit level under a benefit plan if such change in status occurs during the period beginning 6
months prior to a Change in Control and ending 24 months after it; or
(iv) any change of more than 50 miles in the location of the principal place of employment.
“Retirement” means the voluntary termination of employment after attaining (a) age 65 or (b) in the event that person has
been employed for 10 or more years on the date of termination, age 60.
57
Outstanding Equity Awards at December 31, 2023(1)
Option Awards(2)
Number of
Securities
Underlying
Unexercised
Options (#)
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable Unexercisable
Option
Exercise
Price ($)
Option
Expiration
Date(3)
Mark J. Tarr
Stock Awards
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested (#)(6)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(5)
Equity
Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested ($)(7)
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)(4)
P
R
O
X
Y
19,460
25,516
56,306
62,078
69,335
66,670
42,882
24,503
—
12,260
16,075
55,194
29,196
24,831
21,101
24,825
15,966
9,122
14,543
14,858
12,636
12,435
11,702
7,526
4,300
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,440
49,007
49,498
—
—
—
—
—
—
—
7,983
18,249
18,430
—
—
—
—
—
3,763
8,602
8,689
—
—
—
—
—
—
—
—
3/3/2025
2/26/2026
2/24/2027
3/1/2028
3/1/2029
3/2/2030
3/2/2031
3/1/2032
3/1/2033
3/3/2025
2/26/2026
10/28/2026
2/24/2027
3/1/2028
3/1/2029
3/2/2030
3/2/2031
3/1/2032
3/1/2033
2/26/2026
2/24/2027
3/1/2028
3/1/2029
3/2/2030
3/2/2031
3/1/2032
3/1/2033
35.83
29.06
35.06
44.67
52.96
63.56
66.76
55.13
56.21
35.83
29.06
32.94
35.06
44.67
52.96
63.56
66.76
55.13
56.21
29.06
35.06
44.67
52.96
63.56
66.76
55.13
56.21
—
—
—
—
—
—
—
—
61,503
5,086
13,055
16,824
—
—
—
—
—
22,902
1,894
4,863
6,265
31,321
—
—
—
—
—
10,799
893
2,293
2,954
14,774
—
—
—
4,909
812
2,307
2,972
4,388
726
1,862
2,726
4,103,480
339,338
871,030
1,122,497
—
—
—
—
—
1,528,021
126,368
324,459
418,001
2,089,737
—
—
—
—
—
720,509
59,581
152,989
197,091
985,721
—
—
—
327,528
54,177
153,923
198,292
292,767
48,439
124,233
181,879
74,711
100,946
—
—
—
—
—
—
—
27,820
37,588
—
—
—
—
—
—
—
—
13,116
17,720
—
—
—
—
—
—
6,601
8,914
—
—
5,329
8,178
—
—
4,984,718
6,735,117
—
—
—
—
—
—
—
1,856,150
2,507,871
—
—
—
—
—
—
—
—
875,100
1,182,278
—
—
—
—
—
—
440,419
594,742
—
—
355,551
545,636
—
—
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
(1)
(2)
(3)
(4)
For awards granted prior to July 1, 2022, all share amounts and exercise prices have been adjusted to reflect the spin off of our home health and
hospice business on that date.
All options shown above vest in three equal annual installments beginning on the first anniversary of the grant date, except for those options
granted to Mr. Coltharp on October 28, 2016 as a special retention grant. The special grant vested in its entirety on the third anniversary of the
grant date.
The expiration date of each option occurs 10 years after the grant date of each option.
The first amount shown in this column is restricted stock awards resulting from the attainment of the related PSU awards’ performance objectives
during the 2021-2022 performance period, and the second, third, and fourth amounts represent the annual grants of time-based restricted stock in
February 2021, 2022, and 2023, respectively, each of which vest in three equal annual installments beginning on the first anniversary of the grant
date. The fifth amounts for Messrs. Coltharp and Darby represent supplemental retention grants in February 2023 that fully vest on the third
anniversary of the grant date.
58
(5)
(6)
(7)
The market value reported was calculated by multiplying the closing price of our common stock on the last trading day of 2023, $66.72, by the
number of shares set forth in the preceding column.
The PSU awards shown in this column are contingent upon the level of attainment of performance goals for the two-year period from January 1
of the year in which the grant is made. The determination of whether and to what extent the PSU awards are achieved will be made following the
close of the two-year period. The first amount for each officer in this column represents the actual number of shares earned over the 2022-2023
performance period as officially determined by the board of directors in February 2024, which shares shall be restricted through December 31,
2024. The second amount for each officer in this column represents the number of shares to be earned assuming achievement of maximum
performance during the 2023-2024 performance period on the normalized earnings per share and return on invested capital objectives. The actual
number of restricted shares earned at the end of that performance period may be lower.
The market value reported was calculated by multiplying the closing price of our common stock on the last trading day of 2023, $66.72, by the
number of shares set forth in the preceding column.
Options Exercised and Stock Vested in 2023
The following table sets forth information concerning the exercise of options and the vesting of shares for our
named executive officers in 2023.
Name
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Option Awards
Stock Awards
Number of
Shares Acquired
on Exercise
25,330
34,518
*
*
*
Value Realized
on Exercise
($)
1,127,433
1,340,948
*
*
*
Number of
Shares Acquired
on Vesting
54,561
20,318
9,581
5,774
5,059
Value Realized
on Vesting
($)
3,282,493
1,222,367
576,410
348,454
305,317
* No stock option exercises in 2023.
Equity Compensation Plans
The following table sets forth, as of December 31, 2023, information concerning compensation plans under
which our securities are authorized for issuance. The table does not reflect grants, awards, exercises, terminations, or
expirations since that date. Pursuant to the terms of the equity plans, all share amounts and exercise prices have been
adjusted to reflect the spin off of our home health and hospice business on July 1, 2022 and stock splits that occurred
after the date on which any particular underlying plan was adopted, to the extent applicable.
Equity Plans
Approved by stockholders
Not approved by stockholders
Total
Securities to be Issued
Upon Exercise
3,354,824 (2)
104,567 (4)
3,459,391
Weighted Average Securities Available
Exercise Price(1)
for Future Issuance
$49.51
8,204,463 (3)
$49.51
—
8,204,463
(1)
(2)
(3)
(4)
This calculation does not take into account awards of restricted stock, restricted stock units, or performance share units.
This amount assumes maximum performance by performance-based awards for which the performance has not yet been determined.
This amount represents the number of shares available for future equity grants under the 2016 Omnibus Performance Incentive Plan approved
by our stockholders in May 2016.
This amount represents restricted stock units issued under the 2004 Amended and Restated Director Incentive Plan.
2004 Amended and Restated Director Incentive Plan
The 2004 Amended and Restated Director Incentive Plan, or the “2004 Plan,” provided for the grant of common
stock, awards of restricted common stock, and the right to receive awards of common stock, which we refer to as
“restricted stock units,” to our non-employee directors. The 2004 Plan expired in March 2008 and was replaced by the
2008 Equity Incentive Plan. Some awards remain outstanding. Awards granted under the 2004 Plan at the time of its
termination will continue in effect in accordance with their terms. Awards of restricted stock units were fully vested
when awarded and will be settled in shares of common stock on the earlier of the six-month anniversary of the date on
which the director ceases to serve on the board of directors or certain change in control events. The restricted stock units
generally cannot be transferred. Awards are generally protected against dilution upon the issuance of stock dividends and
in the event of a stock split, recapitalization, or other major corporate restructuring.
59
2008 Equity Incentive Plan
Originally approved in May 2008 by our stockholders, the 2008 Equity Incentive Plan, or the “2008 Plan,”
provided for the grant of stock options, restricted stock, stock appreciation rights, deferred stock, other stock-based
awards and cash-settled awards, including our senior management bonus plan awards, to our directors, executives and
other key employees as determined by our board of directors or its Compensation and Human Capital Committee in
accordance with the terms of the plan and evidenced by an award agreement with each participant. In May 2011, our
stockholders approved the amendment and restatement of the 2008 Plan.
P
R
O
X
Y
No additional awards will be made under the 2008 Plan. However, the awards outstanding under the 2008 Plan
will remain in effect in accordance with their terms. The outstanding options have an exercise price not less than the fair
market value of such shares of common stock on the date of grant and an expiration date that is ten years after the grant
date. Awards are generally protected against dilution upon the issuance of stock dividends and in the event of a stock
split, recapitalization, or other major corporate restructuring. Notwithstanding the foregoing, no option may be exercised
and no shares of stock may be issuable pursuant to other awards under the 2008 Plan until we comply with our reporting
and registration obligations under the federal securities laws, unless an exemption from registration is available with
respect to such shares.
2016 Omnibus Performance Incentive Plan
In May 2016, our stockholders approved the 2016 Omnibus Performance Incentive Plan, or the “2016 Plan,” to
provide for the grant of stock options, restricted stock, stock appreciation rights, deferred stock, other stock-based awards
and cash-settled awards, including our senior management bonus plan awards, to our directors, executives and other key
employees as determined by our board of directors or its Compensation and Human Capital Committee in accordance
with the terms of the plan and evidenced by an award agreement with each participant. The 2016 Plan has an expiration
date of May 9, 2026. Any awards outstanding under the 2016 Plan at the time of its termination will remain in effect in
accordance with their terms. The aggregate number of shares of common stock available for issuance in connection with
new awards under the 2016 Plan shown above is subject to equitable adjustment upon a change in capitalization of the
Company or the occurrence of certain transactions affecting the common stock reserved for issuance under the plan. Any
awards under the 2016 Plan must have a purchase price or an exercise price not less than the fair market value of such
shares of common stock on the date of grant.
60
Deferred Compensation
Our board of directors has designated a committee comprised of members of management as the plan
administrator and “named fiduciary” within the meaning of section 402(a) of the Employee Retirement Income Security
Act of 1974, as amended, for the following deferred compensation plans.
Retirement Investment Plans
Each of our named executive officers is eligible to participate in a qualified 401(k) savings plan, the Encompass
Health 401(k) Retirement Plan. The 401(k) Plan allows eligible employees to contribute up to 100% of their annual
compensation (W-2 compensation excluding certain reimbursements, stock awards, and perquisites) on a pre-tax basis
into their individual retirement accounts in the plan, subject to nondiscrimination rules and annual contribution limits.
Employees who are at least 21 years of age are eligible to participate in the 401(k) Plan and all contributions to the plan
are in the form of cash. The employer matching contribution under the 401(k) Plan is 50% of the first 6% of each
participant’s elective deferrals, which vest 100% after three years of service. Participants are always fully vested in their
own contributions.
Participants may invest the amounts contributed to this plan in various investment vehicles, which do not
include our common stock, managed by unrelated third parties. Generally, amounts contributed to these plans will be
paid upon termination of employment, although in-service withdrawals may be made upon the occurrence of a hardship
or the attainment of age 59.5. Distributions will be made in the form of a lump sum cash payment unless the participant
is eligible for and elects a direct rollover to an eligible retirement plan.
Nonqualified Deferred Compensation Plan
We adopted a nonqualified deferred compensation plan, the Encompass Health Corporation Nonqualified
Retirement Plan, or the “NQ Plan,” in order to allow deferrals above what is limited by the IRS. Our named executive
officers were eligible in 2023 to participate in the NQ Plan, the provisions of which follow the 401(k) Plan. Participants
may request, on a daily basis, to have amounts credited to their NQ Plan accounts track the rate of return based on one or
more benchmark mutual funds, which are substantially the same funds as those offered under our 401(k) Plan.
Our eligible employees may elect to defer from 1% to 100% of compensation (W-2 compensation excluding
certain reimbursements, stock awards, and perquisites) to the NQ Plan. We will make an employer matching contribution
to the NQ Plan equal to 50% of the participant’s deferral contributions, up to 6% of such participant’s total
compensation, less any employer matching contributions made on the participant’s behalf to the 401(k) Plan. In addition,
we may elect to make a discretionary contribution to the NQ Plan with respect to any participant. We did not elect to
make any discretionary contributions to the NQ Plan for 2023. All deferral contributions made to the NQ Plan are fully
vested when made and are credited to a separate bookkeeping account on behalf of each participant. Employer matching
contributions vest once the participant has completed three years of service.
Deferral contributions will generally be distributed, as directed by the participant, upon either a termination of
service or the occurrence of a specified date. Matching and discretionary contributions are distributed upon termination
of service. Distributions may also be elected by a participant in the event of an unforeseen emergency in which case
participation in the NQ Plan will be suspended. Distributions will be made in cash in the form of a lump sum payment or
annual installments over a two to fifteen year period, as elected by the participant. Any amounts that are payable from
the NQ Plan upon a termination of employment are subject to the six month delay applicable to specified employees
under section 409A of the Code.
61
The following table sets forth information as of December 31, 2023 with respect to the NQ Plan.
Executive
Contributions
in Last
Fiscal Year
($)(1)
Registrant
Contributions
in Last
Fiscal Year
($)(2)
223,072
190,466
—
61,370
100,299
66,922
28,997
—
9,205
7,431
Name
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau
Andrew L. Price
Aggregate
Earnings/
(Losses)
in Last
Fiscal Year
($)(3)
591,501
320,531
—
39,452 (7)
(8)
150,571
(6)
(5)
P
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Aggregate
Withdrawals/
Distributions
($)
—
—
—
—
—
Aggregate
Balance
at Last Fiscal
Year-End
($)(4)
5,432,703
3,047,645
—
266,994
1,355,990
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
All amounts in this column are included in the 2023 amounts represented as “Salary” and “Non-Equity Incentive Plan Compensation,”
except $118,072 for Mr. Tarr, $85,466 for Mr. Coltharp, $19,870 for Ms. Charbonneau, and $80,199 for Mr. Price included in the 2022
amounts, in the Summary Compensation Table.
All amounts in this column are included in the 2023 amounts represented as “All Other Compensation” except $35,422 for Mr. Tarr,
$11,228 for Mr. Coltharp, $2,981 for Ms. Charbonneau, and $2,406 for Mr. Price included in the 2022 amounts, in the Summary
Compensation Table.
No amounts in this column are included or are required to be included in the Summary Compensation Table.
Other than the amounts reported in this table for 2023, the balances in this column were previously reported as “Salary,” “Non-Equity
Incentive Plan Compensation” and “All Other Compensation” in our Summary Compensation Tables in previous years, except for the
following amounts which represent the aggregate earnings, all of which are non-preferential and not required to be reported in the
Summary Compensation Table: $1,412,013 for Mr. Tarr, $691,883 for Mr. Coltharp, $47,902 for Ms. Charbonneau, $518,323 for
Mr. Price.
Represents earnings and (losses) from amounts invested in the following mutual funds: Vanguard Midcap Index Instl, Mainstay Winslow
Lgcap Grth R1, Vanguard Wellington Admiral Shares, Vanguard Total Bond Market Index Inst, Vanguard Sm Cap Index Instl, Vanguard
Equity Income Admiral, Vanguard Fed Money Market Fund, EuroPacific Growth R6, Vanguard Instl Index Instl PL, Vanguard Tot Intl
Stk Idx Adm, and Dodge & Cox Income X.
Represents earnings and (losses) from amounts invested in the following mutual funds: Vanguard Wellington Admiral Shares, Vanguard
Total Bond Market Index Inst, Vanguard Infl Protected Secs In, Vanguard Equity Income Admiral, Vanguard Fed Money Market Fund,
Vanguard Mid Cap Growth Index Adm, Vanguard Instl Index Instl PL, and Dodge & Cox Income X.
Represents earnings and (losses) from amounts invested in the following mutual funds: Mainstay Winslow Large Cap Growth R1,
Vanguard Wellington Admiral Shares, Vanguard Sm Cap Index Inst, Vanguard Equity Income Admiral, Vanguard Mid Cap Growth Index
Adm, EuroPacific Growth R6, and Vanguard Instl Index Instl PL.
Represents earnings and (losses) from amounts invested in the following mutual funds: Vanguard Mid Cap Index Instl, Mainstay Winslow
Large Cap Grth R1, Vanguard Wellington Admiral Shares, Vanguard Total Bond Market Index Inst, Vanguard Infl Protected Secs In,
Vanguard Small Cap Index Instl, Vanguard Equity Income Admiral, Vanguard Fed Money Market Fund, Vanguard Mid Cap Growth
Index Adm, EuroPacific Growth R6, Amcent Emerging Markets R6, Vanguard Instl Index Instl PL, Dodge & Cox Income X, and
Vanguard Emrg Mkt Stk Idx Inst.
CEO Pay Ratio
Mr. Tarr’s 2023 Summary Compensation Table (“SCT”) Total Compensation was $8,836,376. We used the
2023 Form W-2 Box 1 “Wages, Tips and Other Compensation” for employees to determine our median employee as of
December 31, 2023. We annualized pay amounts for those who started employment with us during 2023. Our median
employee’s 2023 SCT Total Compensation was $41,969. The ratio of CEO pay to median worker pay is 211:1.
The composition of our workforce greatly impacts this ratio. Approximately 38% of our workforce consists of
employees working less than full-time, which is a common employment arrangement in the healthcare services sector.
Flexible staffing arrangements that fit employees’ needs allow us to attract and retain well-qualified employees.
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Pay vs. Performance
This section is the Pay versus Performance disclosure required by the Securities and Exchange Commission.
The tabular disclosure below includes the SEC-defined “Compensation Actually Paid,” or CAP, for our principal
executive officer and the average CAP for our other NEOs for each of the most recent three fiscal years. Because of
changes in the value of unvested equity awards, the CAP does not represent amounts actually paid to or earned or
recognized by those individuals. The disclosure also presents information regarding shareholder return and financial
performance metrics. Amounts referencing the Summary Compensation Table, or SCT, can be found on page 52.
Pay vs. Performance Table
Value of Initial Fixed $100
Investment Based on:
SCT Total for
PEO(1)
8,836,376
CAP for PEO(2)
14,065,892
Average SCT
Total for Non-
PEO NEOs(1)
2,829,231
Average CAP
for Non-PEO
NEOs(2)
3,823,684
Total
Shareholder
Return(3)
128.23
7,735,969
8,252,128
6,925,127
9,873,499
6,225,882
8,446,945
1,926,245
2,318,768
2,268,718
1,363,196
1,350,557
2,697,053
113.86
97.26
121.42
Year
2023
2022
2021
2020
Peer Group
Total
Shareholder
Return(4)
124.34
118.22
147.19
133.81
Net
Income(5)
Adjusted
EBITDA(6)
(in millions)
463.0
365.9
517.2
368.8
971.1
819.3
816.4
697.1
(1) Mr. Tarr, President and Chief Executive Officer, is the principal executive officer, or PEO, for each year represented. The other named
executive officers represented in the Non-PEO average amounts above are:
• 2023: Messrs. Coltharp, Darby, and Price, and Ms. Charbonneau
• 2022: Messrs. Coltharp, Darby, and Price, and Mses. Jacobsmeyer and Charbonneau
• 2021: Messrs. Coltharp and Darby, and Mses. Jacobsmeyer, Charbonneau, and Anthony
• 2020: Messrs. Coltharp and Darby, and Mses. Jacobsmeyer and Anthony
Ms. Jacobsmeyer ceased serving as an officer of the company upon the spin off of its home health and hospice business on July 1, 2022, and
all of her unvested equity awards were cancelled at that time in return for equity awards in the newly public company. Ms. Anthony resigned
effective June 18, 2021, and all of her unvested equity awards were cancelled at that time.
(2) To calculate CAP, the following amounts were deducted from and added to the SCT total compensation:
Reconciliation of Summary Compensation Table (“SCT”) Total to Compensation Actually Paid (“CAP”)
2023
2022
2021
2020
Average
Non-PEO
NEOs
Average
Non-PEO
NEOs
PEO
Average
Non-PEO
NEOs
Average
Non-PEO
NEOs
PEO
PEO
PEO
Deductions
Additions
SCT Total Compensation 8,836,376
2,829,231
7,735,969
1,926,245
8,252,128
2,318,768
6,925,127
2,268,718
Grant Date Fair Value of Stock
Awards Reported in SCT (4,453,885) (1,543,550)
(4,357,861)
(967,531)
(4,188,878)
(950,358)
(3,893,034) (1,007,046)
Grant Date Fair Value of Option
Awards Reported in SCT
(951,957)
(130,390)
(1,055,281)
(192,180)
(1,026,087)
(212,314)
(857,191)
(221,715)
Year-end Fair Value for Awards
Granted during Year
Increase (Decrease) in Fair Value
during Year for Prior Year
Unvested Awards
Increase (Decrease) in Fair Value
from Year-end to Vesting/
Cancellation during Year
Dividends Paid on Awards Vesting
during Year
8,375,441
2,263,913
6,212,964
864,201
5,162,931
971,657
5,056,742
1,308,042
2,331,154
406,946
695,380
(364,445)
(2,065,946)
(784,965)
681,373
220,905
(199,895)
(25,915)
514,852
84,648
(111,958)
(25,964)
351,589
81,947
128,658
23,449
127,476
12,258
203,692
33,733
182,339
46,202
CAP 14,065,892
3,823,684
9,873,499
1,363,196
6,225,882
1,350,557
8,446,945
2,697,053
(3)
Cumulative Total Shareholder Return (“TSR”) represents stock price appreciation plus dividends paid (assuming reinvestment) during the
measurement period beginning as of market close December 31, 2019 through December 31 of the year noted. The TSR amounts in the table
reflect the appreciation on the assumed investment of $100 on December 31, 2019 and the reinvestment of any dividends paid. The TSR
reflects the effect of the spin off of our home health and hospice business on July 1, 2022, which was structured as a pro rata distribution of
one share of newco common stock for every two shares of Encompass Health common stock. The TSR calculation assumes the reinvestment
on July 1, 2022 of the value of the newco stock distributed, which for each share of Encompass Health stock was assumed to be the cash
equivalent of half of the opening trading price of newco stock on that date.
63
(4)
(5)
(6)
The peer group represented here is the S&P Health Care Services Selected Industry Index which is the peer group represented in Part II, Item
5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, of our Annual Report on
Form 10-K. The cumulative TSR for the peer group reflects weighting of each constituent company’s TSR by its stock market capitalization.
The Net Income amounts reported here are the net and comprehensive income amounts reflected in the Company’s audited consolidated
financial statements for the applicable years, which amounts include income/loss from discontinued operations and income attributable to
noncontrolling interests. Accordingly, the decline in Net Income from 2021 to 2022 reflects the spin off of our home health and hospice
business completed on July 1, 2022.
Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles in the United States of America
(“GAAP”). A reconciliation of Adjusted EBITDA to net cash provided by operating activities, which is the most comparable GAAP financial
measure, is shown in Appendix A to this proxy statement. Adjusted EBITDA shown above does not include income/loss from discontinued
operations and income attributable to noncontrolling interests. Adjusted EBITDA, as used as a metric in our annual cash incentive plan, is
further adjusted for certain unusual or nonrecurring unbudgeted items as described on page 43.
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Narrative Disclosure to the Pay vs. Performance Table
The three items listed below represent the most important financial measures used to link executive
compensation to company performance for 2023. Each item is a separate metric within one of our incentive
compensation plans, as further described on pages 43-46.
Most Important Performance Measures
Adjusted EBITDA
Normalized Earnings Per Share (“EPS”)
Return on Invested Capital (“ROIC”)
The following graphs provide visual representations of the relationship between both the CAP of our PEO and
the average CAP of our non-PEO NEOs and our (i) TSR, (ii) net income and (iii) company-selected metric, Adjusted
EBITDA, as well as depicting the relationship between our own TSR and a peer group TSR.
The graph below illustrates the positive correlation between CAP and the TSR of our common stock. The TSR
amounts in the graph assume the investment of $100 on December 31, 2019 and the reinvestment of any dividends paid.
This positive correlation is to be expected due to the fact that equity awards constitute a significant percentage of our
NEOs’ total overall compensation packages. This relationship can be seen for both our CEO and our other NEOs as a
group.
The chart below compares the TSR for our common stock to the TSR of the S&P Health Care Services Selected
Industry Index. The TSR amounts in the graph assume the investment of $100 on December 31, 2019 and the
reinvestment of any dividends paid. Our four-year TSR is similar to, but slightly higher than, that of the index, but the
two TSR performances do not exhibit a positive correlation each year in the period.
64
Annual CAPTSRCompensation Actually Paid vs. EHC TSRCEO CAPOther NEO Avg CAPEHC TSR12/31/2019FY 2020FY 2021FY 2022FY 2023$—$2,000,000$4,000,000$6,000,000$8,000,000$10,000,000$12,000,000$14,000,000$16,000,000$—$20.00$40.00$60.00$80.00$100.00$120.00$140.00$160.00 The graph below compares “Compensation Actually Paid” to our Net Income. The CAP for our NEOs does not
appear to correlate to our net income. Net income is not a metric included, or otherwise a consideration, in our executive
compensation program. Net income includes income from discontinued operations and income attributable to
noncontrolling interests. Accordingly, the decline in Net Income from 2021 to 2022 reflects the spin off of our home
health and hospice business completed on July 1, 2022.
The graph below compares CAP to our Adjusted EBITDA. Adjusted EBITDA is our company selected measure
as required to be identified by the SEC. Adjusted EBITDA is the most heavily weighted metric in our annual incentive
plan, the Senior Management Bonus Plan. In addition, we believe our investors use Adjusted EBITDA as a key measure
to evaluate our company, which in turn drives our stock price. We believe the impacts of, and challenges related to, the
COVID-19 pandemic during the period represented make it difficult to draw conclusions from the comparison for the
short period of time reflected.
65
EHC TSR vs. Peer TSREHC TSRPeer TSR12/31/201912/31/202012/31/202112/31/202212/31/2023$90.00$100.00$110.00$120.00$130.00$140.00$150.00Annual CAPNet Income (in millions)Compensation Actually Paid vs. Net IncomeCEO CAPOther NEO Avg CAPNet Income2020202120222023$0$2,000,000$4,000,000$6,000,000$8,000,000$10,000,000$12,000,000$14,000,000$16,000,000$0.0$100.0$200.0$300.0$400.0$500.0$600.0Annual CAPAdjusted EBITDA(in millions)Compensation Actually Paid vs. Adjusted EBITDACEO CAPOther NEO Avg CAPAdjusted EBITDA (millions)2020202120222023$0$2,000,000$4,000,000$6,000,000$8,000,000$10,000,000$12,000,000$14,000,000$16,000,000$0$200$400$600$800$1,000 P
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Review and Approval of Transactions with Related Persons
For purposes of this section, an executive officer or a member of our board of directors or any family member
of an executive officer or board member is referred to as a “related party.” The board considers, in consultation with the
Nominating/Corporate Governance Committee, whether a transaction between a related party and the Company presents
any inappropriate conflicts of interest or impairs the “independence” of any director, or both. Additionally, the following
are prohibited unless expressly approved by the disinterested members of the board:
•
•
•
transactions between the Company and any related party in which the related party has a material direct or
indirect interest;
employment by the Company of any sibling, spouse or child of an executive officer or a member of the
board of directors, other than as expressly allowed under our employment policies; and
any direct or indirect investment or other economic participation by a related party in any entity not
publicly traded in which the Company has any direct or indirect investment or other economic interest.
Each independent director is required to promptly notify the chairman of the board of directors if any actual or
potential conflict of interest arises between such member and the Company which may impair such member’s
independence. If a conflict exists and cannot be resolved, such member is required to submit a written notification of
such conflict of interest and an offer of resignation from the board and each of the committees on which the member
serves. The board need not accept such offer of resignation; however, the submission of such offer of resignation
provides the opportunity for the board to review the appropriateness of the continuation of the individual’s membership.
Members of the board must recuse themselves from any discussion or decision that affects their personal,
business, or professional interest. The non-interested members of the board will consider and resolve any issues
involving conflicts of interest of other members.
Transactions with Related Persons
Our policies regarding transactions with related persons and other matters constituting potential conflicts of
interest are contained in our Corporate Governance Guidelines and our Standards of Business Ethics and Conduct which
can be found on our website at https://investor.encompasshealth.com.
Since January 1, 2023, there has not been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or are to be a party in which the amount involved exceeds $120,000 and in which any
director, executive officer or holder of more than 5% of our voting securities, or an immediate family member of any of
the foregoing, had or will have a direct or indirect material interest. Additionally, none of our directors, nominees or
executive officers is a party to any material proceedings adverse to us or any of our subsidiaries or has a material interest
adverse to us or any of our subsidiaries.
66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of our common stock as of
February 14, 2024 (unless otherwise noted), for (1) each person who is known by us to own beneficially more than 5% of
the outstanding shares of our common stock, (2) each director, (3) each executive officer named in the Summary
Compensation Table, and (4) all of our current directors and executive officers as a group. The address of our directors and
executive officers is c/o Encompass Health Corporation, 9001 Liberty Parkway, Birmingham, Alabama 35242. We know
of no arrangements, the operation of which may at a subsequent date result in the change of control of Encompass Health.
Name
Greater Than 5% Beneficial Owners
The Vanguard Group
BlackRock, Inc.
Wellington Management Group LLP
William Blair Investment Management, LLC
Directors and Executive Officers
Greg D. Carmichael
Elissa J. Charbonneau
John W. Chidsey
Edward M. Christie III
Douglas E. Coltharp
Donald L. Correll
Patrick Darby
Joan E. Herman
Leslye G. Katz
Patricia A. Maryland
Kevin J. O’Connor
Andrew L. Price
Christopher R. Reidy
Nancy M. Schlichting
Mark J. Tarr
Terrance Williams
All directors and executive officers as a group
Common Shares
Beneficially
Owned(1)
Percent of
Class(2)
10,120,689 (3)
9,125,779 (4)
8,215,770 (5)
5,218,171 (6)
10.1%
9.1%
8.2%
5.2%
13,051
20,800
162,416
1,488
463,456 (7)
99,754
159,148 (8)
43,803
43,803
11,221
6,399
70,384
9,019
17,578
901,428 (9)
11,575
2,131,557 (10)
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
2.1%
* Less than 1%.
(1) Unless otherwise indicated, each person or entity named in the table has sole voting and investment power with respect to all shares of stock
listed as owned by that person.
(2) The percentage of beneficial ownership is based upon 100,140,031 shares of common stock outstanding as of February 14, 2024.
(3) Based on a Schedule 13G/A filed with the SEC on February 12, 2024, The Vanguard Group (investment adviser) reported, as of January 31,
2024, beneficial ownership of 10,120,689 shares, with shared voting power for 35,285 shares, sole investment power for 9,977,546 shares, and
shared investment power for 143,143 shares. This holder is located at 100 Vanguard Blvd., Malvern, PA 19355.
(4) Based on a Schedule 13G/A filed with the SEC on January 24, 2024, BlackRock, Inc. (parent holding company/control person) reported, as of
December 31, 2023, beneficial ownership of 9,125,779 shares, with sole voting power for 8,856,379 shares and sole investment power for
9,125,779 shares. This holder is located at 50 Hudson Yards, New York, NY 10001.
(5) Based on a Schedule 13G/A filed with the SEC on February 8, 2024, Wellington Management Group LLP (parent holding company/control
person), Wellington Group Holdings LLP (parent holding company/control person), Wellington Investment Advisors Holdings LLP (parenting
holding company/control person), and Wellington Management Company LLP (investment advisor)(the “IA”) reported, as of December 31,
2023, beneficial ownership of 8,215,770 shares, including shared voting power for up to 7,805,156 shares and shared investment power for up to
8,215,770 shares, except that the IA reported shared voting power for up to 7,675,639 shares and shared investment power for up to 7,983,806
shares. These holders are located at 280 Congress Street Boston, MA 02210.
(6) Based on a Schedule 13G filed with the SEC on February 12, 2024, William Blair Investment Management, LLC (investment adviser) reported,
as of December 31, 2023, beneficial ownership of 5,218,171 shares, with sole voting power for 4,568,329 shares and sole investment power for
5,218,171 shares. This holder is located at 150 North Riverside Plaza Chicago, IL 60606.
(7) Includes 125,631 shares held in an irrevocable trust for the benefit of his children for which he is presumed to share voting or investment power
and 231,820 shares issuable upon exercise of options.
67
(8) Includes 88,960 shares issuable upon exercise of options.
(9) Includes 429,192 shares issuable upon exercise of options.
(10)Includes 749,972 shares issuable upon exercise of options.
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68
EXECUTIVE OFFICERS
The following table lists all of our executive officers. Each of our executive officers will hold office until his or
her successor is elected and qualified, or until his or her earlier resignation or removal.
Name
Mark J. Tarr
Douglas E. Coltharp
Patrick Darby
Elissa J. Charbonneau, D.O.
Andrew L. Price
Edmund M. Fay
Age
62
62
59
64
57
57
Position
President and Chief Executive Officer; Director
Executive Vice President and Chief Financial Officer
Executive Vice President, General Counsel and Secretary
Chief Medical Officer
Chief Accounting Officer
Senior Vice President and Treasurer
Since
12/29/2016
5/6/2010
2/18/2016
7/1/2015
10/22/2009
3/1/2008
There are no family relationships or other arrangements or understandings known to us between any of the
executive officers listed above and any other person pursuant to which he or she was or is to be selected as an officer, other
than any arrangements or understandings with persons acting solely as officers of Encompass Health.
Executive Officers Who Are Not Also Directors
Douglas E. Coltharp—Executive Vice President and Chief Financial Officer
Mr. Coltharp was named Executive Vice President and Chief Financial Officer on May 6, 2010. Prior to joining
us, Mr. Coltharp served as a partner at Arlington Capital Advisors and Arlington Investment Partners, LLC, a boutique
investment banking firm and private equity firm, from May 2007 to May 2010. Prior to that, he served 11 years as
executive vice president and chief financial officer for Saks Incorporated and its predecessor organization. Prior to joining
Saks in November 1996, Mr. Coltharp spent approximately 10 years with Nations Bank, N.A. and its predecessors in
various positions of increasing responsibilities culminating in senior vice president and head of southeast corporate
banking. He currently serves as a member of the board of directors of Under Armour, Inc.
Patrick Darby—Executive Vice President, General Counsel and Secretary
Mr. Darby was named Executive Vice President, General Counsel and Secretary effective February 18, 2016.
Before joining us, Mr. Darby was a partner at the law firm Bradley Arant Boult Cummings LLP in Birmingham, Alabama,
where he practiced from 1990 to 2016, and an adjunct professor at Cumberland School of Law, in Birmingham, Alabama.
Elissa J. Charbonneau, D.O.—Chief Medical Officer
Dr. Charbonneau, a board-certified physical medicine and rehabilitation physician, was named Chief Medical
Officer on July 1, 2015. From January 2015 to June 2015, she served as Vice President of Medical Services at Encompass
Health. From 2001 to 2014, she served as Medical Director of New England Rehabilitation Hospital of Portland, a joint
venture between Maine Medical Center and Encompass Health, where she was a staff physician for several years. Dr.
Charbonneau received her doctor of osteopathic medicine from New York College of Osteopathic Medicine, a master’s
degree in natural sciences/epidemiology from the State University of New York at Buffalo, and a bachelor’s degree from
Cornell University. She is a diplomat of the American Board of Physical Medicine and Rehabilitation and of the American
Osteopathic Board of Rehabilitation Medicine.
Andrew L. Price—Chief Accounting Officer
Mr. Price was named Chief Accounting Officer in October 2009 and has held various management positions with
us since joining Encompass Health in June 2004 including Senior Vice President of Accounting and Vice President of
Operations Accounting. Prior to joining us, Mr. Price served as senior vice president and corporate controller of Centennial
HealthCare Corp, an Atlanta-based operator of skilled nursing centers and home health agencies, from 1996 to 2004, and as
a manager in the Atlanta audit practice of BDO Seidman, LLC. Mr. Price is a certified public accountant and member of
the American Institute of Certified Public Accountants.
69
Edmund M. Fay—Senior Vice President and Treasurer
Mr. Fay joined Encompass Health in 2008 as Senior Vice President and Treasurer. Mr. Fay has more than 16
years of experience in financial services specializing in corporate development, mergers and acquisitions, bank treasury
management, fixed income and capital markets products. Prior to joining us, he served in various positions at Regions
Financial Corporation, including executive vice president of strategic planning/mergers and acquisitions. Previously, he
held vice president positions at Wachovia Corporation and at J.P. Morgan & Company, Inc.
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GENERAL INFORMATION
Other Business
We know of no other matters to be submitted at the annual meeting. By submitting the proxy, the stockholder
authorizes the persons named on the proxy to use their discretion in voting on any matter brought before the annual meeting.
Annual Report to Stockholders
A copy of our 2023 Form 10-K is being mailed concurrently with this proxy statement to stockholders who have
requested hard copies previously and are entitled to notice of and to vote at the annual meeting. Our annual report to
stockholders is not incorporated into this proxy statement and will not be deemed to be solicitation material. A copy of our
2023 Form 10-K is available without charge from the “Investors” section of our website at
https://investor.encompasshealth.com. Our 2023 Form 10-K is also available in print to stockholders without charge and
upon request, addressed to Encompass Health Corporation, 9001 Liberty Parkway, Birmingham, Alabama 35242, Attention:
Investor Relations.
Proposals for 2025 Annual Meeting of Stockholders
All stockholder proposals must be sent by mail or courier service and addressed to Encompass Health
Corporation, 9001 Liberty Parkway, Birmingham, Alabama 35242, Attention: Corporate Secretary. Electronic mail
and facsimile delivery are not monitored routinely for stockholder submissions, so timely delivery cannot be insured.
Any proposals that our stockholders wish to have included in our proxy statement and form of proxy for the 2025
annual meeting of stockholders must be received by us no later than the close of business on December 3, 2024, and must
otherwise comply with the requirements of Rule 14a-8 of the Exchange Act in order to be considered for inclusion in the
2025 proxy statement and form of proxy.
You may also submit a proposal without having it included in our proxy statement and form of proxy, but we need
not submit such a proposal for consideration at the annual meeting if it is considered untimely or does not include the
information required by Section 2.9 of our Bylaws. In accordance with Section 2.9, to be timely your proposal must be
delivered to or mailed and received at our principal executive offices on or after January 2, 2025 and not later than
February 1, 2025; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days
before or after anniversary date of this year’s annual meeting, your proposal, in order to be timely, must be received not later
than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. Section 2.9 also
requires, among other things, that the proposal must set forth a brief description of the business to be brought before the
annual meeting and the reasons for conducting that business. A stockholder proposing business for the annual meeting must
update and supplement the notice information required by Section 2.9 of our Bylaws so that it is true and correct as of the
record date(s) for determining the stockholders entitled to receive notice of and to vote at the annual meeting. Any
stockholder that intends to submit a proposal should read the entirety of the requirements in Section 2.9 of our Bylaws
which can be found in the “Corporate Governance” section of our website at https://investor.encompasshealth.com.
71
Reconciliations of Non-GAAP Financial Measures to GAAP Results
Appendix A
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To help our readers understand our past financial performance, our future operating results, and our liquidity,
we supplement the financial results we provide in accordance with generally accepted accounting principles in the
United States of America (“GAAP”) with certain non-GAAP financial measures, including our leverage ratio and
Adjusted EBITDA. Our management regularly uses our supplemental non-GAAP financial measures to understand,
manage, and evaluate our business and make operating decisions. We believe our leverage ratio and Adjusted EBITDA,
as defined in our credit agreement, are measures of our ability to service our debt and our ability to make capital
expenditures.
The leverage ratio is defined as the ratio of consolidated total debt to Adjusted EBITDA for the trailing four
quarters. Additionally, the leverage ratio is a standard measurement used by investors to gauge the creditworthiness of an
institution. Our credit agreement also includes a maximum leverage ratio financial covenant which allows us to deduct
cash on hand from consolidated total debt.
We use Adjusted EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on
a consolidated basis is important in analyzing our liquidity because it is the key component of certain material covenants
contained within our credit agreement, which is discussed in more detail in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” and Note 10, Long-term
Debt, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2023 (the “2023 Form 10-K”). These covenants are material terms of the credit agreement.
Noncompliance with these financial covenants under the credit agreement — its interest coverage ratio and its leverage
ratio — could result in our lenders requiring us to immediately repay all amounts borrowed. If we anticipated a potential
covenant violation, we would seek relief from our lenders, which would have some cost to us, and such relief might be
on terms less favorable to us than those in our existing credit agreement. In addition, if we cannot satisfy these financial
covenants, we would be prohibited under the credit agreement from engaging in certain activities, such as incurring
additional indebtedness, paying common stock dividends, making certain payments, and acquiring and disposing of
assets. Consequently, Adjusted EBITDA is critical to our assessment of our liquidity.
In general terms, the credit agreement definition of Adjusted EBITDA therein, referred to as “Adjusted
Consolidated EBITDA,” allows us to add back to consolidated net income interest expense, income taxes, and
depreciation and amortization and then add back to consolidated net income (1) all unusual or nonrecurring items
reducing consolidated net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses
from discontinued operations, (3) non-ordinary course fees, costs and expenses incurred with respect to any litigation or
settlement, (4) share-based compensation expense, (5) costs and expenses associated with changes in the fair value of
marketable securities, (6) costs and expenses associated with the issuance or prepayment of debt, and acquisitions, and
(7) any restructuring charges and certain pro forma cost savings and synergies related to transactions and initiatives,
which in the aggregate are not in excess of 25% of Adjusted Consolidated EBITDA. We also subtract from consolidated
net income all unusual or nonrecurring items to the extent they increase consolidated net income.
Under the credit agreement, the Adjusted EBITDA calculation does not require us to deduct net income
attributable to noncontrolling interests or gains on fair value adjustments of hedging and equity instruments, disposal of
assets and development activities. It also does not allow us to add back losses on fair value adjustments of hedging
instruments or unusual or nonrecurring cash expenditures in excess of $10 million. These items and amounts, in addition
to the items falling within the credit agreement’s “unusual or nonrecurring” classification, may occur in future periods,
but can vary significantly from period to period and may not directly relate to, or be indicative of, our ongoing liquidity
or operating performance. Accordingly, the Adjusted EBITDA calculation presented here includes adjustments for them.
Adjusted EBITDA is not a measure of financial performance under GAAP, and the items excluded from
Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore,
Adjusted EBITDA should not be considered a substitute for net income or cash flows from operating, investing, or
financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus
susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled
measures of other companies. Revenues and expenses are measured in accordance with the policies and procedures
described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying
the 2023 Form 10-K.
1
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
For the Year Ended December 31,
2023
2022
(In Millions)
Net cash provided by operating activities
Interest expense and amortization of debt discounts and fees
Gain (loss) on sale of investments, excluding impairments
Equity in net income of nonconsolidated affiliates
Net income attributable to noncontrolling interests in continuing operations
Amortization of debt-related items
Distributions from nonconsolidated affiliates
Current portion of income tax expense
Change in assets and liabilities
Cash used in (provided by) operating activities of discontinued operations
State regulatory change impact on noncontrolling interests
Change in fair market value of equity securities
Adjusted EBITDA
$
$
850.8 $
143.5
4.6
3.2
(111.0)
(9.5)
(1.6)
128.3
(50.3)
16.0
(2.2)
(0.7)
971.1 $
705.8
175.7
(15.5)
2.9
(93.6)
(9.7)
(4.0)
72.2
30.4
(52.3)
—
7.4
819.3
For the year ended December 31, 2023, net cash used in investing activities was $602.8 million and resulted
primarily from capital expenditures. Net cash used in financing activities during the year ended December 31, 2023 was
$197.2 million and resulted primarily from net debt payments, distributions paid to noncontrolling interests of
consolidated affiliates, and cash dividends paid on common stock partially offset by contributions from noncontrolling
interests of consolidated affiliates.
For the year ended December 31, 2022, net cash used in investing activities was $627.0 million and resulted
primarily from capital expenditures. Net cash used in financing activities during the year ended December 31, 2022 was
$145.7 million and resulted primarily from net debt payments, cash dividends paid on common stock and distributions
paid to noncontrolling interests of consolidated affiliates partially offset by net cash provided by financing activities of
discontinued operations and contributions from noncontrolling interests of consolidated affiliates.
Reconciliation of Net Income to Adjusted EBITDA
Net income
Loss (income) from discontinued operations, net of tax, attributable to
Encompass Health
Net income attributable to noncontrolling interests included in continuing
operations
Provision for income tax expense
Interest expense and amortization of debt discounts and fees
Loss on early extinguishment of debt
Loss on disposal or impairment of assets
Depreciation and amortization
Stock-based compensation expense
State regulatory change impact on noncontrolling interests
Change in fair market value of equity securities
Adjusted EBITDA
For the Year Ended December 31,
2023
2022
(In Millions)
$
463.0 $
365.9
12.0
(111.0)
132.2
143.5
—
9.8
273.9
50.6
(2.2)
(0.7)
$
971.1 $
(15.2)
(93.6)
100.1
175.7
1.4
4.8
243.6
29.2
—
7.4
819.3
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
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)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
63-0860407
(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:
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Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
EHC
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
_________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒
Non-Accelerated filer ☐
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most
recently completed second fiscal quarter was approximately $6.7 billion. For purposes of the foregoing calculation only, executive officers
and directors of the registrant have been deemed to be affiliates. There were 100,140,031 shares of common stock of the registrant
outstanding, net of treasury shares, as of February 14, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant’s 2024 annual meeting of stockholders is incorporated by reference in Part III
to the extent described therein.
Table of Contents
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Statements and Summary of Risk Factors .........................................
PART I
Item 1.
Business ............................................................................................................................................................
Item 1A.
Risk Factors ......................................................................................................................................................
Item 1B.
Unresolved Staff Comments .............................................................................................................................
Item 1C.
Cybersecurity ....................................................................................................................................................
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties ..........................................................................................................................................................
Legal Proceedings .............................................................................................................................................
Mine Safety Disclosures ...................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ..........................................................................................................................................................
Reserved ...........................................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...........................
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk .........................................................................
Item 8.
Item 9.
Financial Statements and Supplementary Data ................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..........................
Item 9A.
Controls and Procedures ...................................................................................................................................
Item 9B.
Other Information .............................................................................................................................................
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections .............................................................
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Directors and Executive Officers of the Registrant ..........................................................................................
Executive Compensation ..................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........
Certain Relationships and Related Transactions and Director Independence ..................................................
Principal Accountant Fees and Services ...........................................................................................................
Exhibits and Financial Statement Schedules ....................................................................................................
Form 10-K Summary ........................................................................................................................................
Exhibit Index
NOTE TO READERS
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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.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
AND SUMMARY OF RISK FACTORS
This annual report contains historical information, as well as forward-looking statements that involve known and
unknown risks and relate to, among other things, future events, the spread and impact of an infectious disease outbreak, changes
to Medicare reimbursement and other healthcare laws and regulations from time to time, our business strategy, 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, factors that
could cause, and in some cases have previously caused, actual results to differ materially from those estimated by us include,
but are not limited to, each of the factors discussed in Item 1A, Risk Factors, summarized in the list below, as well as
uncertainties and factors, if any, discussed elsewhere in this Form 10-K, in our other SEC filings from time to time, or in
materials incorporated therein by reference.
Risks Related to the Spin Off of Our Home Health and Hospice Business, Enhabit, Inc.
•
•
•
•
•
•
•
To preserve the tax-free treatment of the Spin Off, we may be limited, for a period of time, in our ability to pursue certain
equity issuances, strategic transactions, repurchases, or other transactions (including the certain dispositions of assets) that
we may otherwise believe to be in the best interests of our stockholders or that might increase the value of our business.
If the Spin Off were to fail to qualify as tax-free, including as a result of subsequent acquisitions of our stock or the stock
of Enhabit, Inc., we could be subject to significant tax liabilities.
Reimbursement Risks
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 may require us to incur additional costs to respond to requests for
records and defend the validity of payments and may ultimately require us to refund any amounts determined to have been
overpaid.
Substantive and procedural deficiencies in the administrative appeals process associated with denied Medicare
reimbursement claims, including from various Medicare audit programs, could 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.
• Medicare quality reporting requirements could adversely affect our operating costs or Medicare reimbursement.
•
•
Changes in our payor mix or the acuity of our patients could reduce our revenues or profitability.
Other Regulatory Risks
Changes in the rules and regulations of the healthcare industry at the federal, state or local levels, including those
contemplated now and in the future as part of national healthcare reform and deficit reduction (such as 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.
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 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, such as the CMS vaccine mandate, could decrease our revenues.
Other Operational Risks
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.
Competitive pressures in the healthcare industry, including from large acute-care hospitals that would typically serve as a
referral source for us, and our response to those pressures could adversely affect our revenues or other financial results.
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 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.
Financial Risks
General conditions in the economy and capital markets, including 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, rising interest rates, an international trade war, or a sovereign debt crisis could adversely affect
our financial results or condition, including access to the capital markets and interest expense on new or existing debt.
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.
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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.
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Table of Contents
Item 1.
Business
Overview of the Company
General
PART I
We are a national leader in post-acute healthcare services and 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 December 31, 2023, we operate 161 inpatient rehabilitation hospitals. We are committed to delivering high-quality, cost-
effective patient care. For 2024, we were again named to Fortune’s list of the World’s Most Admired Companies.
Effective January 1, 2018, we changed our corporate name from HealthSouth Corporation to Encompass Health
Corporation and the NYSE ticker symbol for our common stock from “HLS” to “EHC.” Our principal executive offices are
located at 9001 Liberty Parkway, Birmingham, Alabama 35242, and the telephone number of the principal executive offices is
(205) 967-7116. Our website address is www.encompasshealth.com.
On July 1, 2022, we completed the previously announced separation of our home health and hospice business through
the distribution (the “Spin Off”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc.
(“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record
Date”). The Spin Off was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The Spin Off was structured as a pro rata
distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as
of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result
of the Spin Off, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on
the New York Stock Exchange.
In addition to the discussion here, we encourage the reader to review Item 1A, Risk Factors, Item 2, Properties, and
Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, which highlight additional
considerations about our Company.
The table below provides selected operating and financial data.
Consolidated data:
Inpatient rehabilitation:
Number of hospitals
Discharges
Number of licensed beds
Net operating revenues:
Inpatient
Outpatient and other
Total
As of or for the Year Ended December 31,
2022
(Actual Amounts)
2021
2023
161
229,480
10,778
153
211,116
10,356
145
197,639
9,924
(In Millions)
$
$
4,693.8
$
4,251.6
$
3,918.0
107.4
97.0
96.9
4,801.2
$
4,348.6
$
4,014.9
Our inpatient rehabilitation hospitals offer specialized rehabilitative care across an array of diagnoses and deliver
comprehensive, high-quality, cost-effective patient care services. As participants in the Medicare program, our hospitals must
be licensed and certified and otherwise comply with various requirements that are discussed below in the “Sources of Revenues
—Medicare Reimbursement” section. Substantially all (91%) of the patients we serve are admitted from acute-care hospitals
following physician referrals for specific acute inpatient rehabilitative care. Most of those patients have experienced significant
physical or cognitive disabilities or injuries due to medical conditions, such as strokes, hip fractures, and a variety of
debilitating neurological conditions, that are generally nondiscretionary in nature and require rehabilitative healthcare services
in a facility-based setting. During the COVID-19 pandemic (the “pandemic”), our hospitals treated thousands of patients with
or recovering from the COVID-19 virus. Our focus on specialized rehabilitative care has meant that in many cases our hospitals
have been ideal settings for treating the debilitating effects of the COVID-19 virus, such as significant muscle weakness,
cognitive impairments, shortness of breath with activity, and malnutrition. Our teams of highly skilled nurses and physical,
occupational, and speech therapists utilize proven technology and clinical protocols with the objective of restoring our patients’
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physical and cognitive abilities. Patient care is provided by nursing and therapy staff as directed by physician orders while case
managers monitor each patient’s progress and provide documentation and oversight of patient status, achievement of goals,
discharge planning, and functional outcomes. Our hospitals provide a comprehensive interdisciplinary clinical approach to
treatment that leverages innovative technologies and advanced therapies and leads to superior outcomes.
Competitive Strengths
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 below 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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People. We believe our employees share a steadfast commitment to providing outstanding care to our patients. We
undertake significant efforts to ensure our clinical and support staff receives the education and training necessary
to provide the highest quality care in the most cost-effective manner. We embrace the Encompass Health Way,
our core set of values developed through input from a broad cross section of our employees. The Encompass
Health Way calls on each of our employees to set the standard, lead with empathy, do what’s right, focus on the
positive, and ensure we are stronger together. We believe our culture is essential to attracting and retaining talent.
For further discussion of our human capital management and our award-winning culture, see the section titled
“Human Capital Management” below.
Change Agility. We have a demonstrated ability to adapt in the face of numerous and significant regulatory,
legislative, and operating environment changes. We believe our consistent and disciplined operating model allows
us to be nimble and responsive to change. Examples of regulatory and other changes through which we have
successfully managed include:
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The Centers for Medicare & Medicaid Services (“CMS”) adopted a rule, effective beginning in 2007, that
conditioned the reimbursement rate for an inpatient rehabilitation facility, or “IRF,” on at least 60% of a
facility’s patients having at least one of 13 qualifying medical conditions.
The Patient Protection and Affordable Care Act (the “ACA”) enacted in 2010 instituted several mandatory
Medicare payment reforms, including reimbursement reductions for IRFs, and created the Center for
Medicare and Medicaid Innovation (“CMMI”) to develop, test, and promote innovative payment and delivery
models.
The ACA created the IRF Quality Reporting Program. This program requires IRFs to report quality data, the
elements of which are updated annually, and imposes a financial penalty for noncompliance.
The 2010 CMS reimbursement rule for IRFs implemented new IRF coverage requirements, or specifications
as to what conditions must be met to qualify for reimbursement, that were effective for all Medicare
discharges on or after January 1, 2010. Those IRF coverage requirements replaced coverage criteria that were
in place for 25 years.
The Budget Control Act of 2011 implemented an automatic 2% reduction, or “sequestration,” of Medicare
program payments for all healthcare providers beginning in 2013.
The Improving Medicare Post-Acute Care Transformation Act of 2014 directed CMS to promulgate rules
requiring the collection and reporting of standardized patient assessment data across post-acute care
providers.
In 2019, CMS replaced the long-standing patient assessment measure, a component of Medicare
reimbursement, with new assessment measures requiring significant training and operational changes.
In October 2022, CMS significantly changed the extensive admission and discharge interdisciplinary data
elements required to be collected in connection with Medicare reimbursement claims.
Additionally, the pandemic posed a number of challenges in the operating environment. We demonstrated our
ability to change and remain resilient by implementing protocols for the safety of our employees and our patients
while managing supply chain constraints, specifically with personal protective equipment, in a timely and
effective manner. The formation of our COVID Task Force allowed us to centralize decision-making while
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empowering our hospitals to enact the protocols needed as the pandemic cycled through the country. Our therapy
teams developed plans for COVID patients while maintaining our expected high-quality outcomes.
Strategic Relationships. We have a long and successful history of building strategic relationships with major
healthcare systems. More than a third of our inpatient rehabilitation hospitals currently operate as joint ventures
with acute-care hospitals or systems. Joint ventures with market leading acute-care hospitals establish a solid
foundation for providing integrated patient care that can improve the quality of outcomes and reduce the total cost
of care.
Many patients continue to need nursing and therapy services after they leave the IRF setting to continue their
recovery at home. Care collaboration between our hospitals and the home health agencies selected by our patients
offers an excellent means to improve patient experience and outcomes and reduce the total cost of care across a
post-acute episode.
The post-acute innovation tools we have developed, and will continue to develop, support our strategic
relationship initiatives by enhancing the effective and efficient management of patients across multiple post-acute
care settings and facilitating high-quality patient care, improved care coordination, and network provider
performance and cost management.
Additionally, we have a strategic sponsorship with the American Heart Association/American Stroke Association
on a nationwide basis to increase patient independence after a stroke and reduce stroke mortality through
community outreach and information campaigns.
Clinical Expertise and High-Quality Outcomes. We have extensive clinical experience from which we have
developed standardized best practices and protocols. We believe these clinical best practices and protocols,
particularly as leveraged with our well-trained clinicians and industry-leading technology, help ensure the delivery
of consistently high-quality healthcare services, reduced inefficiencies, and improved performance across a
spectrum of operational areas. Currently, we operate 137 hospitals that hold one or more Joint Commission
Disease-Specific Care Certifications, such as stroke rehabilitation, hip fracture rehabilitation, brain injury
rehabilitation, amputee rehabilitation, Parkinson’s Disease rehabilitation, and spinal cord injury rehabilitation
certification.
Cost Effectiveness. Our scale, data-driven business practices, consistent and disciplined operating model, and
culture help us provide healthcare services on a cost-effective basis. We leverage centralized administrative
functions, use data analytics to identify trends and respond on a timely basis, and identify best practices and
implement them across our platform of hospitals. Our de novo and bed addition strategies incorporate pre-
fabrication construction technology to create efficiencies by reducing reliance on subcontractors, improving
supply chain efficiencies, providing a consistent construction quality and realizing a speed-to-market benefit.
Financial Resources. We have a proven track record of generating strong cash flows from operations that have
allowed us to successfully pursue our growth strategy, manage our financial leverage, and make complementary
shareholder distributions. We did not accept any pandemic relief funds under the Coronavirus Aid, Relief, and
Economic Security Act of 2020 (the “CARES Act”) or any other program or legislation. As of December 31,
2023, we have a strong, well-capitalized balance sheet, including ownership of approximately 78% of our hospital
real estate, no significant debt maturities in 2024, 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
business strategy.
Advanced Technology and Innovation. We are focused on developing technology-enabled strategies to further
improve our effectiveness at providing integrated healthcare. Our post-acute innovation strategy is based on using
our clinical expertise, our large post-acute datasets, and our proven capabilities in enterprise-level electronic
medical record technologies, data analytics, data integration, and predictive analytics to drive value-based
performance across the healthcare continuum for our patients, our partners, and our payors. We believe our
information systems and post-acute innovation solutions, in addition to improving patient care and operating
efficiencies, allow us to collect, analyze, and share information on a timely basis making us an ideal partner for
other healthcare providers in a coordinated care delivery environment. Our systems also emphasize
interoperability with referral sources and other providers coordinating care. We have devoted substantial
resources, effort and expertise to leveraging technology to create post-acute solutions that improve patient care
and operating efficiencies.
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Patients and Demographic Trends
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 76, 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.
Despite the growing demand for inpatient rehabilitation services, the number of inpatient rehabilitation facilities has
remained relatively stable — increasing just 0.17% from 1,179 in 2010 to 1,181 in 2022. This supply-demand imbalance is
partly responsible for the relatively low conversion rate of inpatient rehabilitation eligible patients. We believe the percentage
of patients who are discharged from acute-care hospitals with one or more of 13 specified medical conditions that CMS ties to
IRF eligibility and subsequently admitted to an IRF is approximately 13% based on Medicare fee-for-service data, which is the
only publicly available data on the subject. To respond to the strong demand for our services, we continue to develop our
current markets through bed additions and to construct or acquire hospitals in new markets. Since 2012, we have opened or
acquired 61 new hospitals and increased the number of licensed beds we operate by approximately 62%, or 4,122 beds.
Strategy and 2024 Strategic Priorities
Our overall strategy is to expand our network of inpatient rehabilitation hospitals, add capacity to existing hospitals,
further strengthen our relationships with healthcare systems, provider networks, and payors in order to connect patient care
across the healthcare continuum, and to deliver superior patient outcomes in a cost-effective manner. We believe this strategy,
along with our demonstrated ability to adapt to changes in healthcare, positions us for success in the evolving healthcare
delivery system. In pursuit of our strategy, we established the following priorities for 2024.
• Growth. We target the addition of 6 to 10 new inpatient rehabilitation hospitals and 80 to 120 beds to existing
hospitals per year. In 2023, we opened 8 new hospitals (395 beds total) and added 46 beds to existing hospitals. In
2024, we plan to open 6 hospitals (approximately 280 beds) and add approximately 150 beds to existing hospitals
(inclusive of a 40-bed freestanding satellite hospital). We also believe we will continue to have organic growth
opportunities based on our track record of growth, planned bed additions at a number of existing hospitals, and the
maturation of newly opened locations.
• Operational Initiatives. Our priorities include operational initiatives that build on momentum from recent years. We
believe our care coordination efforts have and will continue to contribute to fewer discharges to skilled nursing
facilities, more discharges to community, and improved patient experience. Our care coordination program is the
integrative approach to a patient’s care that includes coordination with physicians, acute-care hospitals, and other post-
acute providers to ensure the best overall care is provided to the patient.
We will continue to demonstrate our value proposition to Medicare Advantage payors by providing superior patient
outcomes, including higher discharge to community rates and lower lengths of stay, compared to alternative sites of
care. The Medicare Advantage enrollment growth rate is greater than that of traditional Medicare fee-for-service, and
our payor mix has shifted accordingly. Medicare Advantage payors represented 8.4% of our net operating revenues in
2017 and 16.2% in 2023. We believe our outcomes and quality of care data have helped drive a significant
improvement in the payments we receive from Medicare Advantage payors. For example, reimbursement based on the
type of patient/treatment required, commonly referred to as the case mix group basis (“CMG”), is typically greater
than reimbursement on a per-diem rate basis, and we increased the percentage of our Medicare Advantage revenue
paid based on CMG from approximately 58% in 2017 to approximately 90% in 2023.
Given the significant number of stroke patients in need of post-acute care, we will continue working to build our stroke
market share through our strategic sponsorship of the American Heart Association/American Stroke Association, the
IRF treatment recommendations published by the Department of Veterans’ Affairs and the Journal of the American
Medical Association, our care coordination, and our hospitals’ participation in The Joint Commission’s Disease-
Specific Care Certification Program. As of December 31, 2023, 136 of our 161 hospitals held stroke-specific
certifications that required us to demonstrate effective use of evidence-based clinical practice guidelines to manage and
optimize stroke care and an organized approach to performance measurement and evaluation of clinical outcomes. In
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2023, approximately 7% of patients recovering from a stroke in the U.S. were treated at our hospitals, accounting for
approximately 18% of our overall patient mix.
We will continue to develop and implement post-acute solutions that allow us to apply our clinical expertise, large
post-acute datasets, electronic medical record technologies, and strategic partnerships to drive improved patient
outcomes and lower the cost of care across the entire post-acute episode, such as our reducing acute-care transfer
model updated in 2022 and our fall prevention model implemented in 2022.
We will seek to expand efforts and initiatives to recruit and retain a qualified clinical workforce. In 2022, we
implemented a centralized nurse recruiting model to create recruiting efficiencies, shorten the hiring process, and
improve the candidate experience.
We will continue to install in our hospitals a hemodialysis system with which we are now able to provide inpatient
dialysis to our patients without relying on third-parties. Historically, our patients have received dialysis from third-
party vendors, either onsite or offsite as available, often resulting in interruptions to their therapy schedules. With this
new onsite hemodialysis system, we can provide our patients dialysis without interrupting therapy or requiring patient
travel, which lowers our cost of treatment and improves patient satisfaction. As of December 31, 2023, we had
installed these systems in 83 of our hospitals.
•
Capital Structure. We seek to maintain balance sheet flexibility, consider opportunistic refinancings and augment
returns from investments in operations with shareholder distributions via common stock dividends and repurchases of
our common stock. Our debt portfolio is concentrated in long-dated fixed-rate debt. Our free cash flow is the primary
source of funding for the considerable investment in our de novo and bed addition growth plans. As an additional
source of liquidity, we can access our $1 billion revolving credit facility of which $968 million was available for
borrowing as of December 31, 2023. Our strong balance sheet as well as our leverage and liquidity profiles mitigate
exposure to interest rate volatility and near-term refinancing risks.
For additional discussion of our strategic priorities as well as our progress toward our priorities in 2023, including
operating results, growth, and shareholder distributions, and our business outlook, see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, “Executive Overview,” “Results of Operations,” and “Liquidity and
Capital Resources.”
Human Capital Management
Overview of Our Employees. As of December 31, 2023, we employed approximately 38,000 individuals. In the
healthcare services sector, many professionals, such as nurses, desire flexible work arrangements. Accordingly, part-time and
per diem employees represent a large percentage of our employee population. Except for 47 employees at one hospital
(approximately 14.5% of that hospital’s workforce), none of our employees are represented by a labor union as of
December 31, 2023. The chart below includes a breakdown of our employees.
Type
Total Employees
Full-time Employees
Part-time Employees
Pool/Per-diem Employees
Employees
37,761
22,356
2,952
12,453
In some markets, the shortage of clinical personnel is a significant operating issue facing healthcare providers.
Shortages of nurses and other clinical personnel, including therapists, may, from time to time, require us to increase use of more
costly temporary personnel, which we refer to as “contract labor,” and other types of premium pay programs. In order to recruit
and retain those clinical employees, we maintain a total rewards program that we view as a combination of the tangible
components of pay and benefits with the intangible components of a culture that encourages learning, development, and a
supportive work environment. We believe our outstanding employee engagement scores, discussed below, evidence that our
human capital management efforts have been successful. We focus on the following strategic human capital imperatives:
• Maintaining competitive compensation and benefit programs that reward and recognize employee performance;
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Fostering a strong culture that values diversity, equity, and inclusion; and
Emphasizing employee development and engagement to attract talent and reduce turnover.
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Compensation and Benefits. Maintaining competitive compensation and benefit programs that reward and recognize
employee performance furthers our goal to attract, retain, and motivate employees who will help us deliver high-quality patient
care. We are also committed to providing comprehensive benefit options that will allow our employees and their families to live
healthier and more secure lives. In our compensation and benefit programs:
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we provide employee wages that are competitive and consistent with employee positions, skill levels, experience,
knowledge and geographic location.
we engage nationally recognized outside compensation and benefits consulting firms to independently evaluate the
effectiveness of our compensation and benefit programs, to provide benchmarking against our peers within the
industry and by specific market, and to recommend design elements for those programs.
we base annual increases and incentive compensation on merit, which is communicated to employees through our
talent management process as part of our annual review procedures.
all full-time and most part-time employees are eligible for health insurance, paid and unpaid leaves, a retirement plan,
a wellness program, telemedicine, tuition reimbursement, an employee assistance program, and life and disability/
accident coverage.
we provide an employer match on retirement plan contributions.
we also offer a wide variety of voluntary benefits that allow employees to select the options that meet their needs,
including pre-paid legal services, dental insurance, vision insurance, hospital indemnity insurance, accident insurance,
critical illness insurance, supplemental life insurance, disability insurance, health savings accounts, flexible spending
accounts, auto/home insurance, and identity theft insurance.
we have various year-long, quarterly, and short-term incentive plans for field leadership, most marketing/sales
employees, and executives.
we make annual grants of restricted stock to employees at various levels, including non-executive management, to
foster a strong sense of ownership and align the interests of management with those of our stockholders.
Diversity, Equity, and Inclusion. We believe fostering a strong culture that values diversity, equity, and inclusion, or
DE&I, allows us to recruit and retain diverse employees and provide high-quality care to our diverse patients. We maintain a
DE&I program that is overseen by a DE&I staff at our corporate office and supported by hospital diversity committees.
Together, they design and execute initiatives that strengthen relationships, improve communication, and increase understanding,
so we can better serve each other, our patients, and our communities. We believe our DE&I program furthers our efforts to
provide culturally competent care. The key components of our DE&I program are:
• Workforce Attraction and Development. We seek to build our workforce to represent and reflect the communities
we serve, which allows us to provide culturally competent care. In addition, we are committed to ensuring that all our
employees are trained on DE&I topics as a foundational element of our employee and leadership development
curriculum. Our other DE&I initiatives include scholastic partnerships with historically black colleges, recruitment
tools to help identify and attract diverse talent, a website career tool to help veterans find jobs that closely align with
their specific skills, and ongoing policy and procedure reviews to incorporate guidance and practices that align with
our DE&I mission. Our Developing Future CEOs, or DFCEO, program provides training and mentorship for emerging
leaders. Since its inception, 42 individuals have completed the program and been placed as hospital CEOs. Of those
placed, 24% have been people of color, and 38% have been women. In 2023, the number of people of color in hospital
leadership roles increased 11.2%.
•
Community Partnership. We establish and maintain relationships with local organizations to improve health
outcomes in our communities. An example of this type of partnership is our arrangement with Holy Family Cristo Rey
Catholic High School in Birmingham. This partnership allows adolescents from disadvantaged groups to gain tangible
work experience in our corporate office while earning funds for school tuition. In 2023, we sponsored seven students.
Our other community initiatives include an annual report that provides information on our DE&I initiatives to people
outside the Company. We also have memberships and active involvement in local chapters of the National Association
of Health Service Executives, an organization that promotes the advancement and development of minority healthcare
leaders. We provide training and mentorship to the next generation of healthcare leaders with the goal of helping them
develop the skills and passion for inpatient rehabilitation. Many of our hospitals have clinical rotations with local
universities and regularly attend school career fairs. In addition, we are active participants in a regional working group
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of Alabama-based businesses convened to discuss and share DE&I best practices. We also sponsored the 2023 Magic
City Classic, the largest historically black college and university football game in the country, in order to promote the
Encompass Health brand and career opportunities to the in-person attendees, estimated at approximately 70,000, as
well as visitors to the event’s website.
•
Supplier Diversity. We maintain a supplier base program that offers contracting opportunities with manufacturers,
distributors and service providers that are certified as minority-owned, veteran-owned and small disadvantage-owned
businesses, and we continue to research and identify additional diverse supplier certifying organizations.
We have undertaken other initiatives to emphasize the importance of DE&I in the workplace and its role in providing
the best quality patient care. For example, we participate in the CEO Action for Diversity and Inclusion Pledge. This coalition
of chief executive officers is dedicated to advancing DE&I in the workplace. Every three to four years, we engage a third-party
consulting agency to help us evaluate our program and explore possible enhancements. We then provide the feedback to our
board of directors. We have published a series of video conversations and written communications with various employees and
members of executive management to highlight personal experience to promote DE&I throughout the organization. In addition,
the DE&I department works closely with the quality, clinical and case management departments to improve health equity
(including through development of our social determinants of health risk assessment for use by patient case managers) and
ensure our interprofessional health care teams have the resources they need to provide culturally competent care.
The success of our DE&I program is evidenced by our annual employee engagement survey results. We ask
employees to rate five separate statements related to our DE&I program, including “there is an equal opportunity for people to
have a successful career at the Company,” “diversity (individual differences, perspectives, and experience) is embraced as a
strength by this Company,” “our Company equips me/staff with the resources to deliver culturally competent care to our
patients,” and “my immediate manager supports diversity, equity, and inclusion in the workplace.” All five of those statements
rated with a level of agreement at or above 80% and above the healthcare benchmark provided by the surveying vendor.
Employee Development and Engagement. Our employee development and engagement further our ability to attract
and retain healthcare professionals in a highly competitive environment where staffing shortages are not uncommon. We track
and measure therapist and nurse turnover for our full-time employees on a quarterly and annual basis for significant trends and
outliers, but we do not believe comparisons of our data to external turnover benchmarks are a valid representation, as they do
not account for the variations in survey data across markets, hospital sizes, practice settings, and practice specialties. The table
below shows those turnover rates for 2023 and 2022.
Therapist
Nurse
2023
7.8%
23.1%
2022
9.1%
28.1%
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We support the long-term career aspirations of our employees through education and personal development.
Education Opportunities. We offer our nurses an opportunity to advance their academic degrees at a reduced tuition
rate of 25% to 50% of the total program cost. To date, approximately 1,167 of our nurses have taken advantage of this
opportunity. Additionally, our full-time inpatient nursing and therapy staff have unlimited access to online education
and training to ensure continuing education units are available at no cost.
Tuition Reimbursement/Scholarship Programs. Employees also have the opportunity to advance their education
through our tuition reimbursement and scholarship programs. We reimbursed over $1.1 million in tuition and paid over
$2.8 million toward employees’ student loan debt in 2023.
Academic Endowments. We endowed five scholarships for deserving students from underrepresented groups
pursuing degrees in nursing and allied health fields.
Therapy Grants. We fund research projects to investigate the impact and effectiveness of therapy in the inpatient
rehabilitation setting. In recent years, we have funded studies and research on topics ranging from caregiver education
to the effectiveness of occupation-centered interventions. The program is open to qualified candidates, including
employees.
• Other Employee Development Programs:
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career ladders that offer paths to develop, demonstrate, and be rewarded for expanded responsibility in
nursing, therapy and case management;
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online development library that provides access to a wide range of readily available internal and external
content on many topics important for success in current or desired jobs;
developing future leaders program that develops nurses and therapists for supervisory positions and develops
nurse and therapy supervisors for higher level positions;
leadership precepting that provides new leaders 6-12 months of structured mentoring from experienced, high-
performing peers;
leadership coaching that provides six months of executive coaching to high performing leaders; and
DFCEO program that provides 18-24 months of intensive on-the-job experience to develop participants for
future hospital chief executive officer openings.
To further aid in employee development, we have invested in best-in-class technology to offer on-demand learning and
development programs. Additionally, we annually review our talent to identify potential successors for key positions and to
identify candidates for accelerated development based on their performance and potential. The annual process includes an
assessment of employee promotability based on a set of leadership core competencies defined as part of the Company’s talent
strategy.
Employee engagement is a key driver of retention. As such, we conduct an annual employee engagement survey open
to all our employees, helping us to gauge employee satisfaction with and commitment to their jobs. In 2023, 82% of our
employees participated in the survey, which measures perceptions based on 38 questions from the categories listed below. The
overall Company engagement score was 83% favorable, representing a 2% increase over 2022. In 2023, we again surpassed the
healthcare benchmarks in each of the 10 categories:
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• work environment
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engagement
culture of trust
individual value
communication
Furthermore, some hospitals participate in a 5-item pulse engagement survey mid-year to gain feedback on their
engagement action plans. Pulse surveys allow us to target and achieve improved engagement scores at the hospital level.
Competition
The inpatient rehabilitation industry, outside of our leading position, is highly fragmented. Our inpatient rehabilitation
hospitals compete primarily with rehabilitation units, most of which are within acute-care hospitals, in the markets we serve. An
acute-care hospital operating its own unit, particularly one owned or operated by a large public company or not-for-profit that
has a dominant position in the local market, can be a formidable competitor because 91% of our patients come from acute-care
hospitals. There are several privately held companies offering post-acute rehabilitation services that compete with us primarily
in select geographic markets. In addition, there is a public company that is primarily focused on other post-acute care services
but also operates 33 inpatient rehabilitation hospitals. Other providers of post-acute care services compete for some
rehabilitation patients. For example, nursing homes may market themselves as offering certain rehabilitation services,
particularly to patients not in need of intensive rehabilitation therapy, even though those nursing homes are not required to offer
the same level of care, and are not licensed, as hospitals. The primary competitive factors in any given market include the
quality of care and service provided, the treatment outcomes achieved, the relationship and reputation with managed care and
other private payors and the acute-care hospitals, physicians, or other referral sources in the market, and the regulatory barriers
to entry in certificate of need states. The ability to work as part of an integrated delivery payment model with other providers,
including the ability to deliver quality patient outcomes and cost-effective care, could become an increasingly important factor
in competition if a significant number of people in a market are participants in one or more of these models. See the
“Regulation—Relationships with Physicians and Other Providers” and “Regulation—Certificates of Need” sections below for
further discussion of some of these factors. For a list of our inpatient rehabilitation markets by state, see the table in Item 2,
Properties.
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Regulatory and Reimbursement Challenges
Healthcare is a highly regulated industry facing many well-publicized regulatory and reimbursement challenges driven
by escalating costs and the pursuit of better quality of care. The Medicare reimbursement system for inpatient rehabilitation has
changed significantly over the years. The future of many aspects of healthcare regulation remains uncertain. Any regulatory or
legislative changes impacting the healthcare industry ultimately may affect, among other things, reimbursement of healthcare
providers, consumers’ access to coverage of health services, including among non-Medicare aged population segments within
commercial insurance markets and Medicaid enrollees, and competition among providers. Changes may also affect the delivery
of healthcare services to patients by providers and the regulatory compliance obligations associated with those services.
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 more in-depth discussion of the primary challenges and risks related to our business,
particularly the changes in Medicare reimbursement, increased compliance and enforcement burdens, and changes to our
operating environment resulting from healthcare reform, see “Sources of Revenues—Medicare Reimbursement” and
“Regulation” below in this section as well as Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, “Executive Overview—Key Challenges.”
Sources of Revenues
We receive payment for patient care services from the federal government (primarily under the Medicare program),
managed care plans and private insurers, and, to a considerably lesser degree, state governments (under their respective
Medicaid or similar programs) and directly from patients. Revenues and receivables from Medicare are significant to our
operations. The federal and state governments establish payment rates as described in more detail below. We negotiate the
payment rates with non-governmental group purchasers of healthcare services that are included in “Managed care” in the tables
below, including private insurance companies, employers, health maintenance organizations (“HMOs”), preferred provider
organizations (“PPOs”), and other managed care plans. Patients are generally not responsible for the difference between
established gross charges and amounts reimbursed for such services under Medicare, Medicaid, and other private insurance
plans, HMOs, or PPOs but are responsible to the extent of any exclusions, deductibles, copayments, or coinsurance features of
their coverage. Medicare, through its Medicare Advantage program, offers Medicare-eligible individuals an opportunity to
participate in managed care plans. Revenues from Medicare and Medicare Advantage represent approximately 81% of total
revenues.
The sources and relative mix of our revenues for the last three years are:
Medicare
Medicare Advantage
Managed care
Medicaid
Other third-party payors
Workers' compensation
Patients
Other income
Total
Medicare Reimbursement
For the Year Ended December 31,
2023
2022
2021
65.0 %
16.2 %
11.1 %
4.0 %
0.9 %
0.5 %
0.3 %
2.0 %
65.3 %
15.1 %
11.6 %
4.2 %
0.9 %
0.6 %
0.4 %
1.9 %
64.4 %
15.2 %
12.1 %
4.1 %
1.1 %
0.6 %
0.5 %
2.0 %
100.0 %
100.0 %
100.0 %
Medicare is a federal program that provides hospital and medical insurance benefits to persons aged 65 and over,
qualified disabled persons, and persons with end-stage renal disease. Medicare, through statutes and regulations, establishes
reimbursement methodologies and rates for various types of healthcare providers, facilities, and services. Each year, the
Medicare Payment Advisory Commission (“MedPAC”), an independent agency that advises the United States Congress on
issues affecting Medicare, makes payment policy recommendations to Congress for a variety of Medicare payment systems
including, among others, the inpatient rehabilitation facility prospective payment system (the “IRF-PPS”). MedPAC also makes
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recommendations on regulatory actions to CMS. Neither Congress nor CMS is obligated to adopt MedPAC recommendations,
and, based on outcomes in previous years, there can be no assurance either will adopt MedPAC’s recommendations in a given
year. However, MedPAC’s recommendations have, and could in the future, become the basis for subsequent legislative or, as
discussed below, regulatory action.
The Medicare statutes are subject to change from time to time. With respect to Medicare reimbursement, the ACA
provided for specific reductions to healthcare providers’ annual market basket updates and other payment policy changes. In
August 2011, President Obama signed into law the Budget Control Act of 2011 providing for an automatic 2% reduction, or
“sequestration,” of Medicare program payments for all healthcare providers. Sequestration took effect April 1, 2013 and, as a
result of subsequent legislation, will continue through mid-fiscal year 2032 unless Congress and the President take further
action. In response to the public health emergency associated with the pandemic, Congress and the President suspended
sequestration through March 31, 2022. Additional Medicare payment reductions are also possible under the Statutory Pay-As-
You-Go Act of 2010 (“Statutory PAYGO”). Statutory PAYGO requires, among other things, that mandatory spending and
revenue legislation not increase the federal budget deficit over a 5- or 10-year period. If the Office of Management and Budget
(the “OMB”) finds there is a deficit in the federal budget, Statutory PAYGO requires OMB to order sequestration of Medicare.
The Congressional Budget Office estimated that the American Rescue Plan Act of 2021 would result in budget deficits
necessitating a 4% reduction in Medicare program payments under the Statutory PAYGO, but subsequent legislation enacted by
Congress suspended until 2025 the Statutory PAYGO reductions that would have gone into effect. In the future, concerns about
the federal deficit, national debt levels and the solvency of the Medicare trust fund could result in enactment of further federal
spending reductions, further entitlement reform legislation affecting the Medicare program, or both. Healthcare will almost
certainly be the subject of significant regulatory and legislative changes regardless of the party in control of the executive and
legislative branches of state and federal governments.
From time to time, Medicare regulations, including reimbursement methodologies and rates, can be further modified
by CMS. Subject to its statutory authority, CMS may make some prospective payment system changes. For example, CMS
changed the IRF-PPS, effective October 1, 2019, to replace the FIM™ assessment instrument with new patient assessment
measures, which we refer to as “Section GG functional measures” or “Section GG” based on the designation CMS assigned to
them. Section GG affects patients’ classification into case-mix groupings, relative weights, and length-of-stay values under the
IRF-PPS, which in turn affect our reimbursement amounts. In some instances, CMS’s modifications can have a substantial
impact on healthcare providers. In accordance with Medicare laws and statutes, CMS makes annual adjustments to Medicare
payment rates in prospective payment systems, including the IRF-PPS, by what is commonly known as a “market basket
update.” CMS may take other regulatory action affecting rates as well. For example, under the ACA, CMS requires IRFs to
submit data on certain quality of care measures for the IRF quality reporting program. A facility’s failure to submit the required
quality data results in a two percentage point reduction to that facility’s annual market basket increase factor for payments made
for discharges in a subsequent Medicare fiscal year. IRFs began submitting quality data to CMS in October 2012. All of our
inpatient rehabilitation hospitals have met the reporting deadlines to date resulting in no corresponding reimbursement
reductions.
We cannot predict the adjustments to Medicare payment rates Congress or CMS may make in the future. Congress,
MedPAC, and CMS will continue to address reimbursement rates for a variety of healthcare settings. Any additional downward
adjustment to rates or limitations on reimbursement for the types of facilities we operate and services we provide could have a
material adverse effect on our business, financial position, results of operations, and cash flows. For additional discussion of the
risks associated with our concentration of revenues from the federal government or with potential changes to the statutes or
regulations governing Medicare reimbursement, see Item 1A, Risk Factors, “Reimbursement Risks” and “Other Regulatory
Risks” and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive
Overview—Key Challenges.”
Although reductions or changes in reimbursement from governmental or third-party payors and regulatory changes
affecting our business represent one of the most significant challenges to our business, our operations are also affected by other
rules and regulations that indirectly affect reimbursement for our services, such as data coding rules and patient coverage rules
and determinations. For example, Medicare providers like us can be negatively affected by the adoption of coverage policies,
either at the national or local level, that determine whether an item or service is covered and under what clinical circumstances
it is considered to be reasonable and necessary. Current CMS coverage rules require inpatient rehabilitation services to be
ordered by a physician and be coordinated by an interdisciplinary team and the admission to the IRF must be reviewed and
approved by a specialized rehabilitation physician. The interdisciplinary team must meet weekly to review patient status and
make any needed adjustments to the individualized plan of care. Qualified personnel must provide the rehabilitation nursing,
physical therapy, occupational therapy, speech-language pathology, social services, psychological services, and prosthetic and
orthotic services that may be needed. Medicare contractors processing claims for CMS make coverage determinations regarding
medical necessity that can represent novel or restrictive interpretations of the CMS coverage rules. Those interpretations are not
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made through a notice and comment review process. We cannot predict how future CMS coverage rule interpretations or any
new local coverage determinations will affect us. However, more restrictive coverage interpretations can limit or delay our
reimbursement for services provided to potentially large pools of patients with similar medical conditions.
In the ordinary course, Medicare reimbursement claims made by healthcare providers, including inpatient
rehabilitation hospitals, are subject to audit from time to time by governmental payors and their agents, such as the Medicare
Administrative Contractors (“MACs”) that act as fiscal intermediaries for all Medicare billings, as well as the United States
Department of Health and Human Services Office of Inspector General (the “HHS-OIG”), CMS, and state Medicaid programs.
In addition to those audits conducted by existing MACs, CMS has developed and instituted various Medicare audit programs
under which CMS contracts with private companies to conduct claims and medical record audits. Some contractors are paid a
percentage of the overpayments recovered. The Recovery Audit Contractors (“RACs”) conduct payment reviews of claims,
which can examine coding, overall billing accuracy, and medical necessity. When conducting an audit, the RACs receive claims
data directly from MACs on a monthly or quarterly basis.
CMS has also established Unified Program Integrity Contractors (“UPICs”) to perform fraud, waste, and abuse
detection, deterrence and prevention activities for Medicare and Medicaid claims. Like the RACs, the UPICs conduct audits and
have the ability to refer matters to the HHS-OIG or the United States Department of Justice (“DOJ”). Unlike RACs, however,
UPICs do not receive a specific financial incentive based on the amount of the payment errors they identify.
As a matter of course, we undertake significant efforts through training, education, and documentation to ensure
compliance with coding and medical necessity coverage rules. Despite our efforts to ensure accurate coding and assessment of
patients, audits have in the past led and may in the future lead to assertions that we have been underpaid or overpaid by
Medicare or that we have submitted improper claims in some instances. Audits also require us to incur additional costs to
respond to requests for records and defend the validity of payments and claims, and ultimately require us to refund any amounts
determined to have been overpaid. We cannot predict when or how these audit programs will affect us. Any denial of a claim
for payment, either as a result of an audit or ordinary course payment review by the MAC, is subject to an appeals process that
can take years to complete. For additional discussion of these audits and the risks associated with them, see Item 1A, Risk
Factors, “Reimbursement Risks” and “Other Regulatory Risks” and Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, “Executive Overview—Key Challenges.”
As noted above, our inpatient rehabilitation hospitals receive a fixed payment reimbursement amount per discharge
under the IRF-PPS based on the patient’s rehabilitation impairment category and other characteristics and conditions identified
by the attending clinicians. In order to qualify for reimbursement under the IRF-PPS, our hospitals must comply with various
Medicare rules and regulations including documentation and coverage requirements, or specifications as to what conditions
must be met to qualify for reimbursement. These requirements relate to, among other things, pre-admission screening, and
individual treatment planning that all delineate the role of physicians in ordering and overseeing patient care. For example,
physicians must approve patient admissions and in doing so determine that the treatment of the patients in an IRF setting is
reasonable and necessary. A rehabilitation physician must then conduct face-to-face visits with the patients at least three days
per week throughout the IRF stay. Also, patients admitted to IRFs must be able to tolerate a minimum of three hours of therapy
per day for five days per week, and IRFs must have a registered nurse available 24 hours, each day of the week.
In addition, to qualify as an IRF under Medicare rules, a facility must be primarily focused on treating patients with
one of 13 specified medical conditions that typically require intensive therapy and supervision, such as stroke, brain injury, hip
fracture, certain neurological conditions, and spinal cord injury. Specifically, at least 60% of a facility’s patients must have a
diagnosis or qualifying comorbidity from at least one of these 13 conditions, which requirement is known as the “60% Rule.” If
an IRF does not demonstrate compliance with the 60% Rule by either the presumptive method or through a review of medical
records, then its classification as an IRF may be terminated by CMS causing the facility to be paid under the acute-care
payment system which would result in reduced total reimbursement per patient. If some of our hospitals fail to demonstrate
compliance with the 60% Rule and CMS re-classifies them as acute-care hospitals, our revenue and profitability may be
materially and adversely affected.
Under the IRF-PPS, CMS is required to adjust the payment rates based on an IRF-specific market basket index. The
annual market basket update is designed to reflect changes over time in the prices of a mix of goods and services used by IRFs.
In setting annual market basket updates, CMS uses data furnished by the Bureau of Labor Statistics for price proxy purposes,
primarily in three categories: Producer Price Indexes, Consumer Price Indexes, and Employment Cost Indexes. With IRF-PPS,
our inpatient rehabilitation hospitals retain the difference, if any, between the fixed payment from Medicare and their operating
costs. Accordingly, our hospitals benefit from being cost-effective providers.
On July 27, 2022, CMS released its notice of final rulemaking for fiscal year 2023 IRF-PPS (the “2023 IRF Rule”).
The 2023 IRF Rule implemented a net 3.9% market basket increase (market basket update of 4.2% reduced by a productivity
adjustment of 0.3%) effective for discharges between October 1, 2022 and September 30, 2023. The productivity adjustment
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equals the trailing 10-year average of changes in annual economy-wide private nonfarm business multi-factor productivity. The
2023 IRF Rule also included changes that impacted our hospital-by-hospital base rate for Medicare reimbursement. Such
changes included, but were not limited to, revisions to the wage index and labor-related share values, updates to outlier
payments and updates to the case-mix group relative weights and average lengths of stay values.
On July 27, 2023, CMS released its notice of final rulemaking for fiscal year 2024 IRF-PPS (the “2024 IRF Rule”).
The 2024 IRF Rule implements a net 3.4% market basket increase (market basket update of 3.6% reduced by a productivity
adjustment of 0.2%) effective for discharges between October 1, 2023 and September 30, 2024. The 2024 IRF 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 and labor-related share values, updates to outlier payments and updates to the case-mix
group relative weights and average lengths of stay values. Based on our analysis, which utilizes, among other things, the acuity
of our patients annualized over the twelve-month prior period ended June 30, 2023, our experience with outlier payments over
that same time frame, and other factors, we believe the 2024 IRF Rule will result in a net increase to our Medicare payment
rates of approximately 3.3% effective October 1, 2023.
Unlike our inpatient services, our outpatient services are primarily reimbursed under the Medicare Part B physician fee
schedule. On November 2, 2023, CMS released its final notice of rulemaking for the payment policies under the physician fee
schedule and other revisions to Part B policies for calendar year 2024. The updates to the fee schedule are not expected to be
material to us.
For additional discussion of the Medicare payment rules and other regulatory and legislative initiatives affecting
Medicare reimbursement that could impact our businesses, see Item 1A, Risk Factors, “Reimbursement Risks” and “Other
Regulatory Risks” and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,
“Executive Overview—Key Challenges.”
Medicare Advantage, Managed Care and Other Discount Plans
We negotiate payment rates with certain large group purchasers of healthcare services, including Medicare Advantage
plans, managed care plans, private insurance companies, and third-party administrators. Managed care contracts typically have
terms between one and three years, although we have a number of managed care contracts that automatically renew each year
(with pre-defined rate increases) unless a party elects to terminate the contract. In 2023, typical rate increases for our contracts
ranged from 2-4%. We cannot provide any assurance we will continue to receive increases in the future. Our managed care staff
focuses on establishing and re-negotiating contracts that provide equitable reimbursement for the services provided.
As the percentage of Medicare-eligible beneficiaries choosing Medicare Advantage over traditional Medicare has
grown, we have seen the percentage of our revenue derived from Medicare Advantage payors grow. In 2023, approximately
50% of Medicare beneficiaries enrolled in Medicare Advantage plans. This percentage has steadily increased over time since
2003. The Congressional Budget Office projects that the share of all Medicare beneficiaries enrolled in Medicare Advantage
plans will rise to about 62% by 2033. We expect the percentage of our total revenues attributable to Medicare Advantage plans
to continue to grow as well. Typically, Medicare Advantage and other managed care plans reimburse us less than traditional
Medicare for the same type of care and patient, but that differential has been shrinking in recent years.
Medicaid Reimbursement
Medicaid is a jointly administered and funded federal and state program that provides hospital and medical benefits to
qualifying individuals who are deemed unable to afford healthcare. As the Medicaid program is administered by the individual
states under the oversight of CMS in accordance with certain regulatory and statutory guidelines, there are substantial
differences in reimbursement methodologies and coverage policies from state to state. Historically, states experiencing
shortfalls in their Medicaid budgets have implemented cuts in Medicaid reimbursement rates. Additionally, certain states
control Medicaid expenditures through restricting or eliminating coverage of some services. On average, our reimbursement per
discharge from Medicaid is lower than that from traditional Medicare, Medicare Advantage and other managed care payors. For
the year ended December 31, 2023, Medicaid payments represented only 4.0% of our consolidated Net operating revenues, and
Medicaid discharges represented 6.3% of our total inpatient discharges. For additional discussion, see Item 1A, Risk Factors,
“Reimbursement Risks.”
Cost Reports
Because of our participation in Medicare and Medicaid, we are required to meet certain financial reporting
requirements. Federal and, where applicable, state regulations require the submission of annual cost reports covering the
revenue, costs, and expenses associated with the services provided by healthcare providers to Medicare beneficiaries and
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Medicaid recipients. These annual cost reports are subject to routine audits which may result in adjustments to the amounts
ultimately determined to be due to us under these reimbursement programs. These audits are used for determining if any under-
or over-payments were made to these programs and to set payment levels for future years. Medicare also makes retroactive
adjustments to payments for certain low-income patients after comparing subsequently published statistical data from CMS to
the cost report data. We cannot predict what retroactive adjustments, if any, will be made, but we do not anticipate these
adjustments will have a material impact on us.
Regulation
The healthcare industry is subject to significant federal, state, and local regulation that affects our business activities by
controlling the reimbursement we receive for services provided, requiring licensure or certification of our operations, regulating
our relationships with physicians and other referral sources, regulating the use of our properties, and controlling our growth.
State and local healthcare regulation may cover additional matters such as nurse staffing ratios, healthcare worker safety,
disclosure of charges for services provided, marijuana legalization, and assisted suicide. We are also subject to the broader
federal and state regulations that prohibit fraud and abuse in the delivery of healthcare services. Congress, HHS-OIG, and the
DOJ have historically focused on fraud and abuse in healthcare. Since the 1980s, a steady stream of changes have stiffened
criminal and civil penalties or made it easier for DOJ to impose liability on companies and individuals. As a healthcare
provider, we are subject to periodic audits, examinations and investigations conducted by, or at the direction of, government
investigative and oversight agencies. Failure to comply with applicable federal and state healthcare regulations can result in a
provider’s exclusion from participation in government reimbursement programs and in substantial civil and criminal penalties.
We undertake significant effort and expense to provide the medical, nursing, therapy, and ancillary services required to
comply with local, state, and federal regulations, as well as, for most hospitals, accreditation standards of The Joint
Commission and, for some hospitals, the Commission on Accreditation of Rehabilitation Facilities. Accredited hospitals are
subject to periodic resurvey to ensure the standards are being met.
Beyond healthcare specific regulations, we face increasing state and local regulation in areas, such as labor and
employment and data privacy, traditionally subject to only or primarily federal regulation. In addition to the risk and burden of
new, additional, or more stringent regulatory standards, these state and local regulations often conflict with federal regulation,
and with each other. Given the number of locations in which we operate, increasing state and local regulation, which may be
more stringent than federal regulation and may even conflict with federal or other state or local regulation, represents a
significant burden and risk to us.
We maintain a comprehensive ethics and compliance program to promote conduct and business practices that meet or
exceed requirements under laws, regulations, and industry standards. The program monitors the Company’s performance on,
and raises awareness of, various regulatory requirements among employees and emphasizes the importance of complying with
governmental laws and regulations. As part of the compliance program, we provide annual compliance training to our
employees, Board members, medical directors, vendors, and other non-employees that operate within our hospitals, and require
all employees to report any violations to their supervisor or another person of authority or through a toll-free telephone hotline.
Another integral part of our compliance program is a policy of non-retaliation against employees who report compliance
concerns.
Licensure and Certification
Healthcare facility construction and operation are subject to numerous federal, state, and local regulations relating to,
among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, acquisition and
dispensing of pharmaceuticals and controlled substances, infection control, maintenance of adequate records and patient
privacy, fire prevention, and compliance with building codes and environmental protection laws. Our inpatient rehabilitation
hospitals are subject to periodic inspection and other reviews by governmental and non-governmental certification authorities to
ensure continued compliance with the various standards necessary for facility licensure. All of our hospitals are required to be
licensed.
In addition, inpatient rehabilitation hospitals must be certified by CMS to participate in the Medicare program and
generally must be certified by Medicaid state agencies to participate in Medicaid programs. Certification and participation in
these programs involve numerous regulatory obligations. For example, hospitals must treat at least 20 patients without
reimbursement prior to certification and eligibility for Medicare reimbursement. Once certified by Medicare, hospitals undergo
periodic on-site surveys and revalidations in order to maintain their certification. All of our inpatient hospitals participate in the
Medicare program.
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Failure to comply with applicable certification requirements may make our hospitals ineligible for Medicare or
Medicaid reimbursement. In addition, Medicare or Medicaid may seek retroactive reimbursement from noncompliant hospitals
or otherwise impose sanctions for noncompliance. Non-governmental payors often have the right to terminate provider
contracts if the provider loses its Medicare or Medicaid certification.
All Medicare providers are subject to employee screening requirements and associated fees. The screening of
employees with patient access must include a licensure check and may include other procedures such as fingerprinting, criminal
background checks, unscheduled and unannounced site visits, database checks, and other screening procedures prescribed by
CMS. If a healthcare provider arranges or contracts with an individual or entity who is excluded by HHS-OIG from
participation in a federal healthcare program, the provider may be subject to civil monetary penalties if the excluded person
renders services reimbursed, directly or indirectly, by a program.
We have developed operational systems to facilitate compliance with the various standards and requirements of the
Medicare program and have established ongoing quality assurance activities; however, given the complex nature of
governmental healthcare regulations, there can be no assurance Medicare, Medicaid, or other regulatory authorities will not
allege instances of noncompliance. A determination by a regulatory authority that a hospital is not in compliance with
applicable requirements could also lead to the assessment of fines or other penalties, loss of licensure, exclusion from
participation in Medicare and Medicaid, and the imposition of requirements that the offending hospital must take corrective
action.
Certificates of Need
In some states and U.S. territories where we operate, the construction or expansion of facilities, the acquisition of
existing facilities, or the introduction of new beds or inpatient services may be subject to review by and prior approval of state
regulatory bodies under a “certificate of need,” or “CON,” law. As of December 31, 2023, approximately 36% of our licensed
beds are in states or U.S. territories that have CON laws. CON laws require a reviewing authority or agency to determine the
public need for additional or expanded healthcare facilities and services. These laws also generally require approvals for capital
expenditures involving inpatient rehabilitation hospitals if such capital expenditures exceed certain thresholds. In addition,
CON laws in some states require us to abide by certain charity care commitments as a condition for approving a CON. Any
instance where we are subject to a CON law, we must obtain it before acquiring, opening, reclassifying, or expanding a
healthcare facility or starting a new healthcare program.
We potentially face opposition any time we initiate a project requiring a new or amended CON or seek to acquire an
existing CON. This opposition may arise either from competing national or regional companies or from local hospitals or other
providers which file competing applications or oppose the proposed CON project. Opposition to our applications may delay or
prevent our future addition of beds or hospitals in given markets or increase our costs in seeking those additions. The necessity
for these approvals serves as a barrier to entry and has the potential to limit competition for us (in markets where we hold a
CON) and for other providers (in markets where we are seeking a CON). We have generally been successful in obtaining CONs
or similar approvals, although there can be no assurance we will achieve similar success in the future, and the likelihood of
success varies by locality and state.
In an attempt to reduce regulation and increase competition, lawmakers in several states have recently proposed
modification or even full repeal of CON laws. In 2019, Florida enacted legislation to repeal CON laws for several provider
types, including IRFs. Similarly, in 2023, South Carolina enacted legislation to repeal CON laws for several provider types,
including IRFs. We believe CON-related legislation and regulation changes, including both repeal and expansion of CON
requirements, will continue to be proposed in various states for the foreseeable future.
False Claims
The federal False Claims Act (the “FCA”) imposes liability for the knowing presentation of a false claim to the United
States government and provides for penalties equal to three times the actual amount of any overpayments plus up to
approximately $27,000 per claim. Federal civil penalties will be adjusted to account for inflation each year. In addition, the
FCA allows private persons, known as “relators,” to file complaints under seal and provides a period of time for the government
to investigate such complaints and determine whether to intervene in them and take over the handling of all or part of such
complaints. The government and relators may also allege violations of the FCA for the knowing and improper failure to report
and refund amounts owed to the government in a timely manner following identification of an overpayment. This is known as a
“reverse false claim.” The government deems identification of the overpayment to occur when a person has, or should have
through reasonable diligence, determined that an overpayment was received and quantified the overpayment.
Because we have hundreds of thousands of claims a year for which we are reimbursed by Medicare and other federal
payors and there is a relatively long statute of limitations, a billing error, cost reporting error or disagreement over physician
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medical judgment could result in significant damages and civil and criminal penalties under the FCA. Many states have also
adopted similar laws relating to state government payments for healthcare services. The ACA amended the FCA to expand the
definition of false claim, to make it easier for the government to initiate and conduct investigations, to enhance the monetary
reward to relators where prosecutions are ultimately successful, and to extend the statute of limitations on claims by the
government. The federal government has become increasingly aggressive in asserting that incidents of erroneous billing or
record keeping represent FCA violations and in challenging the medical judgment of independent physicians as the basis for
FCA allegations. Furthermore, well-publicized enforcement actions indicate that the federal government has increasingly
sought to use statistical sampling to extrapolate allegations to larger pools of claims or to infer liability without proving
knowledge of falsity of individual claims. A violation of the FCA by us could have a material adverse effect upon our business,
financial position, results of operations, or cash flows. Even the assertion of a violation could have an adverse effect upon our
stock price or reputation. For additional discussion, see Item 1A, Risk Factors, “Reimbursement Risks” and “Other Regulatory
Risks” and Note 18, Contingencies and Other Commitments, to the accompanying consolidated financial statements.
Relationships with Physicians and Other Providers
Anti-Kickback Law. Various state and federal laws regulate relationships between providers of healthcare services,
including management or service contracts and investment relationships. Among the most important of these restrictions is a
federal law prohibiting the offer, payment, solicitation, or receipt of remuneration by individuals or entities to induce referrals
of patients for services reimbursed under the Medicare or Medicaid programs (the “Anti-Kickback Law”). The ACA amended
the federal Anti-Kickback Law to provide that proving violations of this law does not require proving actual knowledge or
specific intent to commit a violation. Another amendment made it clear that Anti-Kickback Law violations can be the basis for
claims under the FCA. These changes and those described above related to the FCA, when combined with other recent federal
initiatives, are likely to increase investigation and enforcement efforts in the healthcare industry generally. In addition to
standard federal criminal and civil sanctions, including imprisonment and penalties of up to $100,000 for each violation plus
tripled damages for improper claims, violators of the Anti-Kickback Law may be subject to exclusion from the Medicare and/or
Medicaid programs. Federal civil penalties will be adjusted to account for inflation each year. HHS-OIG regulations itemize
compensation arrangements that are not viewed as illegal remuneration under the Anti-Kickback Law. Those regulations
provide for certain safe harbors for identified types of compensation arrangements that, if fully complied with, assure
participants in the particular arrangement that HHS-OIG will not treat that participation as a criminal offense under the Anti-
Kickback Law or as the basis for an exclusion from the Medicare and Medicaid programs or the imposition of civil sanctions.
On November 20, 2020, HHS-OIG finalized a rule to modernize the Anti-Kickback Law by reducing regulatory
barriers to care coordination and accelerating adoption of value-based delivery and payment models (the “2020 AKL Rule”).
The 2020 AKL Rule adds several new safe harbors for value-based arrangements and modifies several existing safe harbors
with the goal of encouraging innovations that are beneficial to patients while maintaining necessary safeguards to protect
against fraud and abuse. The 2020 AKL Rule also expands the safe harbor for cybersecurity technology by covering
remuneration in the form of cybersecurity technology and services. The new and modified value-based safe harbors are
available to inpatient rehabilitation providers if the applicable conditions are met.
Failure to fall within a safe harbor does not constitute a violation of the Anti-Kickback Law, but HHS-OIG has
indicated failure to fall within a safe harbor may subject an arrangement to increased scrutiny. A violation of the Anti-Kickback
Law by us or one or more of our joint ventures could have a material adverse effect upon our business, financial position,
results of operations, or cash flows. Even the assertion of a violation could have an adverse effect upon our stock price or
reputation.
We operate a number of our rehabilitation hospitals through joint ventures with institutional healthcare providers that
may be in a position to make or influence referrals to us. In addition, we have a number of relationships with physicians and
other healthcare providers, including management or service contracts. Some of these investment relationships and contractual
relationships may not fall within the protection offered by a safe harbor. Despite our compliance and monitoring efforts, there
can be no assurance violations of the Anti-Kickback Law will not be asserted in the future, nor can there be any assurance our
defense against any such assertion would be successful.
For example, we have entered into agreements to manage our hospitals that are owned by joint ventures. Most of these
agreements incorporate a percentage-based management fee. Although there is a safe harbor for personal services and
management contracts, this safe harbor requires, among other things, the aggregate compensation paid to the manager over the
term of the agreement be set in advance. Because our management fee may be based on a percentage of revenues, the fee
arrangement may not meet this requirement. However, we believe our management arrangements satisfy the other requirements
of the safe harbor for personal services and management contracts and comply with the Anti-Kickback Law.
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Physician Self-Referral Law. The federal law commonly known as the “Stark law” and CMS regulations promulgated
under the Stark law prohibit physicians from making referrals for “designated health services” including inpatient and
outpatient hospital services, physical therapy, occupational therapy, radiology services, and home health services, to an entity in
which the physician (or an immediate family member) has an investment interest or other financial relationship, subject to
certain exceptions. The Stark law also prohibits those entities from filing claims or billing Medicare for those referred services.
Violators of the Stark law and regulations may be subject to recoupments, civil monetary sanctions (up to approximately
$30,000 for each violation and assessments up to three times the amount claimed for each prohibited service) and exclusion
from any federal, state, or other governmental healthcare programs. The statute also provides a penalty of up to approximately
$200,000 for a circumvention scheme. Federal civil penalties will be adjusted to account for inflation each year. There are
statutory exceptions to the Stark law for many of the customary financial arrangements between physicians and providers,
including personal services contracts and leases. However, in order to be afforded protection by a Stark law exception, the
financial arrangement must comply with every requirement of the applicable exception.
Under the ACA, the exception to the Stark law that currently permits physicians to refer patients to hospitals in which
they have an investment or ownership interest has been dramatically limited by providing that only physician-owned hospitals
with a provider agreement in place on December 31, 2010 are exempt from the general ban on self-referral. Existing physician-
owned hospitals are prohibited from increasing the physician ownership percentage in the hospital after March 23, 2010.
Additionally, physician-owned hospitals are prohibited from increasing the number of licensed beds after March 23, 2010,
except when certain market and regulatory approval conditions are met. We have no hospitals that would be considered
physician-owned under this law.
On November 20, 2020, CMS finalized a rule implementing various changes to the Stark law to provide better access
and outcomes for patients by creating clearer paths for providers to serve patients through enhanced coordinated care
agreements (the “2020 Stark Rule”). Notably, the 2020 Stark Rule creates permanent exceptions for value-based compensation
arrangements that provide at least one value-based activity, which arrangements must further one value-based purpose, which
may include: (1) coordinating and managing patient care; (2) improving quality of care for a target population; (3) reducing
costs or expenditure growth without reducing quality of care; and (4) transitioning from health care delivery and payment
mechanisms that are based on volume to outcome-based delivery and payment systems. In addition, the 2020 Stark Rule adopts
a new exception regarding the provision of cybersecurity items to physicians and makes permanent the electronic health record
exception under the Stark law.
The complexity of the Stark law and the associated regulations and their associated strict liability provisions are a
challenge for healthcare providers, who do not always have the benefit of significant regulatory or judicial interpretation of
these laws and regulations. We attempt to structure our relationships to meet one or more exceptions to the Stark law, but the
regulations implementing the exceptions are detailed and complex. Accordingly, we cannot assure that every relationship
complies fully with the Stark law.
Additionally, no assurances can be given that any agency charged with enforcement of the Stark law and regulations
might not assert a violation under the Stark law, nor can there be any assurance our defense against any such assertion would be
successful or that new federal or state laws governing physician relationships, or new interpretations of existing laws governing
such relationships, might not adversely affect relationships we have established with physicians or result in the imposition of
penalties on us. A violation of the Stark law by us could have a material adverse effect upon our business, financial position,
results of operations, or cash flows. Even the assertion of a violation could have an adverse effect upon our stock price or
reputation.
HIPAA
The Health Insurance Portability and Accountability Act of 1996, commonly known as “HIPAA,” broadened the scope
of certain fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health
benefit programs. HIPAA also added a prohibition against incentives intended to influence decisions by Medicare or Medicaid
beneficiaries as to the provider from which they will receive services. In addition, HIPAA created new enforcement
mechanisms to combat fraud and abuse, including the Medicare Integrity Program, and an incentive program under which
individuals can receive a monetary reward for providing information on Medicare fraud and abuse that leads to the recovery of
Medicare funds. Penalties for violations of HIPAA include civil and criminal monetary penalties. The United States Department
of Health and Human Services Office of Civil Rights (“HHS-OCR”) implemented a permanent HIPAA audit program for
healthcare providers nationwide in 2016. As of December 31, 2023, we have not been selected for audit.
HIPAA and related regulations contain certain administrative simplification provisions that require the use of uniform
electronic data transmission standards for certain healthcare claims and payment transactions submitted or received
electronically. HIPAA regulations also regulate the use and disclosure of individually identifiable health-related information,
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whether communicated electronically, on paper, or orally. The regulations provide patients with significant rights related to
understanding and controlling how their health information is used or disclosed and require healthcare providers to implement
administrative, physical, and technical practices to protect the security of individually identifiable health information.
The Health Information Technology for Economic and Clinical Health (“HITECH”) Act modifies and expands the
privacy and security requirements of HIPAA. The HITECH Act applies certain of the HIPAA privacy and security
requirements directly to business associates of covered entities. The modifications to existing HIPAA requirements include:
expanded accounting requirements for electronic health records, tighter restrictions on marketing and fundraising, and
heightened penalties and enforcement associated with noncompliance. Significantly, the HITECH Act also establishes new
mandatory federal requirements for notification of breaches of security involving protected health information. HHS-OCR rules
implementing the HITECH Act expand the potential liability for a breach involving protected health information to cover some
instances where a subcontractor is responsible for the breaches and that individual or entity was acting within the scope of
delegated authority under the related contract or engagement. These rules generally define “breach” to mean the acquisition,
access, use or disclosure of protected health information in a manner not permitted by the HIPAA privacy standards, which
compromises the security or privacy of protected health information. Under these rules, improper acquisition, access, use, or
disclosure is presumed to be a reportable breach, unless the potentially breaching party can demonstrate a low probability that
protected health information has been compromised.
HHS-OCR is responsible for enforcing the requirement that covered entities notify the United States Department of
Health and Human Services (“HHS”) and any individual whose protected health information has been improperly acquired,
accessed, used, or disclosed. In certain cases, notice of a breach is required to be made to media outlets. The heightened
penalties for noncompliance range from $100 to $50,000 per violation for most violations. In the event of violations due to
willful neglect that are not corrected within 30 days, penalties start at approximately $64,000 per violation and are not subject to
a per violation statutory maximum. Penalties are also subject to an annual cap for multiple identical violations in a single
calendar year. Pursuant to guidance from HHS-OCR, this enforcement cap ranges from a minimum of $25,000 per year to a
maximum of $1,500,000 per year depending on an entity’s level of culpability. Importantly, HHS-OCR has indicated that the
failure to conduct a security risk assessment or adequately implement HIPAA compliance policies could qualify as willful
neglect.
In addition, there are numerous legislative and regulatory initiatives at the federal and state levels addressing patient
privacy concerns. Healthcare providers will continue to remain subject to any federal or state privacy-related laws, including
but not limited to the California Consumer Privacy Act, that are more restrictive than the privacy regulations issued under
HIPAA. These laws vary and could impose additional penalties. HHS-OIG and other regulators have also increasingly
interpreted laws and regulations in a manner as to increase exposure of healthcare providers to allegations of noncompliance.
Any actual or perceived violation of privacy-related laws and regulations, including HIPAA and the HITECH Act, could have a
material adverse effect on our business, financial position, results of operations, and cash flows.
Civil Monetary Penalties Law
Under the Civil Monetary Penalties Law, HHS may impose civil monetary penalties on healthcare providers that
present, or cause to be presented, ineligible reimbursement claims for services. The 2018 Budget Act increased the civil
monetary penalties, which vary depending on the offense from $5,000 to $100,000 per violation, plus treble damages for the
amount at issue and may include exclusion from federal health care programs such as Medicare and Medicaid. The penalties are
adjusted annually to account for inflation. HHS may seek to impose monetary penalties under this law for, among other things,
offering inducements to beneficiaries for program services and filing false or fraudulent claims.
Available Information
We make available through our website, www.encompasshealth.com, the following documents, free of charge: our
annual reports (Form 10-K), our quarterly reports (Form 10-Q), our current reports (Form 8-K), and any amendments to those
reports promptly after we electronically file such material with, or furnish it to, the United States Securities and Exchange
Commission.
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Item 1A.
Risk Factors
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Our business, operations, and financial position are subject to various risks. Some of these risks are described below,
and the reader should take such risks into account in evaluating Encompass Health or any investment decision involving
Encompass Health. This section does not describe all risks that may be applicable to us, our industry, or our business, and it is
intended only as a summary of material risk factors. More detailed information concerning other risks and uncertainties as well
as those described below is contained in other sections of this annual report. Still other risks and uncertainties we have not or
cannot foresee as material to us may also adversely affect us in the future. If any of the risks below or other risks or
uncertainties discussed elsewhere in this annual report are actually realized, our business and financial condition, results of
operations, and cash flows could be adversely affected. In the event the impact is materially adverse, the trading price of our
common stock could decline.
Risks Related to the Spin Off of Our Home Health and Hospice Business
We may not be able to engage in beneficial capital-raising or strategic transactions.
On July 1, 2022, we completed the previously announced separation of our home health and hospice business through
the distribution (the “Spin Off”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc.
(“Enhabit”) to the stockholders of Encompass Health. As a result of the Spin Off, Enhabit is now an independent public
company and its common stock is listed under the symbol “EHAB” on the New York Stock Exchange. The Spin Off is intended
to be a tax-free transaction. Under current U.S. federal income tax law, a spin off that otherwise qualifies for tax-free treatment
can be rendered taxable to the parent corporation and its stockholders as a result of certain post-spin-off transactions, including
certain acquisitions of shares or assets of the parent corporation. To preserve the tax-free treatment of the Spin Off, we may be
limited, for a period of time, in our ability to pursue certain equity issuances, strategic transactions, repurchases, or other
transactions (including certain dispositions of assets) that we may otherwise believe to be in the best interests of our
stockholders or that might increase the value of our business.
If the Spin Off were to fail to qualify as tax-free, including as a result of transactions in our stock or the stock of Enhabit,
we could be subject to significant tax liabilities.
We received a private letter ruling from the Internal Revenue Service regarding certain U.S. federal income tax matters
relating to the Spin Off and its associated transactions and an opinion of outside counsel regarding the qualification of certain
elements of those transactions. Although we intend for the Spin Off to be tax-free for U.S. federal income tax purposes, there
can be no assurance that the Spin Off will not trigger a tax event. Even if the Spin Off were to otherwise qualify as a tax-free
transaction under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, it may result in taxable gain to us (but not our
stockholders) under Section 355(e) of the Code if it is deemed to be part of a plan (or series of related transactions) pursuant to
which one or more persons acquire, directly or indirectly, shares representing a 50% or greater ownership interest (by vote or
value) in us or Enhabit. If the IRS were to determine that any post-Spin Off acquisitions of our stock or that of Enhabit,
pursuant to such a plan (when aggregated with any pre-Spin Off acquisitions of our stock or that of Enhabit, as applicable,
pursuant to such a plan) would represent a 50% or greater ownership interest therein, such determination could result in
significant tax liabilities to us. Any such tax liabilities imposed on us may adversely affect an investment in our stock.
Under a tax matters agreement we entered into with Enhabit in connection with the Spin Off, Enhabit is required to
indemnify us for any taxes we incur resulting from the Spin Off to the extent such amounts result from certain disqualifying
actions by, or acquisition of equity securities of, Enhabit. Additionally, Enhabit is generally required to indemnify us for a
specified portion of any taxes we incur (a) arising as a result of the failure of the Spin Off and certain related transactions to
qualify as a transaction that is generally tax-free or a failure of the Spin Off that is intended to qualify as a transaction that is
generally tax-free to so qualify to the extent such amounts did not result from a disqualifying action by, or acquisition of equity
securities of, Enhabit or us or (b) arising from certain audit or other adjustments to tax liabilities incurred with respect to the
Spin Off that were not intended to qualify as tax-free. The amount of any such taxes for which we would be responsible may be
significant, and if we were unable to obtain indemnification payments from Enhabit to which we are entitled under the tax
matters agreement or other agreements entered into in connection with the Spin Off, we would incur significant losses.
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Reimbursement Risks
Reductions or changes in reimbursement from government or third-party payors could adversely affect our Net operating
revenues and other operating results.
We derive a substantial portion of our Net operating revenues from the Medicare program. See Item 1, Business,
“Sources of Revenues,” for a table identifying the sources and relative payor mix of our revenues. In addition to many ordinary
course reimbursement rate changes that The Centers for Medicare & Medicaid Services (“CMS”) of the U.S. Department of
Health and Human Services (“HHS”) adopts each year as part of its annual rulemaking process for various healthcare provider
categories, Congress and some state legislatures have periodically proposed significant changes in laws and regulations
governing the healthcare system. Many of these changes have resulted in limitations on the increases in and, in some cases,
significant roll-backs or reductions in the levels of payments to healthcare providers for services under many government
reimbursement programs. There can be no assurance that future governmental initiatives will not result in reimbursement
freezes and reductions, or reimbursement increases that are less than the increases we experience in our costs of operation.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act of 2010 (the “ACA”)
as a significant healthcare reform. Many provisions within the ACA have impacted or could in the future impact our business,
including Medicare reimbursement reductions and promotion of alternative payment models, such as accountable care
organizations (“ACOs”) and bundled payment initiatives. The nature and substance of state and federal healthcare laws are
subject to change, by means of both broad base healthcare reform legislation, like the ACA, and targeted legislative and
regulatory action. Any future legislative and regulatory changes may impact the provisions of the ACA discussed below or
other laws or regulations that either currently affect, or may in the future affect, our business.
For Medicare providers like us, these laws include reductions in CMS’s annual adjustments to Medicare
reimbursement rates, commonly known as a “market basket update.” In accordance with Medicare laws and statutes, CMS
makes market basket updates by provider type in an effort to compensate providers for rising operating costs. The ACA
required reductions, the last of which ended in 2019, in the annual market basket updates for hospital providers ranging from 10
to 75 basis points. In addition, the ACA requires the market basket updates for hospital providers to be reduced by a
productivity adjustment on an annual basis. The productivity adjustment equals the trailing 10-year average of changes in
annual economy-wide private nonfarm business multi-factor productivity. To date, the productivity adjustments have typically
resulted in decreases to the market basket updates ranging from 30 to 100 basis points.
Other federal legislation can also have a significant impact on our Medicare reimbursement. On August 2, 2011,
President Obama signed into law the Budget Control Act of 2011, which provided for an automatic 2% reduction of Medicare
program payments. This automatic reduction, known as “sequestration,” began affecting payments received after April 1, 2013.
Under current law, for each year through mid-fiscal year 2032, the reimbursement we receive from Medicare, after first taking
into account all annual payment adjustments including the market basket update, will be reduced by sequestration unless it is
repealed or modified before then. In response to the public health emergency associated with the COVID-19 pandemic,
Congress and the President suspended sequestration from May 1, 2020 through March 31, 2022.
Additional Medicare payment reductions are also possible under the Statutory Pay-As-You-Go Act of 2010 (“Statutory
PAYGO”). Statutory PAYGO requires, among other things, that mandatory spending and revenue legislation not increase the
federal budget deficit over a 5- or 10-year period. If the Office of Management and Budget (the “OMB”) finds there is a deficit
in the federal budget, Statutory PAYGO requires OMB to order sequestration of Medicare. In March 2021, President Biden
signed the American Rescue Plan Act of 2021 (the “American Rescue Plan Act”). The Congressional Budget Office estimated
that the American Rescue Plan Act would result in budget deficits necessitating a 4% reduction in Medicare program payments
for 2022 under the Statutory PAYGO, but subsequent legislation enacted by Congress suspended until 2025 the Statutory
PAYGO reductions that would have gone into effect.
Additionally, concerns held by federal policymakers about the federal deficit, national debt levels, or healthcare
spending specifically, including solvency of the Medicare trust fund, could result in enactment of further federal spending
reductions, further entitlement reform legislation affecting the Medicare program, and further reductions to provider payments.
In October 2014, President Obama signed into law the Improving Medicare Post-Acute Care Transformation Act of 2014 (the
“IMPACT Act”). The IMPACT Act directs HHS, in consultation with healthcare stakeholders, to implement standardized data
collection processes for post-acute quality and outcome measures. Although the IMPACT Act does not specifically call for the
implementation of a new post-acute payment system, we believe this act lays the foundation for possible future post-acute
payment policies that would be based on patients’ medical conditions and other clinical factors rather than the setting where the
care is provided, also referred to as “site neutral” reimbursement. CMS has begun changing current post-acute payment systems
to improve comparability of patient assessment data and clinical characteristics across settings, which could make it easier to
create a unified payment system in the future. For example, CMS recently established new case-mix classification models for
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both home health and skilled nursing facilities which rely on patient characteristics rather than the amount of therapy received
to determine payments. Another example is CMS’s implementation of the new patient assessment measures for IRFs discussed
below. The IMPACT Act also created additional data reporting requirements for our hospitals in the domains of functional and
cognitive status, skin integrity, medication reconciliation, incidence of major falls, and transfer of health information. The
precise details of these new reporting requirements, including timing and content, were developed and implemented by CMS
through the regulatory process over several years, and CMS may continue to make changes to these quality measures and
standardized patient assessment data elements in the future. We cannot quantify the potential effects of the IMPACT Act on us.
Each year, the Medicare Payment Advisory Commission (“MedPAC”), an independent agency, advises Congress on
issues affecting Medicare and makes payment policy recommendations to Congress for a variety of Medicare payment systems
including, among others, the inpatient rehabilitation facility prospective payment system (the “IRF-PPS”). MedPAC also
provides comments to CMS on proposed rules, including the prospective payment system rules. Neither Congress nor CMS is
obligated to adopt MedPAC recommendations, and, based on outcomes in previous years, there can be no assurance MedPAC’s
recommendations will be adopted in a given year. However, MedPAC’s recommendations have, and could in the future,
become the basis for legislative or regulatory action.
In connection with CMS’s final rulemaking for the IRF-PPS in each year since 2008, MedPAC has recommended
either no updates to payments or reductions to payments. For example, in its March 2023 report to Congress, MedPAC
recommended, among other things, legislative changes to reduce by 3% the base payment rate under IRF-PPS. MedPAC has
also previously called on the HHS Secretary to conduct focused medical record reviews on IRFs.
In a June 2018 report mandated by the IMPACT Act, MedPAC reiterated its recommendation that Congress adopt a
unified payment system for all post-acute care (a “PAC-PPS”) in lieu of separate systems for inpatient rehabilitation facilities
(“IRFs”), skilled nursing facilities, long-term acute-care hospitals, and home health agencies. A PAC-PPS would rely on “site
neutral” reimbursement based on patients’ medical conditions and other clinical factors rather than the care settings. MedPAC
found a PAC-PPS to be feasible and desirable but also suggested many existing regulatory requirements, including, for IRFs,
the 60% rule discussed below and the requirement for a minimum of three hours of therapy per day, should be waived or
modified as part of implementing a PAC-PPS. MedPAC previously estimated, although we cannot verify the methodology or
the accuracy of that estimate, a PAC-PPS would result in a 15% reduction in IRF reimbursements. As a precursor to a PAC-
PPS, MedPAC discussed in November 2017 a potential recommendation to change the case-mix weights in each post-acute
setting for 2019 and 2020 to a blend of the current setting specific weight and the proposed PAC-PPS weight, which MedPAC
suggested would shift money from for-profit and freestanding IRFs to non-profit and hospital-based IRFs. MedPAC has also
called for aligning Medicare regulatory requirements across post-acute providers, although the agency has acknowledged it
could take years to complete this effort. MedPAC issued another report on the PAC-PPS in June 2023. In that report, MedPAC
concluded the design of a PAC-PPS is “relatively straight-forward” but noted “developing companion policies could take many
years; implementing them would be complex and possibly controversial.” Additionally, MedPAC previously has suggested that
Medicare should ultimately move from fee-for-service reimbursement to more integrated payment models.
We cannot predict what alternative or additional deficit reduction initiatives, Medicare payment reductions, or post-
acute care reforms, if any, will be adopted or enacted into law, or the timing or effect of any initiatives or reductions. Those
initiatives or reductions would be in addition to many ordinary course reimbursement rate changes that CMS adopts each year
as part of the market basket update rulemaking process for various provider categories. While we do not expect the drive
toward integrated payment models, value-based purchasing, and post-acute site neutrality in Medicare reimbursement to
subside, there will almost certainly be new or alternative healthcare reforms in the future which may change these initiatives
and other healthcare laws and regulations. We cannot predict the nature or timing of any changes to the laws or regulations that
either currently affect, or may in the future affect, our business.
There can be no assurance future governmental action will not result in substantial changes to, or material reductions
in, our reimbursements. Similarly, we may experience material increases in our operating costs. For example, in 2022 and 2023,
our wage and benefit costs increased at a rate in excess of our aggregate Medicare reimbursement rate increases. In any given
year, the net effect of statutory and regulatory changes may result in a decrease in our reimbursement rate, and that decrease
may occur at a time when our expenses are increasing. As a result, there could be a material adverse effect on our business,
financial position, results of operations, and cash flows. For additional discussion of how we are reimbursed by Medicare, see
Item 1, Business, “Regulatory and Reimbursement Challenges” and “Sources of Revenues—Medicare Reimbursement.”
In addition, there are increasing pressures from managed care, including Medicare Advantage, and other third-party
payors to control healthcare costs and to reduce or limit increases in reimbursement rates for medical services. For example,
each year, CMS adopts updates to the payments to, and the payment policies for, Medicare Advantage payors, and those
updates may result in a net decrease in payments to those payors. Our relationships with managed care and nongovernmental
third-party payors, such as health maintenance organizations and preferred provider organizations, are generally governed by
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negotiated agreements. These agreements set forth the amounts we are entitled to receive for our services. Our Net operating
revenues and our ability to grow our business with these payors could be adversely affected if we are unable to negotiate and
maintain favorable agreements with these payors.
Reimbursement claims are subject to various audits from time to time and such audits may negatively affect our operations
and our cash flows from operations.
We receive a substantial portion of our revenues from the Medicare program. Medicare reimbursement claims made by
healthcare providers, including inpatient rehabilitation hospitals, are subject to audit from time to time by governmental payors,
such as CMS and state Medicaid programs, their agents, such as the Medicare Administrative Contractors (“MACs”) that act as
fiscal intermediaries for all Medicare billings and other auditors contracted by CMS, and private insurance carriers, as well as
the HHS Office of Inspector General (the “HHS-OIG”). As noted above, the clarity and completeness of each patient medical
file, some of which is the work product of a physician not employed by us, is essential to successfully challenging any payment
denials. If the physicians working with our patients do not adequately document, among other things, their diagnoses and plans
of care, our risks related to audits and payment denials in general are greater. Depending on the nature of the conduct found in
such audits and whether the underlying conduct could be considered systemic, the resolution of these audits could have a
material adverse effect in the aggregate on our financial position, results of operation, cash flows, and liquidity.
In the context of our inpatient rehabilitation business, one of the common grounds cited for denying a claim or
challenging a previously paid Medicare claim in an audit is that the patient’s treatment in a hospital was not medically
necessary. The medical record must support that both the documentation and coverage criteria requirements are met for the
hospital stay to be considered medically necessary. Medical necessity is an assessment by an independent physician of a
patient’s ability to tolerate and benefit from intensive multi-disciplinary therapy provided in an IRF setting. A Medicare claim
may be denied or challenged based on an opinion of the auditor that the record did not evidence medical necessity for treatment
in an IRF or lacked sufficient documentation to support the conclusion. Some MACs have in the past applied and are likely in
the future to apply their own unique interpretation of CMS coverage rules or impose otherwise arbitrary conditions not set out
in the related rules, which has resulted and may in the future result in payment denials.
In some cases, we believe the reviewing party is not merely challenging the sufficiency of the medical record but is
substituting its judgment of medical necessity for that of the attending physician or imposing documentation or other
requirements that are not set out in the regulations. We argue that doing so is inappropriate and has no basis in law. When the
government or its contractors reject the medical judgment of physicians or impose documentation and other requirements
beyond the language of the statutes and regulations, patient access to inpatient rehabilitation as well as our Medicare
reimbursement from the related claims may be adversely affected.
Under CMS’s Targeted Probe and Educate (“TPE”) program, MACs use data analysis to identify healthcare providers
with high claim error rates and items and services that have high national error rates. Once a MAC selects a provider for claims
review, the initial volume of claims review is limited to 20 to 40 claims. The TPE program includes up to three rounds of
claims review with corresponding provider education and a subsequent period to allow for improvement. If results do not
improve sufficiently after three rounds, the MAC may refer the provider to CMS for further action, which may include
extrapolation of error rates to a broader universe of claims or referral to a UPIC or RAC (defined below). As of December 31,
2023, none of our hospitals have progressed beyond the third round of reviews, so it is unclear how the review process after
TPE would proceed. We cannot predict whether the TPE initiative or similar probes or reviews will materially impact our
reimbursement or the timeliness of collections from Medicare in the future.
CMS has developed and instituted various audit programs under which CMS contracts with private companies to
conduct claims and medical record audits. These audits are in addition to those conducted by existing MACs. Some contractors
are paid a percentage of the overpayments recovered. One type of audit contractor, the Recovery Audit Contractors (“RACs”),
receive claims data directly from MACs on a monthly or quarterly basis and are authorized to review previously paid claims.
RAC audits of IRFs have focused on reviews of patient coding, medical necessity, and billing accuracy. CMS has, however,
authorized RACs to conduct complex reviews of the medical records associated with IRF reimbursement claims. CMS has
previously operated a demonstration project that expanded the RAC program to include prepayment review of Medicare fee-
for-service claims from primarily acute-care hospitals. It is unclear whether CMS intends to conduct RAC prepayment reviews
in the future and if so, what providers and claims would be the focus of those reviews.
CMS has also established other types of contractors, including the Uniform Program Integrity Contractors (“UPICs”)
and the Supplemental Medical Review Contractor (“SMRC”). The UPICs conduct audits with a focus on potential fraud and
abuse issues. Like the RACs, the UPICs conduct audits and have the ability to refer matters to the HHS-OIG or the United
States Department of Justice (“DOJ”). Unlike RACs, however, UPICs do not receive a specific financial incentive based on the
amount of the error. In December 2017, we received notice of a UPIC audit at one of our hospitals. The UPIC sampled 100
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claims and challenged the propriety of a subset of the sample representing $1.3 million in previously paid claims. The UPIC
extrapolated the alleged error rate to all claims from that hospital during a period of approximately four years, resulting in an
alleged overpayment of $33.9 million. Our MAC later reduced the determination of overpayment to $30.5 million, which it
collected through recoupment of current claims during 2019. We appealed the overpayment determination to an Administrative
Law Judge (“ALJ”), who heard the appeal in August 2021. In October 2022, the ALJ overturned $12.5 million of the
overpayment determination. We received payment of this amount, plus $3.2 million in interest, in December 2022. We have
appealed the remaining $18.0 million of the overpayment determination to the next level of administrative appeal, challenging
both the denials and the improper use of extrapolation. It is not possible to predict when this matter will be resolved or the
ultimate outcome. The SMRC conducts nationwide medical reviews of Medicare claims to determine compliance with
coverage, coding, payment, and billing requirements. During the first quarter of 2023, the SMRC initiated a review of claims
from March 2020 through December 2020 totaling approximately $21 million. We have received initial results for the claims
under review and, as of December 31, 2023, approximately 87% of these have been approved with approximately $3 million
under appeal.
Audits may lead to assertions that we have been underpaid or overpaid by Medicare or have submitted improper
claims in some instances. Such assertions may require us to incur additional costs to respond to requests for records and defend
the validity of payments and claims and may ultimately require us to refund any amounts determined to have been overpaid. In
some circumstances auditors have the authority to extrapolate denial rationales to large pools of claims not actually audited,
which could greatly increase the impact of the audit. As a result, we may suffer reduced profitability, and we may have to elect
not to accept patients and conditions physicians believe can benefit from inpatient rehabilitation. We cannot predict when or
how these audit programs will affect us.
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Our managed care, including Medicare Advantage, and other third-party payors may also, from time to time, request
audits of the amounts paid, or to be paid, to us. We could be adversely affected if one or more auditing payors allege substantial
overpayments were made to us due to coding errors or lack of documentation to support medical necessity determinations.
Similarly, there can be no assurance that our current or future MACs will not make restrictive or otherwise incorrect
interpretations of Medicare coverage rules. Because one MAC has jurisdiction over a significant number of our hospitals and
our hospitals derive a substantial portion of their revenue from Medicare, the adoption of restrictive or otherwise incorrect
interpretations of coverage rules by that MAC could result in a large number of payment denials and materially and adversely
affect our financial position, results of operations, and cash flows.
Substantive and procedural deficiencies in the administrative appeals process associated with denied Medicare
reimbursement claims could delay and reduce our reimbursement for services previously provided.
Ordinary course Medicare pre-payment denials by MACs, as well as denials resulting from post-payment audits, are
subject to appeal by providers. HHS provides an initial appeal process through its ALJs. We have historically appealed a
majority of our claims denials. Due to the sheer number of appeals by all Medicare providers and various administrative
inefficiencies, including a shortage of judges, appeals that are required by statute to be resolved in a matter of months have in
the past taken years to complete. In recent years, this protracted appeals process led to a significant backlog of appeals of
denials, which a federal judge ultimately ordered HHS to resolve by the end of 2022. By December 31, 2022, substantially all
of our backlog awaiting ALJ hearing had been resolved. However, there can be no assurance significant backlogs will not
develop in the future in the event the rate of new claims denials exceeds the rate at which those claims are resolved in the
appeal process.
Providers may appeal adverse ALJ rulings to the Department Appeals Board (the “DAB”). Denials by the DAB may
be appealed to United States district courts. As of December 31, 2023, we have approximately $5 million and $31 million in
denied claims awaiting review at the ALJ and DAB levels, respectively. In addition, we have approximately $7 million in
claims denied by the DAB pending review by United States district courts as of December 31, 2023.
Changes implemented by CMS to resolve the prior appeal backlog may have harmed the ability of providers like us to
recover on valid Medicare claims. The Medicare appeals adjudication process is administered by the Office of Medicare
Hearings and Appeals (“OMHA”). Beginning in March 2020, OMHA increased the frequency of ALJ hearings and the number
of claims set at each hearing, which we believe adds to the substantive and procedural deficiencies in the ALJ appeals process.
Based on a number of factors, including prior experience in the appeals process, we record our estimates for pre-
payment denials and for post-payment audit denials that will ultimately not be collected as a component of Net operating
revenues. See Note 1, Summary of Significant Accounting Policies, “Net Operating Revenues,” to the accompanying
consolidated financial statements. In the fourth quarter of 2023, we recorded an aggregate amount of $21.9 million in additional
reserves for estimated uncollectible amounts associated with claims that were part of the prior appeal backlog. The increase in
reserves was driven principally by an increase in unfavorable adjudication outcomes experienced at the DAB during the second
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half of 2023 and largely offset the remaining net carrying value of these claims. We may experience additional decreases in Net
operating revenues and decreases in cash flow as a result of greater frequency of unfavorable resolution of denials or increasing
unresolved denials and the associated increasing accounts receivable, which may in turn force us to change the patients we
admit and conditions we treat. Any of these impacts could have an adverse effect on our financial position, results of
operations, and liquidity.
Changes in our payor mix or the acuity of our patients could adversely affect our Net operating revenues or our profitability.
Many factors affect reimbursement rates for our services and, in turn, our revenues. These factors include the treating
facility’s urban or rural status, the length of stay, the payor and its applicable rate of reimbursement, and the patient’s medical
condition and impairment status (acuity). The reimbursement rates we receive from traditional Medicare fee-for-service are
generally higher than those received from other payors, although the difference between traditional Medicare and Medicare
Advantage payments for inpatient rehabilitation care has decreased in the last several years. Over the same period, we have seen
a shift in the payor mix from traditional Medicare to Medicare Advantage and other managed care providers. Not only do
Medicare Advantage and managed care payors generally pay us less, but we would expect bad debt to be higher for patients
covered by Medicare Advantage and managed care as patients typically retain more payment responsibility under those
arrangements. Additionally, the rate at which Medicare Advantage referrals are converted to admissions is lower than the rate
for traditional Medicare.
We have also experienced a shift in recent years to a slightly larger percentage of Medicaid patients, driven in part by
the expansion of coverage consistent with the intent of the ACA and the expansion of coverage resulting from regulatory
actions during the COVID-19 public health emergency. Medicaid reimbursement rates are almost always the lowest among
those of our payors, and frequently Medicaid patients come to us with other complicating conditions that make treatment more
difficult and costly. We cannot predict the growth of, or changes to, Medicaid, but President Biden has stated that he favors
extending public health insurance coverage to low income individuals currently ineligible for Medicaid.
We could also experience a shift to a lower average patient acuity which typically results in lower reimbursement rates
regardless of the payor. Both a shift in our payor mix away from Medicare fee-for-service and a shift to a lower patient acuity
would likely adversely affect reimbursement. See the “Results of Operations—Net Operating Revenues” section of Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations. We cannot predict the extent to
which our payor mix may shift to lower reimbursement rate payors. We have in recent years experienced, and in the future may,
experience shifts in our payor mix or the acuity of our patients that could adversely affect our reimbursement, Net operating
revenues, and profitability.
Delays in collection or non-collection of our accounts receivable could adversely affect our business, financial position,
results of operations, cash flows, and liquidity.
Reimbursement is typically conditioned on our documenting medical necessity and correctly applying diagnosis codes.
Incorrect or incomplete documentation and billing information could result in non-payment for services rendered. Billing and
collection of our accounts receivable are further subject to the complex regulations that govern Medicare and Medicaid
reimbursement and rules imposed by nongovernment payors. Our inability to bill and collect on a timely basis pursuant to these
regulations and rules could subject us to payment delays that could have a material adverse effect on our business, financial
position, results of operations, cash flows, and liquidity.
In addition, timing delays in billings and collections may increase our working capital burden. Working capital
management, including prompt and diligent billing and collection, is an important factor in our financial position and results of
operations and in maintaining liquidity. It is possible that Medicare, Medicaid, documentation support, system problems or
other provider issues or industry trends, particularly with respect to newly acquired entities for which we have limited
operational experience, may extend our collection period, which may materially adversely affect our working capital, and our
working capital management procedures may not successfully mitigate this risk.
The timing of payments made under the Medicare and Medicaid programs is subject to governmental budgetary
constraints, which may result in an increased period of time between submission of claims and subsequent payment under
specific programs, most notably under the Medicare and Medicaid managed care programs, which in many cases pay claims
significantly slower than traditional Medicare or state Medicaid programs do as a result of more complicated authorization,
billing and collecting processes that are required by Medicare and Medicaid managed care programs. In addition, we may
experience delays in reimbursement as a result of the failure to receive prompt approvals related to change of ownership
applications for acquired or other facilities or from delays caused by our or other third parties’ information system failures.
Furthermore, the proliferation of Medicare and Medicaid managed care programs could have a material adverse impact on the
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results of our operations as a result of more complicated authorization, billing and collection requirements implemented by such
programs.
A change in our estimates of collectability or a delay in collection of accounts receivable could adversely affect our
results of operations and liquidity. The estimates are based on a variety of factors, including the length of time receivables are
past due, significant one-time events, contractual rights, the nature of the underlying payment denials, and historical experience.
In the fourth quarter of 2023, we recorded aggregate amount of $21.9 million in additional reserves for estimated uncollectible
amounts associated with claims denied and appealed prior to 2023. The increase in reserves largely offset the accounts
receivable associated with these claims. A delay in collecting our accounts receivable, or the non-collection of accounts
receivable, including, without limitation, in connection with our transition and integration of acquired companies and the
attendant movement of underlying billing and collection operations from legacy systems to future systems, could have a
material negative impact on our results of operations and liquidity, and we could be required to record impairment charges on
our financial statements.
Efforts to reduce payments to healthcare providers undertaken by third-party payors, conveners, and referral sources could
adversely affect our revenues and profitability.
Health insurers and managed care companies, including Medicare Advantage plans, may utilize certain third parties,
known as conveners, to attempt to control costs. Conveners offer patient placement and care transition services to those payors
as well as bundled payment participants, ACOs, and other healthcare providers with the intent of managing post-acute
utilization and associated costs. Conveners may influence referral source decisions on which post-acute setting to recommend,
as well as how long to remain in a particular setting. Given their focus on perceived financial savings, conveners customarily
suggest that patients avoid higher acuity post-acute settings altogether or move as soon as practicable to lower acuity settings as
those settings are reimbursed at lower rates due to the lower level of care they are required to provide. Conveners are not
healthcare providers and may suggest a post-acute setting or duration of care that may not be appropriate from a clinical
perspective potentially resulting in worse patient outcomes and costly acute-care hospital readmissions.
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We also depend on referrals from physicians, acute-care hospitals, and other healthcare providers in the communities
we serve. As a result of various alternative payment models, many referral sources are becoming increasingly focused on
reducing post-acute costs by eliminating post-acute care referrals or referring patients to perceived low-cost post-acute settings
rather than rehabilitation hospitals, sometimes without understanding the potential impact on patient outcomes over an entire
episode of care. Our ability to attract patients could be adversely affected if any of our hospitals fail to provide or maintain a
reputation for providing high-quality care on a cost-effective basis as compared to other providers.
Quality reporting requirements could adversely affect the Medicare reimbursement we receive.
The focus on alternative payment models and value-based purchasing of healthcare services has, in turn, led to more
extensive quality of care reporting requirements. In many cases, the new reporting requirements are linked to reimbursement
incentives. For example, under the ACA, CMS established new quality data reporting, effective October 1, 2012, for all IRFs. A
facility’s failure to submit the required quality data results in a two percentage point reduction to that facility’s annual market
basket increase factor for payments made for discharges in the subsequent Medicare fiscal year. Hospitals began submitting
quality data to CMS in October 2012. All of our hospitals have met the reporting deadlines to date resulting in no corresponding
reimbursement reductions.
The IMPACT Act mandated that CMS adopt several new quality reporting measures for the various post-acute
provider types. The adoption of additional quality reporting measures to track and report will require additional time and
expense and could affect reimbursement in the future. In healthcare generally, the burdens associated with collecting, recording,
and reporting quality data are increasing. There can be no assurance all of our hospitals will meet quality reporting requirements
or quality performance in the future which may result in one or more of our hospitals seeing a reduction in its Medicare
reimbursements. Regardless, we, like other healthcare providers, are likely to incur additional expenses in an effort to comply
with additional and changing quality reporting requirements.
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Other Regulatory Risks
The ongoing evolution of the healthcare delivery system, including alternative payment models and value-based purchasing
initiatives, in the United States may significantly affect our business and results of operations.
The healthcare industry in general is facing regulatory uncertainty around attempts to improve outcomes and reduce
costs, including coordinated care and integrated payment models. In an integrated payment model, hospitals, physicians, and
other care providers are reimbursed in a fashion meant to encourage coordinated healthcare on a more efficient, patient-centered
basis. These providers are then paid based on the overall value and quality (as determined by outcomes) of the services they
provide to a patient rather than the number and nature of services they provide. While this is consistent with our goal and
proven track record of being a high-quality, cost-effective provider, broad-based implementation of a new payment model
would represent a significant evolution or transformation of the healthcare industry, which may have a significant impact on our
business and results of operations.
In recent years, HHS has been studying the feasibility of bundling, including conducting a voluntary, multi-year
bundling pilot program to test and evaluate alternative payment methodologies. CMS’ voluntary Bundled Payments for Care
Improvement Advanced (“BPCI Advanced”) initiative began October 1, 2018, runs through December 31, 2025, and covers 29
types of inpatient, three types of outpatient clinical episodes, and two multi-setting clinical episodes, including stroke and hip
fracture. Providers participating in BPCI Advanced are subject to a semi-annual reconciliation process where CMS compares
the aggregate Medicare expenditures for all items and services included in a clinical episode against the target price for that
type of episode to determine whether the participant is eligible to receive a portion of the savings, or is required to repay a
portion of the payment above target. Accordingly, reimbursement may be increased or decreased, compared to what would
otherwise be due, based on whether the total Medicare expenditures and patient outcomes meet, exceed or fall short of the
targets.
Similarly, CMS has established per the ACA several separate ACO programs, the largest of which is the Medicare
Shared Savings Program (“MSSP”), a voluntary ACO program in which hospitals, physicians, and other care providers pursue
the delivery of coordinated healthcare on a more efficient, patient-centered basis. Conceptually, ACOs receive a portion of any
savings generated above a certain threshold from care coordination as long as benchmarks for the quality of care are
maintained. Under the MSSP, there are two ACO tracks from which participants can choose. Each track offers a different
degree to which participants share any savings realized or any obligation to repay losses suffered. The ACO rules adopted by
CMS are extremely complex and remain subject to further refinement by CMS. Based on CMS data, the number of MSSP
ACOs for 2024 is the same as it was in 2017.
We continue to evaluate, on a case-by-case basis, appropriate BPCI Advanced and ACO participation opportunities for
our hospitals. We are party to 30 participation or preferred provider agreements in connection with these alternative payment
models. The associated hospitals have treated only a limited number of patients under these alternative payment models to date.
On November 16, 2015, CMS published its final rule establishing the Comprehensive Care for Joint Replacement
(“CJR”) payment model, which holds acute-care hospitals accountable for the quality of care they deliver to Medicare fee-for-
service beneficiaries for lower extremity joint replacements (i.e., knees and hips) from surgery through recovery. The CJR
originally was mandatory for the acute-care hospitals in the 67 geographic areas covered. On November 30, 2017, CMS issued
a final rule making the CJR voluntary in 33 of those areas. The CJR model’s original five-year term ended in December 2020,
but CMS extended the model through 2024 for most providers in the 34 geographic areas with mandatory participation. Under
CJR, healthcare providers in the mandatory participation areas are paid under existing Medicare payment systems. However,
CMS holds the acute-care hospital where a joint replacement takes place accountable for the quality and costs of care for the
entire episode of care — from the time of the original admission through 90 days after discharge. Depending on the quality and
cost performance during the entire episode, the acute-care hospital may receive an additional payment or be required to repay
Medicare a portion of the episode costs. As a result, CMS believes acute-care hospitals are incented to work with physicians
and post-acute care providers to ensure beneficiaries receive the coordinated care they need in an efficient manner. Acute-care
hospitals participating in the CJR model may enter into risk-sharing financial arrangements with post-acute providers, including
IRFs. CJR has not had a material impact on our hospitals.
HHS and CMS continue to explore ways to encourage and facilitate increased participation in alternative payment
models and value-based purchasing initiatives. For example, the HHS-OIG and CMS finalized rules in 2020 modernizing the
Anti-Kickback Statute and Stark law to, in part, promote a more coordinated, value-based system of care. The bundling and
ACO initiatives have served as motivating factors for regulators and healthcare industry participants to identify and implement
workable coordinated care and integrated payment models. Broad-based implementation of a new payment model would
represent a significant transformation for us and the healthcare industry generally. The nature and timing of the evolution or
transformation of the current healthcare system to coordinated care delivery and integrated payment models and value-based
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purchasing remain uncertain. The development of new delivery and payment systems will almost certainly take significant time
and expense. Many of the alternative approaches, including those discussed above, being explored may not work or could
change substantially prior to any nationwide implementations. While only a small percentage of our business currently is or is
anticipated to be subject to the alternative payment models discussed above, we cannot be certain these models will not be
expanded or made standard or new models will not be implemented broadly.
Additionally, as the number and types of bundling, direct contracting, and ACO models increase, the number of
Medicare beneficiaries who are treated in one of the models increases. Our willingness or inability to participate in integrated
payment and other alternative payment models and the referral patterns of other providers participating in those models may
limit our access to Medicare patients who would benefit from treatment in inpatient rehabilitation hospitals. In an attempt to
reduce costs, ACOs may seek to discourage referrals to post-acute care all together. To the extent that acute-care hospitals
participating in those models do not perceive our quality of care or cost efficiency favorably compared to alternative post-acute
providers, we may experience a decrease in volumes and Net operating revenues, which could adversely affect our financial
position, results of operations, and cash flows. For further discussion of coordinated care and integrated payment models and
value-based purchasing initiatives, the associated challenges, and our efforts to respond to them, see the “Executive Overview
—Key Challenges—Changes in Medicare Reimbursement and Regulatory Requirements for Operating IRFs” section of Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Other legislative and regulatory initiatives and changes affecting the industry could adversely affect our business and results
of operations.
In addition to the legislative and regulatory actions that directly affect our reimbursement rates or further the evolution
of the current healthcare delivery system, other legislative and regulatory changes, including as a result of ongoing healthcare
reform, affect healthcare providers like us from time to time. For example, the ACA provides for the expansion of the federal
Anti-Kickback Law and the False Claims Act (the “FCA”) that, when combined with other recent federal initiatives, are likely
to increase investigation and enforcement efforts in the healthcare industry generally. Changes include increased resources for
enforcement, lowered burden of proof for the government in healthcare fraud matters, expanded definition of claims under the
FCA, enhanced penalties, and increased rewards for relators in successful prosecutions. CMS may also suspend payment for
claims prospectively if, in its opinion, credible allegations of fraud exist. The initial suspension period may be up to 180 days.
However, the payment suspension period can be extended almost indefinitely if the matter is under investigation by the HHS-
OIG or DOJ. Any such suspension would adversely affect our financial position, results of operations, and cash flows.
Some states in which we operate have also undertaken, or are considering, healthcare reform initiatives that address
similar issues. While many of the stated goals of other federal and state reform initiatives are consistent with our own goal to
provide care that is high-quality and cost-effective, legislation and regulatory proposals may lower reimbursements, increase the
cost of compliance, decrease patient volumes, promote frivolous or baseless litigation, and otherwise adversely affect our
business. We cannot predict what healthcare initiatives, if any, will be enacted, implemented or amended, or the effect any
future legislation or regulation will have on us.
On September 30, 2019, CMS adopted a new rule as called for by the IMPACT Act that revises the discharge planning
requirements applicable to our inpatient rehabilitation hospitals. Effective November 29, 2019, CMS requires every hospital
(including IRFs) to have a discharge planning process that focuses on patients’ goals and preferences and on preparing them
and, as appropriate, their caregivers, to be active partners in their post-discharge care. For our hospitals, this rule requires
instituting standardized procedures to identify those patients who are likely to suffer adverse health consequences upon
discharge in the absence of adequate discharge planning and to provide a discharge planning evaluation for such patients to
ensure that appropriate arrangements for post-hospital care are made before discharge. At the time of discharge, a hospital must
transfer or refer the patient, along with all necessary medical information pertaining to the patient’s current course of illness and
treatment, post-discharge goals of care, and treatment preferences, to the appropriate post-acute care service providers and
suppliers, facilities, agencies, and other outpatient service providers and practitioners responsible for the patient’s follow-up or
ancillary care. Patients must also be informed of all post-acute providers in the area and, for patients enrolled in managed care
organizations, in network providers must be identified if the hospital has that information. Additional information must be
provided to patients who are discharged home and referred for home health agency services or who are referred to other post-
acute care services. In areas where we are not part of a managed care network with significant enrollment, this discharge
planning rule may negatively affect the number of patients choosing us.
In accordance with requirements adopted pursuant to the IMPACT Act, CMS implemented requirements to publish
certain Medicare spending per beneficiary measures for each inpatient rehabilitation hospital in October 2016. The intent of
tracking and publishing this data is to evaluate a given provider’s payment efficiency relative to the efficiency of the national
median provider in that provider’s post-acute segment. CMS believes this measure will encourage improved efficiency and
coordination of care in the post-acute setting by holding providers accountable for Medicare resource use during an episode of
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care. However, the measures may be misleading as they do not incorporate patient outcomes associated with those resources
used. CMS has not proposed to compare payment efficiency across provider segments.
On December 14, 2020, CMS announced the proposal of a five-year review choice demonstration for inpatient
rehabilitation services (the “IRF RCD”). IRF RCD began in Alabama in August 2023. CMS intends to expand this
demonstration to Pennsylvania, Texas, and California but has not yet announced the timing for doing so. We operate 47
inpatient rehabilitation hospitals (representing approximately 30% of our IRF Medicare claims) in those four states. After the
initial four states, CMS intends to expand the demonstration to include additional IRFs based on the Medicare Administrative
Contractor to which those IRFs submit claims. Under the IRF RCD, participating IRFs have an initial choice between pre-claim
or post-payment review of 100% of claims submitted to demonstrate compliance with applicable Medicare coverage and
clinical documentation requirements. Under the pre-claim review choice, services may 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 and reviewed before the final claim is submitted for payment. Under the post-payment review choice, IRFs would
provide services, submit all claims for payment following their normal processes, and then submit required documentation for
medical review. If a certain percentage of the claims reviewed are found to be valid, the IRF may then opt out of the 100%
review. That percentage will initially be 80% or greater for the first six-month period and eventually increases to 90% or greater
in subsequent review cycles. 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 random sample. For the review beginning in August 2023, we chose pre-claim
review. As of year end 2023, we cannot be certain our claim validation rate will continue to exceed the required percentage for
each review cycle, nor can we predict the impact, if any, it may have on the collectability of our Medicare claims over its five-
year term. We may ultimately experience decreases in Net operating revenues and in cash flow, or we may incur costs
associated with patient care for which the Medicare claim is subsequently denied, any of which could have an adverse effect on
our financial position, results of operations, and liquidity.
In January 2020, the HHS-OIG announced an audit to review incentives under the IRF-PPS to discharge patients
prematurely to home health agencies. Following this audit, the HHS-OIG announced in December 2021 its recommendation to
CMS to establish an IRF transfer payment policy for early discharges to home health care in which the IRF would only receive
a per diem rate in lieu of the full case-mix payment. The HHS-OIG estimated the policy could have reduced total Medicare
payments to IRFs in 2017 and 2018 by between 6% and 7%. The CMS proposed rule for fiscal year 2023 for the IRF-PPS
included a request for comment on a potential change that could be included in future rulemaking. Based on the HHS-OIG
report, CMS noted it was considering whether to modify the IRF transfer payment policy to reduce reimbursement for early
discharges to home health, similar to how early discharges to acute-care hospitals, skilled nursing facilities, long-term acute-
care hospitals, or another IRF, are currently treated under the IRF-PPS. In the final IRF-PPS rule for 2023, CMS acknowledged
industry comments on the policy and noted those comments would be taken under advisement for future rulemaking, but
neither the proposed nor the final rulemaking for fiscal year 2024 IRF-PPS made reference to a change in the IRF transfer
payment policy.
We cannot predict what legislative or regulatory reforms or changes, if any, will ultimately be enacted, or the timing or
effect any of those changes or reforms will have on us. If enacted, they may be challenging for all providers and have the effect
of limiting Medicare beneficiaries’ access to healthcare services and could have a material adverse impact on our Net operating
revenues, financial position, results of operations, and cash flows. For additional discussion of healthcare reform and other
factors affecting reimbursement for our services, see Item 1, Business, “Regulatory and Reimbursement Challenges” and
“Sources of Revenues—Medicare Reimbursement.”
Compliance with the extensive laws and government regulations applicable to healthcare providers requires substantial
time, effort and expense, and if we fail to comply with them, we could suffer penalties or be required to make significant
changes to our operations.
Healthcare providers are required to comply with extensive and complex laws and regulations at the federal, state, and
local government levels. These laws and regulations relate to, among other things:
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licensure, certification, enrollments, and accreditation;
policies, either at the national or local level, delineating what conditions must be met to qualify for reimbursement
under Medicare (also referred to as coverage requirements);
coding and billing for services;
requirements of the “60% Rule” applicable to inpatient rehabilitation facilities;
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relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws;
quality of medical care;
use and maintenance of medical supplies and equipment;
• maintenance and security of patient information and medical records;
• minimum staffing;
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acquisition and dispensing of pharmaceuticals and controlled substances;
pricing transparency and similar consumer protection rules; and
disposal of medical and hazardous waste.
The “60% Rule” is a Medicare requirement that at least 60% of an IRF’s patients must have a diagnosis or qualifying
comorbidity from at least one of 13 specified medical conditions that typically require intensive therapy and supervision, such
as stroke, brain injury, hip fracture, certain neurological conditions, and spinal cord injury. If an IRF does not demonstrate
compliance with the 60% Rule by either the presumptive method or through a review of medical records, then its classification
as an IRF may be terminated by CMS causing the facility to be paid under the acute-care payment system which would result in
reduced reimbursement per discharge. If one or more of our hospitals fails to demonstrate compliance with the 60% Rule and
CMS re-classifies it as an acute-care hospital, our revenue and profitability may be materially and adversely affected.
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In the future, changes in these laws or regulations or the manner in which they are enforced could subject our current
or past practices to allegations of impropriety or illegality or could require us to make changes in our hospitals, equipment,
personnel, services, capital expenditure programs, operating procedures, and contractual arrangements. Those changes could
also affect reimbursements as well as future compliance, training, and staffing costs.
Examples of regulatory changes that can affect our business, beyond direct changes to Medicare reimbursement rates,
can be found from time to time in CMS’s annual rulemaking. For example, the final rule for the fiscal year 2010 IRF-PPS
implemented new coverage requirements which provided in part that a patient medical record must document a reasonable
expectation that, at the time of admission to an IRF, the patient generally required and was able to participate in the intensive
rehabilitation therapy services uniquely provided at IRFs. CMS has also taken the position that a patient’s medical file must
appropriately document the rationale for the use of group therapies, as opposed to one-on-one therapy. Beginning on October 1,
2015, CMS instituted a new data collection requirement pursuant to which IRFs must capture the minutes and mode (individual,
group, concurrent, or co-treatment) of therapy by specialty. Additionally, from time to time CMS has adopted changes in the
medical conditions that will presumptively count toward the 60% compliance threshold to qualify for reimbursement as an
inpatient rehabilitation hospital.
Of note, the HHS-OIG periodically updates a work plan that identifies areas of compliance focus. In recent years, the
HHS-OIG work plans for IRFs have focused on, among other items, the appropriate utilization of concurrent and group therapy,
adverse and temporary patient harm events, and billing error rates for IRFs. In September 2018, the HHS-OIG released a report
purporting to identify a high error rate (approximately 80% of claims) among inpatient rehabilitation hospital admissions in a
small sample of 220 claims. Based on its findings, the HHS-OIG extrapolated the error rate to the universe of inpatient
rehabilitation claims and, among other things, recommended reevaluation of the IRF-PPS. However, that HHS-OIG report
involved an extremely small sample size, was not a random sample of cases, included some citations to coverage requirements
that did not match actual regulations, appeared to conflate technical documentation requirements with medical necessity
determinations, and was at odds with actual MAC reviews of claims during that same timeframe which found substantially
lower error rates. On September 15, 2022, the HHS-OIG updated its work plan to conduct a nationwide audit of IRF claims in
order to determine the extent to which CMS could clarify the Medicare IRF claim payment criteria. The HHS-OIG expects to
issue a report on this in fiscal year 2024. An HHS-OIG work plan, audit or similar future efforts could result in proposed
changes to the payment systems for providers or increased denials of Medicare claims for patients notwithstanding the referring
physicians’ judgment that treatment is appropriate.
As the recent HHS-OIG work plans demonstrate, the clarity and completeness of each patient medical file, some of
which is the work product of a physician not employed by us, are essential to demonstrating our compliance with various
regulatory and reimbursement requirements. For example, to support the determination that a patient’s IRF treatment was
medically necessary, the file must contain, among other things, an admitting physician’s assessment of the patient as well as a
post-admission assessment by the treating physician and other information from clinicians relating to the plan of care and the
therapies being provided. These physicians are not employees. They exercise independent medical judgment. We and our
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hospital medical directors, who are independent contractors, provide training on a regular basis to the physicians who treat
patients at our hospitals regarding appropriate documentation. However, we ultimately do not and cannot control the
physicians’ medical judgment. In connection with subsequent payment audits and investigations, there can be no assurance as
to what opinion a third party may take regarding the status of patient files or the physicians’ medical judgment evidenced in
those files.
On March 4, 2013, we received document subpoenas from an office of the HHS-OIG addressed to four of our
hospitals. On April 24, 2014, we received document subpoenas relating to an additional seven of our hospitals. Those
subpoenas requested documents, including copies of patient medical records, related to reimbursement claims submitted during
periods ranging from January 2008 through December 2013. The associated investigation led by DOJ was based on
whistleblower claims of alleged improper or fraudulent claims submitted to Medicare and Medicaid and requested documents
and materials relating to practices, procedures, protocols and policies of certain pre- and post-admissions activities at these
hospitals including marketing functions, pre-admission screening, post-admission physician evaluations, patient assessment
instruments, individualized patient plans of care, and compliance with the Medicare 60% rule. We settled the DOJ
investigation, together with the related qui tam or whistleblower lawsuits, in 2019 for a total payment of $48 million, and we
expressly denied any wrongdoing. In return for the settlement payment, the plaintiffs dismissed with prejudice their pending qui
tam claims, and DOJ provided Encompass Health and all its subsidiaries with a release from civil liability.
Although we have invested, and will continue to invest, substantial time, effort, and expense in implementing and
maintaining training programs as well as internal controls and procedures designed to ensure regulatory compliance, we have in
the past been, and could in the future be, required to return portions of reimbursements for discharges alleged after the fact to
have not been appropriate under the applicable reimbursement rules and change our patient admissions practices going forward.
We could also be subjected to other liabilities, including (1) criminal penalties, (2) civil penalties, including monetary penalties
and the loss of our licenses to operate one or more of our hospitals, and (3) exclusion or suspension of one or more of our
hospitals from participation in the Medicare, Medicaid, and other federal and state healthcare programs, which, if lengthy in
duration and material to us, could potentially trigger a default under our credit agreement or debt instruments.
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. As discussed above in connection with the ACA, the federal government has in the last
couple of years made compliance enforcement and fighting healthcare fraud top priorities. In the past few years, DOJ and HHS
as well as federal lawmakers have significantly increased efforts to ensure strict compliance with various reimbursement related
regulations as well as combat healthcare fraud. DOJ has pursued and recovered record amounts based on alleged healthcare
fraud. The increased enforcement efforts have frequently included aggressive arguments and interpretations of laws and
regulations that pose risks for all providers. For example, the federal government has increasingly asserted that incidents of
erroneous billing or record keeping may represent violations of the FCA. Human error and oversight in record keeping and
documentation, particularly where those activities are the responsibility of non-employees, are always a risk in business, and
healthcare providers and independent physicians are not immune to this risk. Additionally, the federal government has been
willing to challenge the medical judgment of independent physicians in determining issues such as the medical necessity of a
given treatment plan.
Settlements of alleged violations or imposed reductions in reimbursements, substantial damages and other remedies
assessed against us could have a material adverse effect on our business, financial position, results of operations, and cash
flows. Even the assertion of a violation, depending on its nature, could have a material adverse effect upon our stock price or
reputation and could cost us significant time and expense to defend.
The use of sub-regulatory guidance, statistical sampling, and extrapolation by CMS, Medicare contractors, HHS-OIG, and
DOJ to deny claims, expand enforcement claims, and advocate for changes in reimbursement policy increases the risk that
we could experience reduced revenue, suffer penalties, or be required to make significant changes to our operations.
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. Our ability to operate in a compliant manner impacts the claims denials, compliance
enforcement, and regulatory processes discussed in other risks above. The federal government’s reliance on sub-regulatory
guidance, such as handbooks, FAQs, internal memoranda, and press releases, presents a unique challenge to compliance efforts.
Such sub-regulatory guidance purports to explain validly promulgated regulations but often expands or supplements existing
regulations without constitutionally and statutorily required notice and comment and other procedural protections. Without
procedural protections, sub-regulatory guidance poses a risk above and beyond reasonable efforts to follow validly promulgated
regulations, particularly when the agency or MAC seeking to enforce such sub-regulatory guidance is not the agency or MAC
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issuing the guidance and therefore not as familiar with the substance and nature of the underlying regulations or even clinical
issues involved.
On August 6, 2020, CMS issued a proposed rule invoking a rarely used retroactive-rulemaking authority to support
CMS’s application of a Medicare payment methodology that the U.S. Supreme Court found to be procedurally improper in Azar
v. Allina Health Services in 2019. CMS’ invocation of its retroactive-rulemaking authority in response to this Supreme Court
decision is an unfavorable precedent for providers because it demonstrates a willingness by CMS to revive adverse
reimbursement actions after those actions are deemed deficient on administrative procedural grounds.
Additionally, the federal government is increasingly turning to statistical sampling and extrapolation to expand claims
denials and enforcement efforts and advocate for changes in reimbursement policy. Through sampling and extrapolation, the
government takes a review of a small number of reimbursement claims and generalizes the results of that review to a much
broader universe of claims, which can result in significant increases in the aggregate number and value of claims at issue.
Increasing use of extrapolation can be found in payment review audits, such as those conducted by RACs and UPICs. In
addition to payment reviews, government agencies may allege compliance violations, including submission of false claims,
based on sampling and extrapolation and seek to change reimbursement policy. For example, the HHS-OIG issued a report in
September 2018 purporting to identify a high error rate (approximately 80% of claims) among inpatient rehabilitation hospital
admissions in a small sample of 220 claims. Based on its findings, the HHS-OIG extrapolated the error rate to the universe of
inpatient rehabilitation claims and, among other things, recommended reevaluation of the IRF-PPS. However, the HHS-OIG
report involves an extremely small sample size, is not a random sample of cases, includes incorrect references to coverage
requirement regulations, appears to conflate technical documentation requirements with medical necessity determinations, and
is at odds with actual MAC reviews of claims during that same timeframe which found substantially lower error rates.
Notwithstanding the technical statistical flaws that can arise in sampling small groups of claims and the extremely problematic
nature of extrapolation in the context of individualized decisions of medical judgment as some courts have noted, sampling and
extrapolation pose a growing risk to healthcare providers in the form of more significant claims of overpayments and increased
legal costs to defend against these problematic regulatory practices. In a recent federal court case, the Fifth Circuit Court of
Appeals ruled in favor of CMS and affirmed the application of extrapolation errors identified in a sample of claims to support
larger claims for overpayment. As discussed under “Reimbursement Risks” above, we are currently challenging, among other
things, the use of extrapolation in a 2017 UPIC audit. Any associated loss of revenue or increased legal costs could materially
and adversely affect our financial position, results of operations, and cash flows.
Efforts to comply with regulatory mandates to increase the use of electronic health data and health system
interoperability may lead to enforcement and negative publicity which could adversely affect our business.
For many years, a primary focus of the healthcare industry has been to increase the use of electronic health records, or
“EHR,” and the sharing of the health data among providers, payors and other members of the industry. The federal government
has been a significant driver of that initiative through rules and regulations. In 2009, as part of the Health Information
Technology for Economic and Clinical Health (“HITECH”) Act, the federal government set aside $27 billion of incentives for
acute-care hospitals and other providers, not including IRFs, to adopt EHR systems. In 2020, CMS and HHS’s Office of the
National Coordinator for Health IT (“ONC”) finalized policy changes implementing interoperability, information blocking, and
patient access provisions of the 21st Century Cures Act and supporting the MyHealthEData initiative, designed to allow
patients to access their health claims information electronically through the application of their choosing. The companion rules
will transform the way in which healthcare providers, health information technology developers, health information exchanges/
health information networks (“HIEs/HINs”), and health plans share patient information. For example, the ONC rule prohibits
healthcare providers, health IT developers, and HIEs/HINs from engaging in practices that are likely to interfere with, prevent,
materially discourage, or otherwise inhibit the access, exchange or use of electronic health information, also known as
“information blocking.” The ONC rule also requires regulated actors to respond to requests for electronic health information in
the content and manner requested, with some exceptions. Enforcement of ONC’s and CMS’ new health information access,
exchange, and use standards began in 2021, and noncompliance can result in civil monetary penalties, exclusion from
participation in federal health care programs and other appropriate “disincentives,” including reductions in Medicare
reimbursements. The United States Department of Health and Human Services Office of Civil Rights (“HHS-OCR”) patient
right of access initiative, which has similar objectives to the new ONC initiative, such as promoting and enforcing patient
access to health information, has led to dozens of settlements of enforcement actions.
The goals of increased use of electronic health data and interoperability are improved quality of care and lower
healthcare costs generally. However, increased use of electronic health data and interoperability inherently magnifies the risk of
security breaches involving that data and information systems used to share it, which risk is discussed under “Other Operational
Risks” below. Additionally, interoperability and the sharing of health information have received increasingly negative publicity.
There is at least one well publicized instance where organizations received significant negative publicity for sharing health data
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despite having appeared to comply in all respects with privacy law. There can be no assurance that our efforts to improve the
care we deliver and to comply with the law through increasing use of electronic data and system interoperability will not
receive negative publicity that may materially and adversely affect our ability to get patient referrals or enter into joint ventures
with other providers or may lead to greater regulatory scrutiny. Negative publicity may also lead to federal or state regulation
that conflicts with current federal policy and interferes with the healthcare industry’s efforts to improve care and reduce costs
through use of electronic data and interoperability.
If any of our hospitals fail to comply with the Medicare enrollment requirements or conditions of participation, that hospital
could be terminated from the Medicare program.
Each of our hospitals must comply with extensive enrollment requirements and conditions of participation for the
Medicare program. If any of our hospitals fail to meet any of the Medicare enrollment requirements or conditions of
participation, we may receive a notice of deficiency from the applicable survey agency or contractor, as applicable. If that
hospital then fails to institute an acceptable plan of correction and correct the deficiency within the applicable correction period,
it could lose the ability to bill Medicare. A hospital could be terminated from the Medicare program if it fails to address the
deficiency within the applicable correction period. If CMS terminates one hospital, it may increase its scrutiny of others under
common control. From time to time, we have individual hospitals that receive notices of deficiency. To date, we have addressed
those as they have arisen, and we have not experienced a termination.
In September 2019, CMS released a final rule adding additional provider enrollment provisions and creating several
new revocation and denial authorities in an attempt to bolster CMS’ efforts to prevent waste, fraud and abuse. This rule requires
Medicare and Medicaid providers and suppliers to disclose any current or previous (in the last five years), direct or indirect
affiliation with a provider or supplier that has ever had a disclosable event. A disclosable event is any uncollected debt to
Medicare or Medicaid, payment suspension under a federal health care program, denial, revocation or termination of enrollment
(even if it is under appeal), or exclusion by the HHS-OIG from participation in a federal health care program. The rule also
broadens the definition of an affiliation, including many indirect ownership or control situations such as ownership interests in a
publicly traded company. If CMS determines an affiliation with a disclosable event poses an undue risk of fraud, waste or
abuse, then the provider reporting that affiliation may be subject to exclusion from Medicare. Currently, information regarding
uncollected debt, payment suspensions and enrollment actions are not generally available, so obtaining such information on
affiliates could prove difficult or impossible in some situations.
Under this new rule, CMS may revoke a provider’s Medicare enrollment, including all of the provider’s locations, if
the provider bills for services performed at, or items furnished from, one location that it knew or should have known did not
comply with Medicare enrollment requirements, including making the disclosures discussed above. CMS has the ability to
prevent applicants from enrolling in the program for up to three years if a provider is found to have submitted false or
misleading information in its initial enrollment application. Additionally, CMS can now block providers and suppliers who are
revoked from re-entering the Medicare program for up to 10 years. CMS may also revoke a provider’s enrollment if it fails to
report on a timely basis any change in ownership or control, revocation or suspension of a federal or state license or
certification, or any other change in its enrollment data.
Any termination of one or more of our hospitals from the Medicare program for failure to satisfy the enrollment
requirements or conditions of participation could materially adversely affect our business, financial position, results of
operations, and cash flows.
If we are found to have violated applicable privacy and security laws and regulations or our contractual obligations, we
could be subject to sanctions, fines, damages and other civil or criminal penalties, which could increase our liabilities, harm
our reputation and have a material adverse effect on our business, financial position, results of operation and liquidity.
There are a number of federal, state and local laws, rules and regulations, as well as contractual obligations, relating to
the protection, collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and
personal information, including protected health information (“PHI”), such as patient medical records. There are also foreign
laws, rules and regulations that address these matters and have extraterritorial application. We do not believe we are currently
subject to these non-United States regulatory regimes but that could change in the future. Existing laws and regulations are
constantly evolving, and new laws and regulations that apply to our business are being enacted at every level of government in
the United States. In many cases, these laws and regulations apply not only to third-party transactions, but also to transfers of
information between or among us, our affiliates and other parties with whom we conduct business. These laws and regulations
may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be
interpreted and applied in ways that may have a material adverse effect on our business. We monitor legal developments in data
privacy and security regulations at the local, state and federal level, however, the regulatory framework for data privacy and
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security worldwide is continuously evolving and developing and, as a result, interpretation and implementation standards and
enforcement practices are likely to remain uncertain for the foreseeable future.
The management of PHI is subject to several regulations at the federal level, including the Health Insurance Portability
and Accountability Act of 1996 (“HIPAA”) and the HITECH Act. The HIPAA privacy and security regulations protect medical
records and other PHI by limiting their use and disclosure, giving individuals the right to access, amend, and seek accounting of
their own health information, and limiting most uses and disclosures of health information to the minimum amount reasonably
necessary to accomplish the intended purpose. The HITECH Act strengthened HIPAA enforcement provisions and authorized
state attorneys general to bring civil actions for HIPAA violations. It also permits HHS to conduct audits of HIPAA compliance
and impose significant civil monetary penalties even if we did not know and could not reasonably have known about a
violation. If we are found to have violated the HIPAA privacy or security regulations or other federal or state laws protecting
the confidentiality of patient health or personal information, including but not limited to the HITECH Act, we could be subject
to litigation, sanctions, fines, damages and other civil or criminal penalties, which could increase our liabilities, harm our
reputation, and have a material adverse effect on our business, financial position, results of operations and liquidity.
In December 2020, HHS-OCR proposed a new rule that would modify HIPAA regulations. According to HHS-OCR,
the proposed rule is intended to promote care coordination and value-based care. The proposed changes to the HIPAA rules also
provide for strengthening individuals’ rights to access their own health information, including electronic information;
improving information sharing for care coordination and case management for individuals; facilitating greater family and
caregiver involvement in the care of individuals experiencing emergencies or health crises; enhancing flexibilities for
disclosures in emergency or threatening circumstances, such as the opioid and COVID-19 public health emergencies; and
reducing administrative burdens on HIPAA covered healthcare providers and health plans, while continuing to protect
individuals’ health information privacy interests. Although one of the stated purposes of the proposed rules is to reduce
healthcare providers burdens, providers would have to engage in a number of activities to come into compliance if the changes
are finalized, including changing policies and procedures, changing patient privacy notices and business associate agreements
and training workforce members in the new requirements.
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Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of PHI. In
recent years, many states have implemented privacy laws and regulations that impose restrictive requirements regulating the use
and disclosure of personally identifiable information, which may include PHI. These laws in many cases are more restrictive or
impose more obligations than, and may not be preempted by, the HIPAA rules, apply to employees and business contacts as
well as patients, and may be subject to new and varying interpretations by courts and government agencies, creating complex
compliance issues and potentially exposing us to additional expense, adverse publicity and liability. We expect that there will
continue to be new laws, regulations and industry standards concerning privacy, data protection and information security
proposed and enacted in various jurisdictions. The U.S. Congress has considered, but not yet passed, several comprehensive
federal data privacy bills over the past few years, such as the CONSENT Act, which was intended to be similar to the landmark
2018 European Union General Data Protection Regulation. We expect federal data privacy laws to continue to evolve.
In the absence of a comprehensive federal privacy law, there is increased focus at the state and local level on
regulating the collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and
personal information. In recent years, we have seen significant changes to data privacy regulations across the United States.
New legislation proposed or enacted will continue to shape the data privacy environment. Certain state laws may be more
stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information
than federal, international or other state laws, and such laws may conflict with each other, which significantly complicates
compliance efforts.
In addition, all 50 U.S. states and the District of Columbia have enacted breach notification laws that may require us to
notify patients, employees, third parties, regulators and the general public in the event of unauthorized access to or disclosure of
personal or confidential information experienced by us or our service providers. These laws are not consistent, and compliance
in the event of a widespread data breach is difficult and may be costly. Moreover, states frequently amend existing laws,
requiring attention to changing regulatory requirements.
We also may be contractually required to notify patients or other counterparties of a security breach. Although we have
contractual protections with many of our service providers, any actual or perceived security breach could harm our reputation
and brand, expose us to potential liability or require us to expend significant resources on data security and in responding to any
such actual or perceived breach, including defending class action litigation. Any contractual protections we have from our
service providers may not be sufficient to adequately protect us from any such liabilities and losses, and we may be unable to
enforce any such contractual protections.
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In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-
regulatory standards from time to time. These and other industry standards may legally or contractually apply to us, or we may
elect to comply with such standards.
Complying with these various laws, rules, regulations and standards could cause us to incur substantial costs that are
likely to increase over time, require us to change our business practices in a manner adverse to our business, divert resources
from other initiatives and projects, and restrict the way products and services involving data are offered, all of which may have
a material adverse effect on our business. Given the rapid development of cybersecurity and data privacy laws, we expect to
encounter inconsistent interpretation and enforcement of these laws and regulations, as well as frequent changes to these laws
and regulations which may expose us to significant penalties or liability for noncompliance, the possibility of fines, lawsuits
(including class action privacy litigation), regulatory investigations, criminal or civil sanctions, audits, adverse media coverage,
public censure, other claims, significant costs for remediation and damage to our reputation, or otherwise have a material
adverse effect on our business and operations. Any allegations of a failure to adequately address data privacy or security-related
concerns, even if unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data
privacy and security, could result in additional cost and liability to us, damage our relationships with patients and business
partners and have a material adverse effect on our business.
We make public statements about our use and disclosure of personal information through our privacy policies,
information provided on our website and press statements. Although we endeavor to comply with our public statements and
documentation about patient privacy, we may at times fail to do so or be accused of having failed to do so. The publication of
our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to
potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices.
Moreover, from time to time, concerns may be expressed about whether our services or business practices compromise the
privacy of patients and others. Any concerns about our data privacy and security practices, even if unfounded, could damage the
reputation of our businesses, discourage potential patients from seeking our services and have a material adverse effect on our
business.
We are subject to federal, state and local laws and regulations that govern our employment practices, including minimum
wage, overtime, living wage and paid-time-off requirements. Failure to comply with these laws and regulations, or changes
to these laws and regulations that increase our employment-related expenses, could adversely impact our operations.
We are required to comply with all applicable federal, state and locals laws and regulations relating to employment,
including occupational safety and health requirements, minimum staffing, wage and hour, overtime and other compensation
requirements, employee benefits and other leave and sick pay requirements, proper classification of workers as employee or
independent contractors, and immigration and equal employment opportunity laws, among others. These laws and regulations
can vary significantly among jurisdictions, can change, and can be highly technical and involve strict liability for
noncompliance with a seemingly mundane technical detail. Costs and expenses related to these requirements are a significant
operating expense and may increase as laws and regulations change. From time to time, we have been, and expect to continue to
be, subject to regulatory proceedings and private litigation, including putative class action lawsuits, concerning our application
of various laws, rules and regulations governing employment practices, including wage and hour claims. Some of these actions
involve large demands, as well as substantial defense costs. Any failure to comply with these employment-related legal
requirements can result in significant penalties or litigation exposure and could have a material adverse effect on our business,
financial position, results of operations, and cash flows.
The pricing transparency and similar consumer protection rules could adversely affect our business and results of
operations.
Effective January 1, 2021, the hospital price transparency rule requires hospitals to publish on the internet in a
consumer-friendly format their standard charges based on negotiated rates for all items and services and up to 300 common
shoppable services. Shoppable services are those routinely provided in non-urgent situations and include those ancillary
services that customarily accompany the primary service being provided. The charges for an individual item or service to be
published include:
•
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•
gross charge (charge as reflected on a hospital’s chargemaster, absent any discounts),
payer-specific negotiated charge (charge negotiated with a third party payer for an item or service),
de-identified minimum negotiated charge (lowest charge negotiated with all third-party payers),
de-identified maximum negotiated charge (highest charge negotiated with all third-party payers), and
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discounted cash price (charge that applies to an individual who pays cash).
Effective July 1, 2024, CMS finalized a requirement for hospitals to display their standard charge information by
conforming to a CMS template layout, data specifications, and data dictionary, and to improve accessibility of the data on their
websites. The hospital will be required to encode its standard charge information in the CMS templates and conform with other
specified technical instructions that will be made available in a data dictionary. This transparency rule imposes significant
initial and ongoing burdens on hospitals to track and publish various billing information. In the event a hospital fails to comply
with the new requirements and does not complete the prescribed corrective action, CMS may impose a civil monetary penalty
of between $300 and $5,500 per day. The maximum penalty for violations is more than $2 million per hospital.
Effective January 1, 2022, the federal No Surprises Act imposes additional price transparency requirements, including
requiring hospitals to send uninsured or self-pay patients a good faith estimate of the expected charges for treatments, including
for attending physicians billing separately, prior to the scheduled stay or upon request. If an uninsured or self-pay patient
receives a bill that is substantially greater than the expected charges in the estimate or the provider furnishes an item or service
that was not included in the estimate, the patient may initiate a patient-provider dispute resolution process established by
regulation. Additionally, HHS may impose penalties of up to $10,000 per violation of the No Surprises Act.
Many states have also passed or are debating legislation establishing price transparency websites, mandating that
health plans or hospitals make price information available to consumers, or prohibiting practices associated with surprise
billing. These requirements and restrictions vary from state to state. We cannot predict what the adverse effects, if any, of new
federal or state pricing transparency and other consumer protection laws or regulations, such as the effect on relations with
managed care payors and referral sources, may be for us. Our failure to maintain compliance with these rules could adversely
affect our financial position, results of operations, and cash flows.
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The proper function, availability, and security of our information systems are critical to our business and failure to maintain
proper function, availability, or security of our information systems or protect our data against unauthorized access could
have a material adverse effect on our business, financial position, results of operations, and cash flows.
We are and will remain dependent on the proper function, availability and security of our and third-party information
systems, including our electronic clinical information system, referred to as ACE-IT, which plays a substantial role in the
operations of the hospitals, and the cloud service providers we directly and indirectly use. We undertake measures to protect the
safety and security of our information systems and the data maintained within those systems, and we periodically test the
adequacy of our security, business continuity, and disaster recovery measures. We have implemented administrative, technical
and physical controls on our systems and devices in an attempt to prevent unauthorized access to that data, which includes
patient information subject to the protections of HIPAA and the HITECH Act and other sensitive information. For additional
discussion of these laws see Item 1, Business, “Regulation” and our cybersecurity program see Item 1C, Cybersecurity.
We expend significant capital to protect against the threat of security breaches, including cyber attacks, email phishing
schemes, malware and ransomware. Substantial additional expenditures may be required to respond to and remediate any
problems caused by breaches, including the unauthorized access to or theft of patient data and protected health information
stored in our information systems and the introduction of computer malware or ransomware to our systems. We also provide
our employees annual training and regular reminders on important measures they can take to prevent breaches and other cyber
threats, including phishing schemes. We routinely identify attempts to gain unauthorized access to our systems. However, given
the rapidly evolving nature and proliferation of cyber threats, there can be no assurance our training and network security
measures or other controls will detect, prevent or remediate security or data breaches in a timely manner or otherwise prevent
unauthorized access to, damage to, or interruption of our systems and operations. For example, it has been widely reported that
many well-organized international interests, in certain cases with the backing of sovereign governments, are targeting the theft
of patient information and the disruption of healthcare services through the use of advanced persistent threats and ransomware
attacks. In recent years, a number of hospitals and hospital systems have reported being victims of ransomware attacks in which
they lost access to their systems, including clinical systems, during the course of the attacks. Large, national healthcare systems
have reported ransomware attacks that forced their facilities to operate without access to information systems for some time
and, to some extent, inhibited their ability to admit patients. We are likely to face attempted attacks in the future. Accordingly,
we may be vulnerable to losses associated with the improper functioning, breach or unavailability of our and our vendors’
information systems, including systems used in acquired operations, and third-party systems we use.
Threat actors continue to attempt to exploit commonly used software and services to gain remote access to a large
number of the information systems of the businesses using the software and services. For example, in December 2021,
widespread exploitation of a vulnerable logging software installed within commonly used applications, services, and websites
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gave threat actors the ability to execute code remotely and potentially take control of affected systems. In May 2023, an
international ransomware group began exploiting a vulnerability in a prevalent enterprise file transfer tool allowing the group to
steal data from thousands of government, public, and business organizations worldwide.
Generally, we, working with our cybersecurity vendors, attempt to monitor various channels and sources to identify
vulnerabilities and threats in both third-party vendor software and services as well as our own systems and to mitigate the risks
promptly. We also routinely work with industry and governmental cybersecurity partners to identify and combat cyber threats,
which are particularly acute in the healthcare industry. When we become aware of threats, we undertake forensic investigations
of our systems using all the indicators of compromise identified by leading security experts. Our forensic analysis to date has
discovered no indicators of compromise. There can be no assurance that we will identify or adequately mitigate all threats to
our systems, particularly in light of the number of well-funded and organized threat actors working to attack healthcare
providers and the possibility of zero-day vulnerabilities and exploits yet to be identified.
To date, we are not aware of having experienced a material compromise from a cyber breach or attack. However,
given the increasing cybersecurity threats in the healthcare industry, there can be no assurance we will not experience business
interruptions; data loss, ransom, misappropriation or corruption, theft, or misuse of proprietary data, patient or other personally
identifiable information; or litigation, investigation, or regulatory action related to any of those, any of which could have a
material adverse effect on our patient care, ability to admit patients, financial position, and results of operations and harm our
business reputation. Moreover, a security breach, or threat thereof, could require that we expend significant resources to repair
or improve our information systems and infrastructure and could distract management and other key personnel from performing
their primary operational duties. In the case of a material breach or cyber attack, the associated expenses and losses may exceed
our current insurance coverage for such events. Some adverse consequences are not insurable, such as reputational harm and
third-party business interruption. Failure to maintain proper function, security, or availability of our information systems or
protect our data against unauthorized access could have a material adverse effect on our business, financial position, results of
operations, and cash flows. In addition, costs, unexpected problems, and interruptions associated with the implementation or
transition to new systems or technology or with adequate support of those systems or technology across numerous hospitals
could have a material adverse effect on our business, financial position, results of operations, and cash flows.
The failure of our business partners and vendors to maintain the proper function, availability, or security of their
information systems or to protect against unauthorized access could have a material adverse effect on our business,
financial position, results of operations, and cash flows.
Our business involves sharing of protected health information and other sensitive information among employees and
with third-parties, including acute-care hospitals, which are typically referral sources, healthcare service and information
vendors, and the federal government, our primary payor. In fact, federal laws and regulations require interoperability among
healthcare entities in many circumstances. The use by our employees and healthcare partners of portable devices to facilitate
patient care increases the risk of loss, theft or inadvertent disclosure of that information. A compromise of the network security
measures or other controls of those businesses, vendors, or governmental agencies and their contractors with whom we interact,
including our direct and indirect cloud service providers and CMS, which results in confidential information being accessed,
obtained, damaged or used by unauthorized persons, or unavailability of systems necessary to the operation of our business,
could impact patient care, claims billing and collection, harm our reputation, and expose us to significant remedial costs as well
as regulatory actions (fines and penalties) and claims from patients, financial institutions, regulatory and law enforcement
agencies, and other persons, any of which could have a material adverse effect on our business, financial position, results of
operations and cash flows.
ACE-IT, our enterprise-level clinical information system, is subject to a licensing, implementation, technology
hosting, and support agreement with Oracle Cerner Corporation. In addition, we have a number of partners and non-software
vendors with whom we share data in order to provide patient care and otherwise operate our business. Our inability, or the
inability of our partners or vendors, to continue to secure, maintain and upgrade information systems, software, and hardware
could disrupt or reduce the efficiency of our operations, including affecting patient care. On February 21, 2024, Change
Healthcare, a subsidiary of UnitedHealth Group that acts as an intermediary for processing of our payment claims for all
payors, notified us of a cybersecurity incident affecting some of its systems. To date, we have not identified any compromise or
unauthorized access of our systems or networks. The Change Healthcare incident has not affected our operations, except the
submission of payment claims. In the event the Change Healthcare service is not restored in a timely fashion, we may
experience payment collection delays as we turn to alternative channels to submit claims. For additional discussion of potential
impacts from the Change Healthcare incident, see the “Liquidity and Capital Resources” section of Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations. A security breach or other system failure involving
Oracle Cerner, Change Healthcare, or another third-party with whom we share data or system connectivity could compromise
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our patient data or proprietary information or disrupt our ability to operate, including submitting claims for payment, any of
which could have a material adverse effect on our business, financial position, results of operations and cash flows.
We face intense competition for patients from other healthcare providers.
We operate in the competitive, fragmented inpatient rehabilitation industry. Although we are the nation’s largest owner
and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals, in any
particular market we may encounter competition from local or national entities with longer operating histories or other
competitive advantages. For example, acute-care hospitals, including those owned and operated by large public companies, may
choose to expand or begin offering post-acute rehabilitation services. Given that approximately 91% of our hospitals’
admissions come from acute-care hospitals, that increase in competition could materially and adversely affect our admission
referrals in the related markets. There are also large acute-care systems that may have more resources available to compete than
we have. Other providers of post-acute care services may attempt to become competitors in the future. For example, nursing
homes frequently market themselves as offering certain rehabilitation services, even though nursing homes are not required to
offer the same level of care, and are not licensed, as hospitals.
Competing companies may offer newer or different services from those we offer or have better relationships with
referring physicians and may thereby attract patients who are presently, or would be candidates for, receiving our inpatient
rehabilitation services. The other public companies and large health insurance companies expanding into post-acute care have
or may obtain significantly greater marketing and financial resources or other advantages of scale than we have or may obtain.
Other companies, including hospitals and other healthcare organizations that are not currently providing competing services,
may expand their services to include inpatient rehabilitation services.
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There can be no assurance this competition, or other competition which we may encounter in the future, will not
adversely affect our business, financial position, results of operations, or cash flows. In addition, from time to time, there are
efforts in states with certificate of need (“CON”) laws to weaken those laws, which could potentially increase competition in
those states. For example, in 2023, South Carolina enacted legislation to repeal CON regulations for several provider types,
including IRFs. Conversely, competition and statutory procedural requirements in some CON states may inhibit our ability to
expand our operations in those states. For a breakdown of the CON status of the states and territories in which we have
operations, see Item 2, Properties.
If we are unable to provide a consistently high quality of care, our business will be adversely impacted.
Providing quality patient care is fundamental to our business. We believe hospitals, physicians and other referral
sources refer patients to us in large part because of our reputation for delivering quality care. Clinical quality is becoming
increasingly important within our industry. Effective October 2012, Medicare began to impose a financial penalty upon acute-
care hospitals that have excessive rates of patient readmissions within 30 days from hospital discharge. We believe this
regulation provides a competitive advantage to post-acute providers who can differentiate themselves based upon quality,
particularly by achieving low acute-care hospital readmission rates and by implementing disease management programs
designed to be responsive to the needs of patients served by referring hospitals. If we should fail to attain our goals regarding
acute-care hospital readmission rates and other quality metrics, we expect our ability to generate referrals would be adversely
impacted, which could have a material adverse effect upon our business and consolidated financial condition, results of
operations, and cash flows.
If we are unable to maintain or develop relationships with patient referral sources, our growth and profitability could be
adversely affected.
Our success depends in large part on referrals from physicians, hospitals, case managers and other patient referral
sources in the communities we serve. By law, referral sources cannot be contractually obligated to refer patients to any specific
provider. However, there can be no assurance that individuals will not attempt to steer patients to competing post-acute
providers or otherwise limit our access to potential referrals. The establishment of joint ventures or networks between referral
sources, such as acute-care hospitals, and other post-acute providers may hinder patient referrals to us. The growing emphasis
on integrated care delivery across the healthcare continuum increases that risk.
Our growth and profitability depend on our ability to establish and maintain close working relationships with patient
referral sources and to increase awareness and acceptance of the benefits of inpatient rehabilitation care by our referral sources
and their patients. We cannot provide assurance that we will be able to maintain our existing referral source relationships or that
we will be able to develop and maintain new relationships in existing or new markets. Our loss of, or failure to maintain,
existing relationships, including because of closures of referral sources in concentrated markets, or our failure to develop new
relationships could adversely affect our ability to grow our business and operate profitably.
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We may have difficulty completing joint ventures, investments and transactions that increase our capacity consistent with
our growth strategy.
We may selectively pursue strategic acquisitions of, and we frequently pursue joint ventures with, other healthcare
providers. We may face limitations on our ability to identify sufficient joint venture, acquisition or other development targets
and to complete those transactions to meet goals.
In the inpatient rehabilitation industry, the costs of constructing new hospitals are increasing faster than reimbursement
rates and the general inflation rate. In many states, the need to obtain governmental approvals, such as a CON or an approval of
a change in ownership, may represent a significant obstacle to completing transactions. Additionally, in states with CON laws,
it is not unusual for third-party providers to challenge the initial awards of CONs, the increase in the number of approved beds
in an existing CON, or the expansion of the area served, and the adjudication of those challenges and related appeals may take
many years.
Changes in federal laws or regulations may also materially adversely impact our ability to acquire hospitals or open de
novo hospitals. Under the Biden administration, DOJ has announced its intention to be much more aggressive in challenging
mergers and acquisitions it believes present anti-trust concerns. In a speech in January 2022, the head of DOJ’s anti-trust
enforcement stated that negotiated settlements are frequently inadequate remedies and that DOJ needs to be more aggressive in
its litigation to block business combinations. He also stated that litigation is preferable to settlements because it represents a
chance to extend legal precedent for what constitutes unlawful anticompetitive activity. Increased DOJ enforcement of antitrust
laws will likely increase the time, effort and expense associated with acquisitions and may ultimately make it less likely to
consummate acquisitions.
These factors and others may delay, or increase the cost to us associated with, any acquisition or de novo development
or prevent us from completing one or more acquisitions or de novo developments.
Acute-care hospitals that participate in joint ventures with us may experience operational or financial challenges that, in
turn, affect our joint venture inpatient rehabilitation hospitals.
We currently have 63 inpatient rehabilitation hospitals that are owned and operated as joint ventures with acute-care
hospitals. In substantially all of these joint ventures, our co-owners are nonprofit hospitals or health systems. The healthcare
provider operating environment has become increasingly challenging in recent years because of inflationary pressures,
(particularly labor costs), reimbursement pressures, tight credit markets with increasing interest rates, and other operational
challenges such as clinical staffing shortages and shifts of some types of care delivery away from the acute-care setting. The
continuation of some or all of these conditions together with general weakening economic conditions and increasing federal and
state limitations on strategic combinations could subject our joint venture partners to significant operational and financial
pressures.
The financial and operational strength, access to credit, and general liquidity of a joint venture partner may affect the
growth or performance for the associated inpatient rehabilitation hospital, and in a few instances in the past has done so. Our
joint venture partners may be, and in the past some have been, unable or unwilling, at the time of our request, to make capital
contributions to fund their proportional shares of operating or capital expenditures that we believe are in the best interest of the
joint ventures. The delay or inability of a joint venture to undertake a funding expenditure could affect the growth or
performance of that hospital. Should a joint venture partner close its acute-care hospital operating in the market with the joint
venture inpatient rehabilitation hospital, we would likely suffer a significant referral disruption or decrease in that market,
particularly in smaller markets where the acute-care hospital that is closing is the primary or only hospital.
We have a small number of inpatient rehabilitation hospitals that are located within our joint venture partner’s acute-
care hospital. In January 2024, we received notice that one of our joint venture partners intends to close its acute-care hospital
in which the joint venture inpatient rehabilitation hospital is located. We closed that joint venture hospital in February and
expect to incur a one-time charge of approximately $2-4 million, net of tax and noncontrolling interest, in the first quarter of
2024.
Any of these occurrences or similar occurrences affecting a number of our joint ventures could, in the aggregate, have
a material adverse impact on our business and consolidated financial condition, results of operations, and cash flows.
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We may make investments or complete transactions that could expose us to unforeseen risks and liabilities.
Investments, acquisitions, joint ventures or other development opportunities identified and completed may involve
material cash expenditures, debt incurrence, operating losses, amortization of certain intangible assets of acquired companies,
issuances of equity securities, liabilities, and expenses, some of which are unforeseen, that could materially and adversely affect
our business, financial position, results of operations and liquidity. Acquisitions, investments, and joint ventures involve
numerous risks, including:
•
•
•
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•
•
limitations, including state CONs as well as anti-trust, Medicare, and other regulatory approval requirements, on
our ability to complete such acquisitions, particularly those involving not-for-profit providers, on terms,
timetables, and valuations reasonable to us;
limitations in obtaining financing for acquisitions at a cost reasonable to us;
difficulties integrating acquired operations, personnel, and information systems, and in realizing projected
revenues, efficiencies and cost savings, or returns on invested capital;
entry into markets, businesses or services in which we may have little or no experience;
diversion of business resources or management’s attention from ongoing business operations; and
exposure to undisclosed or unforeseen liabilities of acquired operations, including liabilities for failure to comply
with healthcare laws and anti-trust considerations as well as risks and liabilities related to previously compromised
information systems.
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As part of our development activities, we intend to open new, or de novo, inpatient rehabilitation hospitals. The
construction of new hospitals involves numerous risks, including the receipt of all zoning and other regulatory approvals, such
as a CON where necessary, construction delays and cost over-runs and unforeseen environmental liability exposure. Once built,
new hospitals must undergo the state and Medicare certification process, the duration of which may be beyond our control. We
may be unable to operate newly constructed hospitals as profitably as expected, and those hospitals may involve significant
additional cash expenditures and operating expenses that could, in the aggregate, have an adverse effect on our business,
financial position, results of operations, and cash flows.
We may not be able to successfully integrate acquisitions or realize the anticipated benefits of any acquisitions.
We may undertake strategic acquisitions from time to time. Prior to consummation of any acquisition, the acquired
business will have operated independently of us, with its own procedures, corporate culture, locations, employees and systems.
We expect to integrate acquired businesses into our existing business utilizing certain common information systems, operating
procedures, administrative functions, financial and internal controls and human resources practices to the extent practicable.
There may be substantial difficulties, costs and delays involved in the integration of an acquired business with our business.
Additionally, an acquisition could cause disruption to our business and operations and our relationships with customers,
employees and other parties. In some cases, the acquired business has itself grown through acquisitions, and there may be
legacy systems, operating policies and procedures, and financial and administrative practices yet to be fully integrated. To the
extent we are attempting to integrate multiple businesses at the same time, we may not be able to do so as efficiently or
effectively as we initially anticipate. The failure to successfully integrate on a timely basis any acquired business with our
existing business could have an adverse effect on our business, financial position, results of operations, and cash flows.
We anticipate our acquisitions will result in benefits including, among other things, increased revenues. However,
acquired businesses may not contribute to our revenues or earnings to the extent anticipated, and any synergies we expect may
not be realized after the acquisitions have been completed. If the acquired businesses underperform and any underperformance
is other than temporary, we may be required to take an impairment charge. Failure to achieve the anticipated benefits could
result in the diversion of management’s time and energy and could have an adverse effect on our business, financial position,
results of operations, and cash flows.
Competition for staffing, shortages of qualified personnel, union activity or other factors may increase our staffing costs and
reduce profitability.
Our operations are dependent on the efforts, abilities, and experience of our medical personnel, such as physical
therapists, occupational therapists, speech pathologists, nurses, and other healthcare professionals. We compete with other
healthcare providers in recruiting and retaining qualified personnel responsible for the daily operations of each of our locations.
The lack of availability of clinical personnel is a significant operating issue facing healthcare providers. The operating
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conditions associated with the COVID-19 pandemic significantly affected the availability and turnover of clinical staff and, in
turn, increased staffing costs. It has been widely reported that the challenging working conditions in healthcare associated with
the COVID-19 pandemic have led to prevalent job dissatisfaction among clinicians. Availability of clinical staff, elevated
turnover and staffing costs continue to be a challenge for us and other healthcare providers. The availability of staff may be
exacerbated if immigration is significantly limited in the future. Staffing shortages or retention concerns in one or more markets
in which we operate have required and may again require us to enhance wages and benefits to recruit and retain qualified
personnel or to contract for more expensive temporary personnel. We also depend on the available labor pool of semi-skilled
and unskilled employees in each of the markets in which we operate.
If our staffing costs increase, we may not experience reimbursement rate or pricing increases to offset these additional
costs. Because a significant percentage of our revenues consists of fixed, prospective payments, our ability to pass along
increased staffing costs is limited. In particular, if staffing costs rise at an annual rate greater than our net annual market basket
update from Medicare, as occurred in 2022 and 2023, or we experience a significant shift in our payor mix to lower rate payors
such as Medicaid, our results of operations and cash flows will be adversely affected. Conversely, decreases in reimbursement
revenues, such as with sequestration, may limit our ability to increase compensation or benefits to the extent necessary to retain
key employees, in turn increasing our turnover and associated costs. Union activity is another factor that may contribute to
increased staffing costs. We currently have a minimal number of union employees, so an increase in labor union activity could
have a significant impact on our staffing costs. Our failure to recruit and retain qualified clinical personnel, or to control our
staffing costs, could have a material adverse effect on our business, financial position, results of operations, and cash flows.
We are a defendant in various lawsuits, and may be subject to liability under qui tam cases, the outcome of which could have
a material adverse effect on us.
We operate in a highly regulated industry in which healthcare providers are routinely subject to litigation. As a result,
various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against
us. We are a defendant in a number of lawsuits, most of which are general and professional liability matters inherent in treating
patients with medical conditions. Our more significant lawsuits and investigations, if any, are discussed in Note 18,
Contingencies and Other Commitments, to the accompanying consolidated financial statements.
Substantial damages, fines, or other remedies assessed against us or agreed to in settlements could have a material
adverse effect on our business, financial position, results of operations, and cash flows, including indirectly as a result of the
covenant defaults under our credit agreement or debt instruments or other claims such as those in securities actions.
Additionally, the costs of defending litigation and investigations, even if frivolous or nonmeritorious, could be significant.
The FCA allows private citizens, called “relators,” to institute civil proceedings on behalf of the United States alleging
violations of the FCA. 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 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.
In 2019, we settled with DOJ to conclude an investigation that originated in 2013 based on the allegations made by
relators. The seven-year investigation produced no evidence of falsity or fraudulent conduct. Eventually, the court overseeing
the qui tam actions refused to give DOJ more time to decide whether to intervene and unsealed the cases. DOJ chose not to
intervene and prosecute the matter. We settled the DOJ investigation, together with the related qui tam or “whistleblower”
lawsuits, for a payment of $48 million, and we expressly denied any wrongdoing. Even when a matter is without merit, as we
believe was the case with this investigation, we may still incur significant costs of defense or settlement costs or both.
It is possible that other 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 FCA.
The healthcare services we provide involve substantial risk of general and professional liability. Inpatient rehabilitative
care involves three hours of daily intensive therapy for patients who are usually elderly and come to our hospitals with
debilitating medical conditions. Our clinicians must frequently assist patients who have difficulty with mobility. We cannot
predict the impact any claims arising out of the care being provided (regardless of their ultimate outcomes) could have on our
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business or reputation or on our ability to attract and retain patients and employees. We also cannot predict the adequacy of any
reserves for such losses or recoveries from any insurance or re-insurance policies.
We self-insure a substantial portion of our professional, general, and workers’ compensation liability risks, which may
not include risks related to regulatory fines and penalties, through our captive insurance subsidiary, as discussed further in
Note 11, Self-Insured Risks, to the accompanying consolidated financial statements. Changes in the number of these liability
claims and the cost to resolve them impact the reserves for these risks. A variance between our estimated and actual number of
claims or average cost per claim could have a material impact, either favorable or unfavorable, on the adequacy of the reserves
for these liability risks, which could have an effect on our financial position and results of operations.
Additionally, we operate in states in which the litigation environment may pose a significant business risk to us. For
instance, we have been involved in lawsuits, including putative class actions, brought under California’s Private Attorneys
General Act (“PAGA”). Under PAGA, individuals, including aggrieved employees, can bring individual or class-action claims
alleging regulatory violations, including alleged violations of employment regulations. Additionally, judges and juries in
California have demonstrated a willingness to grant large verdicts to plaintiffs in connection with employment and labor related
cases. In 2017, the California Supreme Court held that plaintiffs bringing suit under PAGA are generally entitled to request and
receive a significant amount of information from the employer early in the litigation, which creates pressure for employers to
settle early to avoid substantial litigation burdens and which has resulted in a significant increase in PAGA claims in recent
years.
We may be more vulnerable to the effects of a public health emergency than other businesses due to the nature of our
patients, and a regional or global socio-political, weather or other catastrophic event could severely disrupt our business.
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A public health emergency can significantly affect healthcare providers because of the direct impacts on patients,
capacity to accept patients, employees, necessary supplies to treat patients, and regulatory requirements related to the
emergency. The COVID-19 pandemic and actions taken by local, state and federal authorities in response to the pandemic
significantly affected our operations, business and financial condition. Future outbreaks of contagious diseases and associated
governmental actions could adversely affect our operations, business and financial condition, including potentially our liquidity,
particularly if the provision of healthcare services and the supplies for those services are disrupted for a lengthy period of time.
The impact on our operations and financial performance depends on numerous factors, including the rate of spread, duration
and geographic coverage of an outbreak; the rate and extent to which the disease mutates and the severity of the symptoms of
the disease; the status of testing capabilities; the rates of vaccination and therapeutic remedies for the disease and any variant
strains; the legal, regulatory and administrative developments related to the pandemic at federal, state, and local levels, such as
vaccine mandates, anti-mandate laws and orders, shelter-in-place orders, facility closures and quarantines; and the infectious
disease prevention and control efforts of the Company, governments and third parties.
The majority of our patients are elderly individuals with complex medical challenges, many of whom may be more
vulnerable than the general public during a contagious disease outbreak or other public health catastrophe. Our employees are
also at greater risk of contracting contagious diseases due to their increased exposure to vulnerable patients. For example, if
another pandemic were to occur, we could suffer significant losses to our consumer population or a reduction in the availability
of our employees and, at a high cost, be required to replace affected workers. Local, regional or national governments might
limit or ban public interactions to halt or delay the spread of diseases causing business disruptions and the temporary
suspension of our services. Accordingly, certain public health catastrophes could have a material adverse effect on our financial
condition and results of operations.
Other unforeseen events, including acts of violence, war, terrorism and other international, regional or local instability
or conflicts (including labor issues), embargoes, short-term and long-term weather-related events, natural disasters such as
earthquakes and floods, whether occurring in the United States or abroad, could restrict or disrupt our operations and negatively
affect our results of operations and cash flows. This risk is more acute in regions where we have a large number of hospitals,
such as Texas and Florida. For a list of the states in which we have hospital locations, see Item 2, Properties.
Regulatory and other efforts to promote a transition to a lower-carbon economy may result in significant operational and
financial challenges for us.
Legislators and regulators at the international, national, regional and local levels have adopted and are expected to
continue to adopt legal requirements ultimately designed to reduce greenhouse gas emissions and to promote a transition to a
lower-carbon economy. For instance, a number of recently enacted laws and regulations impose on companies broad climate-
related disclosure requirements, such as California’s suite of statutes adopted in 2023 known as the “climate accountability
package,” to track and report matters associated with greenhouse gas emissions, alternative energy usage, energy conservation,
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and the transition to a lower-carbon economy. These types of laws and regulations have proliferated in recent years and are
likely to continue to do so in the future. These climate-related laws and regulations have increased our costs associated with
compliance and are likely to continue to do so in the future. Additionally, the costs that other companies incur to comply with
these types of laws and regulations are likely to be passed on to us, which would increase the cost of the goods and services that
we purchase from vendors and suppliers. These legal requirements, as well as challenges associated with consumer, investor or
lender pressure to change business models and practices, may also lead one or more of our vendors or suppliers to alter, disrupt
or cease operations, which may adversely affect our operations. Furthermore, we, as well as our vendors and suppliers, may be
required to adopt alternative energy sources or technology that may not yet be reliable or cost effective, which may result in
disruptions to our operations. In addition to incremental costs and potential disruptions to our energy supply and broader supply
chain, subsidies from the federal government to the renewable energy industry and other climate-related costs incurred by the
federal government may increase the national deficit and debt, which would increase the reimbursement risks we face. See
“Reimbursement Risks” above.
There are numerous organizations that provide information to investors on corporate governance and related matters,
which have developed rating methodologies for evaluating companies on environmental matters, such as greenhouse gas
emissions. Such ratings are used by some investors to inform their investment and voting decisions. Those organizations,
however, may base their ratings on assumptions regarding our business that are not accurate or otherwise lack an understanding
of the inpatient rehabilitation business, such as conflating our hospitals with typically much larger and energy intensive acute-
care hospitals, and their ratings may result in decreased demand for our stock or advocacy campaigns that divert management
attention from our core business or, if successful, impose additional costs and burdens on us.
The transition to lower greenhouse gas emissions technology; the effects of energy pricing and reliability and changes
in public sentiment, regulations, governmental subsidies and deficits, taxes, public mandates or requirements; the increase in
climate-related lawsuits and insurance premiums; and the implementation of more robust disaster recovery and business
continuity plans are likely to increase the costs to maintain our operations and to divert management attention from our core
business, either of which may have an adverse effect on our business, financial position and results of operations.
Financial Risks
We may incur additional indebtedness in the future, and that debt or the associated increased leverage may have negative
consequences for our business. The restrictive covenants included in the terms of our indebtedness could affect our ability to
execute aspects of our business plan successfully.
As of December 31, 2023, we have approximately $2.4 billion of long-term debt outstanding (including that portion of
long-term debt classified as current and excluding $340.1 million in finance leases). See Note 10, Long-term Debt, to the
accompanying consolidated financial statements. Subject to specified limitations, our credit agreement and the indentures
governing our debt securities permit us and our subsidiaries to incur material additional debt. If new debt is added to our current
debt levels, the risks described here could intensify.
Our indebtedness could have important consequences, including:
•
limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt
service requirements, execution of our business strategy and other general corporate purposes;
• making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in
government regulation and in our business by limiting our flexibility in planning for, and making it more difficult
for us to react quickly to, changing conditions;
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placing us at a competitive disadvantage compared with competing providers that have less debt; and
exposing us to risks inherent in interest rate fluctuations for outstanding amounts under our credit facility, which
could result in higher interest expense in the event of increases in interest rates, as discussed in Item 7A,
Quantitative and Qualitative Disclosures about Market Risk.
We are subject to contingent liabilities, prevailing economic conditions, and financial, business, and other factors
beyond our control. Although we expect to make scheduled interest payments and principal reductions, we cannot provide
assurance that changes in our business or other factors will not occur that may have the effect of preventing us from satisfying
obligations under our credit agreement or debt instruments. If we are unable to generate sufficient cash flow from operations in
the future to service our debt and meet our other needs or have an unanticipated cash payment obligation, we may have to
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refinance all or a portion of our debt, obtain additional financing or reduce expenditures or sell assets we deem necessary to our
business. We cannot provide assurance these measures would be possible or any additional financing could be obtained.
In addition, the terms of our credit agreement and the indentures governing our senior notes do, and our future debt
instruments may, impose restrictions on us and our subsidiaries, including restrictions on our ability to, among other things,
engage in acquisition and combination transactions, pay dividends on or repurchase our capital stock, engage in transactions
with affiliates, or incur or guarantee indebtedness. These covenants could also adversely affect our ability to finance our future
operations or capital needs and pursue available business opportunities. For additional discussion of our material debt
covenants, see the “Liquidity and Capital Resources” section of Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and Note 10, Long-term Debt, to the accompanying consolidated financial statements.
In addition, our credit agreement requires us to maintain specified financial ratios and satisfy certain financial
condition tests. See the “Liquidity and Capital Resources” section of Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and Note 10, Long-term Debt, to the accompanying consolidated financial
statements. Although we remained in compliance with the financial ratios and financial condition tests as of December 31,
2023, we cannot provide assurance we will continue to do so. Events beyond our control, including changes in general
economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests. A severe
downturn in earnings, failure to realize anticipated earnings from acquisitions, or, if we have outstanding borrowings under our
credit facility at the time, a rapid increase in interest rates could impair our ability to comply with those financial ratios and
financial condition tests and we may need to obtain waivers from the required proportion of the lenders to avoid being in
default. If we try to obtain a waiver or other relief from the required lenders, we may not be able to obtain it or such relief might
have a material cost to us or be on terms less favorable than those in our existing debt. If a default occurs, the lenders could
exercise their rights, including declaring all the funds borrowed (together with accrued and unpaid interest) to be immediately
due and payable, terminating their commitments or instituting foreclosure proceedings against our assets, which, in turn, could
cause the default and acceleration of the maturity of our other indebtedness. A breach of any other restrictive covenants
contained in our credit agreement or the indentures governing our senior notes would also (after giving effect to applicable
grace periods, if any) result in an event of default with the same outcome.
As of December 31, 2023, approximately 67% of our consolidated Property and equipment, net was held by our
Company and its guarantor subsidiaries under its credit agreement. See Note 10, Long-term Debt, to the accompanying
consolidated financial statements, the “Liquidity and Capital Resources” section of Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Item 2, Properties.
Uncertainty in the credit markets could adversely affect our financial condition or our growth opportunities.
In recent years, high yield, investment grade, and sovereign credit markets were affected by geopolitical turmoil,
inflationary pressures, and changing central bank policies. These conditions resulted in unsettled credit markets for much of the
year. Future market shocks, such as the status of deliberations and legislation to increase the debt ceiling in the United States,
could result in reductions in the availability of certain types of debt financing, including access to revolving lines of credit.
Future business needs combined with market conditions at the time may cause us to seek alternative sources of potentially less
attractive financing and may require us to adjust our business plan accordingly. Tight credit markets, such as might result from
further turmoil in the sovereign debt markets, would likely make additional financing more expensive and difficult to obtain.
Actions by the United States Federal Reserve system, such as increasing the discount rate, may also increase the interest
expense associated with our current or future borrowings. The inability to obtain additional financing at a reasonable cost could
have a material adverse effect on our financial condition or our growth opportunities.
As a result of credit market uncertainty, we also face potential exposure to counterparties who may be unable to
adequately service our needs, including the ability of the lenders under our credit agreement to provide liquidity when needed.
We monitor the financial strength of our depositories, creditors, and insurance carriers using publicly available information, as
well as qualitative inputs.
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Item 1B.
Unresolved Staff Comments
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Item 1C.
Cybersecurity
Process for Assessing, Identifying and Managing Material Cybersecurity Risks
The proper function, availability, and security of our and third-party information systems are critical to our business.
We have attempted to structure our cybersecurity program and its incident response policies and procedures, including an
incident response plan (the “IRP”), around the National Institute of Standards and Technology (“NIST”) Cybersecurity
Framework, which provides best practices to identify, protect from, respond to, and recover from cyber attacks. The
cybersecurity program, led by our chief security officer (“CSO”), consists of dedicated internal IT security employees,
including the staff of a security operations center, and long-term third-party security service providers. Our IT security staff, led
by our CSO, is responsible for our overall information security strategy, policy, security engineering, operations, and cyber
threat detection and response. In furtherance of our cybersecurity program, members of our internal security staff participate in
industry and governmental cybersecurity cooperative groups, including the Health Information Sharing and Analysis Center
(“H-ISAC”) and the FBI’s InfraGard.
Our CSO, who assumed his current role in 2022, has over 10 years of cybersecurity experience with us and over 27
total years of cybersecurity and IT experience across various industries, including telecom, engineering, and finance. He also
holds several cybersecurity certifications: GIAC Certified Incident Handler, GIAC Certified Penetration Tester, and Certified
Healthcare Information Security Leader. Our CSO reports directly to our chief information officer (“CIO”). Our CIO, who
assumed his current role in 2011, has 34 total years of cybersecurity and IT experience. Prior to assuming the role of CIO, he
served in senior IT and security roles for us beginning in 2001. As a highly decorated United States Air Force officer, he served
as a CIO, regional CIO, and chief technology officer responsible for the USAF health system’s IT worldwide operations. He
also served as a senior staff advisor to various levels of the United States Department of Defense’s military health system on
strategic matters related to IT policy, procedures, procurement, solutions, and is a subject matter expert on cybersecurity. He
has numerous professional certifications and affiliations, including a CERT Certificate in Cybersecurity Oversight from
National Association of Corporate Directors’ Cyber-Risk Oversight Program; Certified Information Systems Security
Professional; lifetime member, fellow, and previous board member of the College of Health Information Management
Executives.
We maintain an inter-departmental privacy and security committee that oversees our programs and initiatives that seek
to protect and secure patient information as well as our data and information systems. This committee is responsible for, among
other things, administering our incident response policies and procedures and various training and awareness programs that
promote good system security practices by employees. This committee consists of our CSO, CIO, deputy CIO, chief privacy
officer, and director of information security and compliance as well as in house attorneys responsible for cybersecurity and
securities matters. It currently meets monthly and as warranted by privacy and security events.
The IRP sets forth the strategy to prepare for cybersecurity threats and incidents and the processes and procedures to
detect, analyze, contain, and recover after any actual or suspected cybersecurity incidents. The IRP also sets forth the internal
reporting process for cybersecurity incidents. In the event of the detection of an actual or suspected cybersecurity incident, the
IRP provides that our IT security staff score the incident based on established criteria and manage the incident pursuant to the
standard operating procedures. Depending on the assessed criticality of the incident and the systems affected, the staff will
report an incident to a security triage team, consisting of the security operations incident response lead and several members of
the privacy and security committee. Working with our third-party security vendors as needed, the triage team investigates the
incident, manages the response, and reports threats and incidents deemed significant to securities counsel. Securities counsel
then works with the executive team to assess materiality for the Company. A member of the executive team would inform our
board of directors as warranted.
In general terms, under our cybersecurity program, we undertake measures to protect the safety and security of our
information systems and the data maintained within those systems. We have implemented administrative, technical and physical
controls on our systems and devices in an attempt to prevent unauthorized access and to promote business resilience in the
event of that access. Core elements of our program include the real-time monitoring of both our network and external
cybersecurity activity by our internal security operations center and our third-party service providers and the procedures for
backing up and recovering our systems. We periodically test the adequacy of our security, business continuity, and disaster
recovery measures, including an annual tabletop exercise involving representatives from all key functional departments with the
Company, our outside cybersecurity legal counsel, and our primary forensic services firm. Our legal and technical advisors
direct the exercise and provide feedback on our performance, which is shared with management and our board of directors. We
provide our employees annual training and regular reminders on measures they can take to prevent breaches and other cyber
threats, including phishing schemes. We participate in the vulnerability scanning service offered by the Cybersecurity and
Infrastructure Security Agency on our internet facing systems and engage external security consultants to perform an annual
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penetration test of our network. Our systems that process electronic protected health information are risk assessed on a quarterly
basis against NIST security controls. Additionally, we maintain insurance coverage for cybersecurity incidents.
Third-party Engagement in Connection with our Cybersecurity Program
We maintain engagements with our cybersecurity legal counsel and forensic services firms, each of which has
visibility into current events through its client base. We engage throughout the year with not only our security vendors but also
H-ISAC, the FBI’s InfraGard, and other communities dedicated to sharing information regarding developing cybersecurity
threats.
Third-party IT Vendor Risk Management
Our IT security staff also maintains a third-party IT vendor risk management process. The staff identifies the third
parties with whom we contract or otherwise have a relationship involving our network or digital assets that represent an
elevated risk based on a detailed rating process. The IT vendor risk management process involves input from various
departments, including the affected internal business constituencies, legal, and compliance.
Using a platform endorsed by the H-ISAC, the IT security staff performs risk assessments of third parties that appear
to represent the greatest risk to our systems and data. Annually, the privacy and security committee reviews and approves our
listing of tier one vendors subject to the assessment. The IT security staff then works with the internal points of contact
responsible for the applications, software or systems and the vendors to gather the information necessary to assess the
associated risks using common cybersecurity standards and frameworks. Any significant risks identified are shared with the
vendors and the compensating controls for those risks are documented in collaboration with the vendors. The internal points of
contact and other constituencies then review the results of the assessment process in order to assess the associated value of the
product or service against the risk.
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Integration into the Overall Risk Management System
Assessing, identifying, and managing cybersecurity related risks are integrated into our overall enterprise risk
management (the “ERM”) process. Cybersecurity risks are included in the risk universe that the ERM function evaluates to
assess the most significant risks to the Company as a whole. To the extent the ERM process identifies a heightened
cybersecurity related risk, risk owners are assigned to develop risk mitigation plans, which are then tracked to completion.
Management presents quarterly the ERM risk assessment, including key risk indicators, to our board of directors.
Board Oversight of the Cybersecurity Program and Patient Privacy Matters
Our board of directors has actively sought out experience and expertise among its members to further its oversight of
cybersecurity risk. We believe that Messrs. Carmichael and Reidy and Ms. Herman have extensive knowledge and experience
in cybersecurity oversight. Mr. Carmichael previously served as chief information officer at multiple companies, and Mr. Reidy
directly supervised and oversaw the information security programs at two companies. Ms. Herman has completed the National
Association of Corporate Directors’ Cyber-Risk Oversight Program, which is designed to enhance cybersecurity literacy and
strengthen cyber-risk oversight practices, and holds a CERT Certificate in Cybersecurity Oversight.
The Compliance and Quality of Care Committee of our board of directors has primary responsibility for oversight of
our cybersecurity risk management program. Our CIO provides quarterly reports on our cybersecurity program to that
committee and at least annually to our full board. The reports to the committee and the full board include details and metrics on,
among other things, our routine vulnerability assessments, internal and external threat intelligence, quarterly NIST framework
assessments, quarterly Company-wide phishing exercises and training, device encryption, routine resilience efforts including
quarterly disaster recovery exercises, third-party vendor risk management, annual tabletop incident response exercise, annual
business continuity exercise, cyber penetration tests, and 23 NIST cyber hygiene controls. Similarly, our chief compliance
officer provides quarterly reports to the Compliance and Quality of Care Committee on patient privacy compliance efforts and
related matters. The Compliance and Quality of Care Committee and the full board review, and the committee approves, the
annual cybersecurity plan that sets out the primary initiatives and internal audits of the IT security function for the upcoming
year. Historically, one or more board members have observed and participated in our annual tabletop incident response
exercise.
Effects of Cybersecurity Risks on the Company
To date, we are not aware of having experienced a material compromise of our systems or networks from a
cybersecurity incident. However, we routinely identify attempts to gain unauthorized access to our systems. Additionally, some
of our vendors and business partners have experienced compromises of their information systems, including systems that we
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use. On February 21, 2024, Change Healthcare, a subsidiary of UnitedHealth Group that acts as an intermediary for processing
of our payment claims for all payors, notified us of a cybersecurity incident affecting some of its systems. In response to the
incident, both we and Change Healthcare severed those business service connections between our systems and Change
Healthcare’s. We promptly conducted forensics on our systems based on the shared information regarding this Change
Healthcare incident. As of February 28, 2024, we have not identified any compromise or unauthorized access of our systems or
networks. The Change Healthcare incident has not affected our operations, except the submission of payment claims. At this
time, we have not determined that this disruption to our submission of claims is likely to materially affect our business strategy,
results of operation or financial condition.
Given the increasing cybersecurity threats in the healthcare industry, there can be no assurance we will not experience
business interruptions; data loss, ransom, misappropriation or corruption, theft, or misuse of proprietary data, patient or other
personally identifiable information; or litigation, investigation, or regulatory action related to any of those, any of which could
have a material adverse effect on our patient care, ability to admit patients and to bill and collect for services provided on a
timely basis, financial position, and results of operations and could harm our business reputation.
We expend significant capital to protect against cybersecurity threats, including denial of service attacks, email
phishing schemes, hacking, advanced persistent threats, malware, and ransomware. Substantial additional expenditures may be
required to respond to and remediate any problems caused by cybersecurity incidents, including the unauthorized access to or
theft of patient data and protected health information stored in our information systems, the inoperability of our electronic
clinical and business systems, and the infiltration or disruption of the information systems of our business partners. In the case
of a material cybersecurity incident, the associated expenses and losses and lost revenue may exceed our current insurance
coverage for such events. Some adverse consequences may not be insurable, such as reputational harm and third-party business
interruption. For further discussion of the risks associated with cyber threats, see Item 1A, Risk Factors, “Other Operational
Risks.”
Item 2.
Properties
We currently maintain our principal executive office at 9001 Liberty Parkway, Birmingham, Alabama, the lease for
which expires in 2033 and has multiple renewal options for additional five-year terms. In addition to our principal executive
office, we lease or own hospital locations as noted in the table below. All of our hospital leases, which represent the substantial
majority of our rent expense, have at least five years remaining on their terms after taking into consideration one or more
renewal options. Our consolidated entities associated with our leased hospitals are generally responsible for property taxes,
property and casualty insurance, and routine maintenance expenses. We do not believe any one of our individual properties is
material to our consolidated operations.
45
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The following table sets forth information regarding our hospital locations as of December 31, 2023:
State
Licensed
Beds
Building
and Land
Owned
Number of Hospitals
Building
Owned
and Land
Leased
Building
and Land
Leased
Total
Alabama *
Arizona
Arkansas
California
Colorado
Delaware *
Florida
Georgia *
Idaho
Illinois *
Indiana
Iowa *
Kansas
Kentucky *
Louisiana
Maine *
Maryland *
Massachusetts *
Mississippi *
Missouri *
Nevada
New Hampshire
New Jersey *
New Mexico
North Carolina *
North Dakota
Ohio
Oklahoma
Pennsylvania
Puerto Rico *
South Carolina
South Dakota
Tennessee *
Texas
Utah
Virginia *
West Virginia *
Wisconsin
457
396
368
251
124
40
1,373
330
40
205
98
40
177
343
87
100
134
529
43
196
219
50
199
87
68
40
260
100
690
75
496
40
566
1,812
84
297
272
92
10,778
3
1
3
4
1
—
19
5 (1)
—
2
1
1
1
2
2
—
2
2
—
—
2
—
1
1
1
—
2
1
5
—
3
1
7
14
1
2
2
1
93
3
2
1
—
—
1
1
1
1
2
—
—
—
1
—
—
—
—
—
2
—
1
1
—
—
—
1
1
—
—
4
—
3
3
—
1
2
—
32
1
3
1
—
1
—
—
—
—
—
—
—
1
—
—
1
—
2
1
—
1
—
1
—
—
1
1
—
4
2
1
—
—
10
—
3
—
1
36
7
6
5
4
2
1
20
6
1
4
1
1
2
3
2
1
2
4
1
2
3
1
3
1
1
1
4
2
9
2
8
1
10
27
1
6
4
2
161
* Hospital certificate of need state or U.S. territory. In 2023, South Carolina enacted legislation to repeal CON laws
for several provider types, including inpatient rehabilitation hospitals.
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(1) The inpatient rehabilitation hospitals in Augusta and Newnan, Georgia are parties to industrial development bond
financings that reduce the ad valorem taxes payable by each hospital. In connection with each of these bond
structures, title to the related property is held by the local development authority. We lease the related hospital
property and hold the bonds issued by that authority, the payment on which equals the amount payable under the
lease. We may terminate each bond financing and the associated lease at any time at our option without penalty,
and fee title to the related hospital property will return to us.
Our principal executive office, hospitals, and other properties are suitable for their respective uses and are, in all
material respects, adequate for our present needs. Information regarding the utilization of our licensed beds and other operating
statistics can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.
Legal Proceedings
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. In the ordinary course of our business, we are subject to regulatory and other governmental
audits and investigations and are party to various legal actions, proceedings, and claims, including employment and personal
injury claims. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties. Some
of these matters have been material to us in the past, and others in the future may, either individually or in the aggregate, be
material and adverse to our business, financial position, results of operations, and liquidity.
Additionally, the False Claims Act (the “FCA”) allows private citizens, called “relators,” to institute civil proceedings
on behalf of the United States alleging violations of the FCA. These lawsuits, also known as “qui tam” actions, are common in
the healthcare industry and 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. 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. Therefore, from time to time, we may be party to one or more undisclosed
qui tam cases brought pursuant to the FCA.
Information relating to certain legal proceedings in which we are involved is included in Note 18, Contingencies and
Other Commitments, to the accompanying consolidated financial statements.
Item 4.
Mine Safety Disclosures
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Shares of our common stock trade on the New York Stock Exchange under the ticker symbol “EHC.”
Holders
As of February 14, 2024, there were 100,140,031 shares of Encompass Health common stock issued and outstanding,
net of treasury shares, held by approximately 6,438 holders of record (participant positions at The Depository Trust Corporation
plus record holders).
Dividends
On October 19, 2023, our board of directors declared a cash dividend of $0.15 per share, payable on January 16, 2024
to stockholders of record on January 2, 2024. We expect quarterly dividends to continue to be paid in January, April, July, and
October. However, the actual declaration of any future cash dividends, and the setting of record and payment dates as well as
the per share amounts, will be at the discretion of our board each quarter after consideration of various factors, including our
capital position and alternative uses of funds.
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Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth, as of December 31, 2023, information concerning compensation plans under which our
securities are authorized for issuance. The table does not reflect grants, awards, exercises, terminations, or expirations since that
date. Pursuant to the terms of the equity plans, all share amounts and exercise prices have been adjusted to reflect the spin off of
our home health and hospice business on July 1, 2022 and stock splits that occurred after the date on which any particular
underlying plan was adopted, to the extent applicable.
Number of securities to
be issued upon exercise
of outstanding options
Weighted-average
exercise price of
outstanding options(1)
Number of
securities available
for future issuance
Plans approved by stockholders
Plans not approved by stockholders
Total
3,354,824 (2) $
104,567 (4)
3,459,391
$
49.51
49.51
8,204,463 (3)
—
8,204,463
(1) This calculation does not take into account awards of restricted stock, restricted stock units, or performance share units.
(2) This amount assumes maximum performance by performance-based awards for which the performance has not yet been
determined.
(3) This amount represents the number of shares available for future equity grants under the 2016 Omnibus Performance
Incentive Plan approved by our stockholders in May 2016.
(4) This amount represents restricted stock units issued under the 2004 Amended and Restated Director Incentive Plan, the
material terms of which are described below.
2004 Amended and Restated Director Incentive Plan
The 2004 Amended and Restated Director Incentive Plan (the “2004 Plan”) provided for the grant of common stock,
awards of restricted common stock, and the right to receive awards of common stock, which we refer to as “restricted stock
units,” to our non-employee directors. The 2004 Plan expired in March 2008 and was replaced by the 2008 Equity Incentive
Plan. Some awards remain outstanding. Awards granted under the 2004 Plan at the time of its termination will continue in
effect in accordance with their terms. Awards of restricted stock units were fully vested when awarded and will be settled in
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shares of common stock on the earlier of the six-month anniversary of the date on which the director ceases to serve on the
board of directors or certain change in control events. The restricted stock units generally cannot be transferred. Awards are
generally protected against dilution in the event of dividends as well as a spin-off stock distribution, stock split, recapitalization,
or other major corporate restructuring.
Purchases of Equity Securities
The following table summarizes our repurchases of equity securities during the three months ended December 31,
2023:
Period
October 1 through
October 31, 2023
November 1 through
November 30, 2023
December 1 through
December 31, 2023
Total
Total Number of
Shares (or Units)
Purchased(1)
Average Price
Paid per Share
(or Unit) ($)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number (or
Approximate Dollar Value)
of Shares That May Yet Be
Purchased Under the Plans
or Programs(2)
545 $
808
—
1,353 $
64.58
62.76
—
63.49
—
—
—
—
198,053,924
198,053,924
198,053,924
(1) Except as noted in the following sentence, the number of shares reported in this column represents shares tendered by
an employee as payment of the tax liabilities incident to the vesting of previously awarded shares of restricted stock. In
October, 545 shares were purchased pursuant to our Directors’ Deferred Stock Investment Plan. This plan is a
nonqualified deferral plan allowing non-employee directors to make advance elections to defer a fixed percentage of
their director fees. The plan administrator acquires the shares in the open market which are then held in a rabbi trust.
The plan also provides that dividends paid on the shares held for the accounts of the directors will be reinvested in
shares of our common stock which will also be held in the trust. The directors’ rights to all shares in the trust are
nonforfeitable, but the shares are only released to the directors after departure from our board.
(2) On October 28, 2013, we announced our board of directors authorized the repurchase of up to $200 million of our
common stock. On February 14, 2014, our board approved an increase in this common stock repurchase authorization
from $200 million to $250 million. On July 24, 2018, our board approved resetting the aggregate common stock
repurchase authorization to $250 million. The repurchase authorization does not require the repurchase of a specific
number of shares, has an indefinite term, and is subject to termination at any time by our board of directors. Subject to
certain terms and conditions, including a maximum price per share and compliance with federal and state securities
and other laws, the repurchases may be made from time to time in open market transactions, privately negotiated
transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended.
Company Stock Performance
Set forth below is a line graph comparing the total returns of our common stock, the Standard & Poor’s 500 Index
(“S&P 500”), and the S&P Health Care Services Select Industry Index (“SPSIHP”), an equal-weighted index of at least 35
companies in healthcare services that are also part of the S&P Total Market Index and subject to float-adjusted market
capitalization and liquidity requirements. Our compensation committee has in prior years used the SPSIHP as a benchmark for
a portion of the awards under our long-term incentive program. The graph assumes $100 invested on December 31, 2018 in our
common stock and each of the indices. The returns below assume reinvestment of dividends paid on the related common stock.
We have paid a quarterly cash dividend on our common stock since October 2013.
The information contained in the performance graph shall not be deemed “soliciting material” or to be “filed” with the
SEC nor shall such information be deemed incorporated by reference into any future filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such filing.
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The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast,
future performance of our common stock. S&P Global Inc. provided the data for the indices presented below. We assume no
responsibility for the accuracy of the indices’ data, but we are not aware of any reason to doubt its accuracy.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
Among Encompass Health Corporation, the S&P 500 Index, and the S&P Health Care Services Select Industry Index
F
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Company/Index Name
Encompass Health Corporation
S&P 500
SPSIHP
Item 6.
[Reserved]
For the Year Ended December 31,
Base Period
2018
100.00
100.00
100.00
2019
114.26
131.49
119.18
Cumulative Total Return
2022
2021
2020
138.73
155.68
159.48
111.12
200.37
175.42
130.10
164.08
140.90
2023
146.52
207.21
148.19
50
Encompass Health CorporationS&P 500SPSIHP12/31/1812/31/1912/31/2012/31/2112/31/2212/31/23$50$100$150$200$250
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Item 7.
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”)
should be read in conjunction with the accompanying consolidated financial statements and related notes. This MD&A is
designed to provide the reader with information that will assist in understanding our consolidated financial statements, the
changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those
changes, as well as how certain accounting principles affect our consolidated financial statements. See “Cautionary Statement
Regarding Forward-Looking Statements and Summary of Risk Factors” 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.
In addition, management’s discussion and analysis of our results of operations and cash flows for the year ended
December 31, 2022 compared to the year ended December 31, 2021 may be found in Part II, Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended
December 31, 2022, filed with the Securities and Exchange Commission on February 27, 2023.
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 December 31, 2023, we operate 161 inpatient
rehabilitation hospitals. For additional information about our business, see Item 1, Business and Item 1A, Risk Factors, of this
report.
Spin Off of Home Health and Hospice Business
On July 1, 2022, we completed the previously announced separation of our home health and hospice business through
the distribution (the “Spin Off”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc.
(“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record
Date”). The Spin Off was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The Spin Off was structured as a pro rata
distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as
of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result
of the Spin Off, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on
the New York Stock Exchange.
In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as
discontinued operations and, as such, have been excluded from continuing operations for all periods presented. Our presentation
of discontinued operations excludes any allocation of general corporate and overhead costs as well as interest expense. Prior to
July 1, 2022, we operated under two reporting segments. We now operate under a single reporting segment. For additional
information see Note 2, Spin Off of Home Health and Hospice Business, to the consolidated financial statements.
In connection with the Spin Off, on June 30, 2022, we entered into several agreements with Enhabit that govern the
relationship of the parties following the Spin Off, including a Separation and Distribution Agreement, a Transition Services
Agreement, a Tax Matters Agreement and an Employee Matters Agreement. See also Note 2, Spin Off of Home Health and
Hospice Business, to the consolidated financial statements.
2023 Overview
During 2023, Net operating revenues increased 10.4% over 2022 due primarily to volume growth and increased
pricing. See the “Results of Operations” section of this Item for additional information.
We continued our development and expansion efforts in 2023. We:
•
began operating our new 51-bed inpatient rehabilitation hospital and 22-bed hospital-in-hospital satellite in
Knoxville, Tennessee with our joint venture partner Covenant Health in March 2023;
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•
•
•
•
•
•
•
•
•
began operating our new 36-bed inpatient rehabilitation hospital in Eau Claire, Wisconsin with our joint venture
partner Hospital Sisters Health System in March 2023(3);
began operating our new 40-bed inpatient rehabilitation hospital in Owasso, Oklahoma with our joint venture
partner Ascension St. John in March 2023;
began operating our new 50-bed inpatient rehabilitation hospital in Clermont, Florida in April 2023;
began operating our new 60-bed inpatient rehabilitation hospital in Bowie, Maryland in June 2023 (joint venture
partnership with University of Maryland Rehabilitation Institute of Southern Maryland, LLC began in July 2023);
began operating our new 40-bed inpatient rehabilitation hospital in Columbus, Georgia with our joint venture
partner Piedmont Healthcare, Inc. in September 2023;
began operating our new 40-bed inpatient rehabilitation hospital in Prosper, Texas in November 2023;
began operating our new 56-bed inpatient rehabilitation hospital in Fitchburg, Wisconsin in November 2023;
continued our capacity expansions by adding 46 new beds to existing hospitals; and
announced or continued the development of the following hospitals:
2024(2)
Number of New Beds
2025(2)
2026(2)
F
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0
K
-
Kissimmee, Florida
Atlanta, Georgia(1)
Johnston, Rhode Island
Fort Mill, South Carolina
Louisville, Kentucky(1)
Houston, Texas
Daytona Beach, Florida
Fort Myers, Florida(1)
Lake Worth, Florida
Concordville, Pennsylvania
Norristown, Pennsylvania
Wildwood, Florida
Athens, Georgia(1)
St. Petersburg, Florida
Palm Beach Gardens, Florida
Amarillo, Texas
Danbury, Connecticut
50
40
50
39
40
61
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
50
60
50
50
50
50
40
50
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
50
50
40
(1) Expected joint venture
(2) Opening dates are tentative
(3) In January 2024, we received notice that our joint venture partner intends to close its acute-care hospital in which the joint venture inpatient
rehabilitation hospital is located. We closed that joint venture hospital in February and expect to incur a one-time charge of approximately $2-4
million, net of tax and noncontrolling interest, in the first quarter of 2024.
We increased the strength and flexibility of our balance sheet as well as augmented returns from investments in
operations with shareholder distributions via common stock dividends. For additional information, see the “Liquidity and
Capital Resources” section of this Item.
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Business Outlook
We remain 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 76, 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,” give us the ability to adapt and succeed in a healthcare industry facing regulatory
uncertainty around attempts to improve outcomes and reduce costs.
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 prior to 2025. 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 and bed additions. See also Item 1,
Business, “Competitive Strengths” and “Strategy and 2024 Strategic Priorities.”
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.
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” and
Item 1A, Risk Factors, “Reimbursement Risks” and “Other Regulatory Risks” for detailed discussions of the most
important regulations we face and our programs intended to ensure we comply with those regulations.
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Reimbursement claims made by healthcare providers, including inpatient rehabilitation hospitals, are subject to
audit from time to time by governmental payors, such as Centers for Medicare & Medicaid Services (“CMS”) and
state Medicaid programs, their agents, such as the Medicare Administrative Contractors (“MACs”) that act as
fiscal intermediaries for all Medicare billings, other auditors contracted by CMS, and private insurance carriers, as
well as the United States Department of Health and Human Services Office of Inspector General. These audits as
well as the ordinary course claim reviews of our billings result in payment denials, including recoupment of
previously paid claims from current accounts receivable. Healthcare providers can challenge any denials through
an administrative appeals process that can be extremely lengthy, taking up to several years. For additional details
of our claim reviews, see Item 1, Business, “Sources of Revenues,” Item 1A, Risk Factors, “Reimbursement
Risks,” and Note 1, Summary of Significant Accounting Policies, “Net Operating Revenues” and “Accounts
Receivable,” to the accompanying consolidated financial statements.
•
Changes in Medicare Reimbursement and Regulatory Requirements for Operating IRFs. Substantially all of our
business consists of inpatient rehabilitation services. From a payor perspective, our reimbursement and regulatory
risk is concentrated in the Medicare inpatient rehabilitation rules and regulations. We derive approximately 65%
of our Net operating revenues from fee-for-service Medicare.
As part of its annual rulemaking process for various healthcare provider categories, CMS adopts IRF
reimbursement rate changes effective from October through the following September. On July 27, 2023, CMS
released its notice of final rulemaking for fiscal year 2024 for IRFs (the “2024 IRF Rule”) under the inpatient
rehabilitation facility prospective payment system (the “IRF-PPS”). Based on our analysis that utilizes, among
other things, the acuity of our patients annualized over a twelve-month period ended June 30, 2023, our
experience with outlier payments over this same time frame, and other factors, we believe the 2024 IRF Rule will
result in a net increase to our Medicare payment rates of approximately 3.3% effective October 1, 2023.
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Congress also regularly adopts legislation that directly affects Medicare reimbursement. These reimbursement
changes can result in limitations on the increases in and, in some cases, significant roll-backs or reductions in the
levels of payments for IRF services. For example, the Patient Protection and Affordable Care Act (the “ACA”)
enacted in 2010 provided for specific reductions to healthcare providers’ annual reimbursement rate updates and
other payment policy changes. The Budget Control Act of 2011 provides for an automatic 2% reduction, or
“sequestration,” of Medicare program payments for all healthcare providers. Sequestration took effect April 1,
2013 and, as a result of subsequent legislation, will continue through mid-fiscal year 2032 unless Congress and the
President take further action. In response to the public health emergency associated with the COVID-19
pandemic, Congress and the President suspended sequestration through March 31, 2022. Additional Medicare
payment reductions are also possible under the Statutory Pay-As-You-Go Act of 2010 (“Statutory PAYGO”).
Statutory PAYGO requires, among other things, that mandatory spending and revenue legislation not increase the
federal budget deficit over a 5- or 10-year period. The Congressional Budget Office estimated that the American
Rescue Plan Act of 2021 would result in budget deficits necessitating a 4% reduction in Medicare program
payments under the Statutory PAYGO, but subsequent legislation enacted by Congress suspended until 2025 the
Statutory PAYGO reductions that would have gone into effect. There can be no assurance that future federal
rulemaking and legislation will not result in reimbursement freezes or reductions, or reimbursement increases that
are less than the increases we experience in our costs of operation.
In addition to direct changes to Medicare reimbursement rates, other federal regulatory and legislative actions
affect healthcare generally and our business specifically. For example, the ACA also included provisions intended
to promote alternative payment models, such as accountable care organizations (“ACOs”) and bundled payment
initiatives, including the Bundled Payments for Care Improvement Initiative Advanced (“BPCI Advanced”) and
the Comprehensive Care for Joint Replacement (“CJR”) program. Likewise, CMS regulatory proposals can affect
our operations. On December 14, 2020, CMS announced a five-year review choice demonstration for inpatient
rehabilitation services (the “IRF RCD”). The IRF RCD began in Alabama in August 2023. CMS intends to
expand this demonstration to Pennsylvania, Texas, and California but has not yet announced the timing for doing
so. The IRF RCD affects the process in which we submit, and receive reimbursement for, Medicare claims. Under
the IRF RCD, 100% of Medicare reimbursement claims are reviewed for compliance with applicable coverage
and clinical documentation requirements. We elected to participate initially in the pre-claim review option under
IRF RCD. The pre-claim review request with required documentation must be submitted and reviewed before the
final claim is submitted for payment. If a certain percentage of the claims reviewed are found to be valid, the IRF
may then opt out of the 100% review. That percentage will initially be 80% or greater for the first six-month
period and eventually increases to 90% or greater in subsequent review cycles. 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
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random sample. As of year end 2023, we cannot be certain our claim validation rate will continue to exceed the
required percentage for each review cycle, nor can we predict the impact, if any, the IRF RCD may have on our
volumes or the collectability of our Medicare claims over its five-year term.
For additional discussion of changes to Medicare reimbursement, including the 2023 IRF Rule and Statutory
PAYGO, and other proposed and adopted legislative and regulatory actions, including alternative payment models
and the IRF RCD, that may be material to our business, see Item 1, Business, and Item 1A, Risk Factors,
“Reimbursement Risks” and “Other Regulatory Risks.”
Concerns held by federal policymakers about the federal deficit, national debt levels, and the solvency of the
Medicare trust fund, as well as other healthcare policy priorities, could result in enactment of further federal
spending reductions, further entitlement reform legislation affecting the Medicare program, and further reductions
to provider payments. We cannot predict what, if any, changes in Medicare spending or modifications to the
healthcare laws and regulations will result from future budget or other legislative or regulatory initiatives.
As discussed in Item 1, Business, healthcare will almost certainly be the subject of significant regulatory and
legislative changes regardless of party in control of the executive and legislative branches of state and federal
governments. We will continue to evaluate these laws and regulations and position the Company for this industry
shift. Based on our track record, we believe we can adapt to regulatory and industry changes. Further, we have
engaged, and will continue to engage, actively in discussions with key legislators and regulators to attempt to
ensure any healthcare laws or regulations adopted or amended promote our goal of high-quality, cost-effective
care.
• 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, 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:
Medicare
Medicare Advantage
Managed care
Medicaid
Other third-party payors
Workers' compensation
Patients
Other income
Total
For the Year Ended December 31,
2023
2022
2021
65.0 %
16.2 %
11.1 %
4.0 %
0.9 %
0.5 %
0.3 %
2.0 %
65.3 %
15.1 %
11.6 %
4.2 %
0.9 %
0.6 %
0.4 %
1.9 %
64.4 %
15.2 %
12.1 %
4.1 %
1.1 %
0.6 %
0.5 %
2.0 %
100.0 %
100.0 %
100.0 %
Our payor mix is weighted heavily towards Medicare. We receive Medicare reimbursements under the IRF-PPS. For
additional information regarding Medicare reimbursement, see the “Sources of Revenues” section of Item 1, Business.
As part of the Balanced Budget Act of 1997, Congress created a program of private, managed healthcare coverage for
Medicare beneficiaries. This program has been referred to as Medicare Part C, or “Medicare Advantage.” The program offers
beneficiaries a range of Medicare coverage options by providing a choice between the traditional fee-for-service program
(under Medicare Parts A and B) or enrollment in a health maintenance organization, preferred provider organization, point-of-
service plan, provider sponsor organization, or an insurance plan operated in conjunction with a medical savings account.
Our Net operating revenues consist primarily of revenues derived from patient care services. Net operating revenues
also include other revenues generated from management and administrative fees and other non-patient care services. These
other revenues are included in “other income” in the above table.
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Our Results
Our consolidated results of operations were as follows:
Net operating revenues
Operating expenses:
Salaries and benefits
Other operating expenses
Occupancy costs
Supplies
General and administrative expenses
Depreciation and amortization
Total operating expenses
Loss on early extinguishment of debt
Interest expense and amortization of debt discounts and
fees
Other (income) expense
Equity in net income of nonconsolidated affiliates
Income from continuing operations before income tax
expense
Provision for income tax expense
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Less: Net income attributable to noncontrolling interests
included in continuing operations
Less: Net income attributable to noncontrolling interests
included in discontinued operations
Less: Net and comprehensive income attributable to
noncontrolling interests
Net income attributable to Encompass Health
For the Year Ended December 31,
2023
2022
2021
(In Millions)
Percentage Change
2023 vs.
2022
2022 vs.
2021
$ 4,801.2 $ 4,348.6 $ 4,014.9
10.4 %
8.3 %
2,600.1
2,393.3
2,127.3
719.1
56.3
218.3
201.7
273.9
670.4
54.7
202.1
154.3
243.6
595.9
59.0
184.2
169.5
219.6
4,069.4
—
3,718.4
1.4
3,355.5
1.0
8.6 %
7.3 %
2.9 %
8.0 %
30.7 %
12.4 %
9.4 %
(100.0) %
12.5 %
12.5 %
(7.3) %
9.7 %
(9.0) %
10.9 %
10.8 %
40.0 %
143.5
(15.7)
(3.2)
607.2
132.2
475.0
(12.0)
463.0
175.7
164.3
(18.3) %
6.9 %
5.2
(2.9)
(7.5)
(3.4)
(401.9) %
(169.3) %
10.3 %
(14.7) %
450.8
100.1
350.7
15.2
365.9
505.0
101.9
403.1
114.1
517.2
34.7 %
32.1 %
35.4 %
(178.9) %
26.5 %
(10.7) %
(1.8) %
(13.0) %
(86.7) %
(29.3) %
(111.0)
(93.6)
(103.2)
18.6 %
(9.3) %
—
(1.3)
(1.8)
(100.0) %
(27.8) %
(111.0)
(94.9)
(105.0)
$
352.0 $
271.0 $
412.2
17.0 %
29.9 %
(9.6) %
(34.3) %
Operating Expenses as a % of Net Operating Revenues
Operating expenses:
Salaries and benefits
Other operating expenses
Occupancy costs
Supplies
General and administrative expenses
Depreciation and amortization
Total operating expenses
For the Year Ended December 31,
2023
2022
2021
54.2 %
15.0 %
1.2 %
4.5 %
4.2 %
5.7 %
55.0 %
15.4 %
1.3 %
4.6 %
3.5 %
5.6 %
53.0 %
14.8 %
1.5 %
4.6 %
4.2 %
5.5 %
84.8 %
85.5 %
83.6 %
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Additional information regarding our operating results is as follows:
For the Year Ended December 31,
Percentage Change
2023
2022
2021
(In Millions, Except Percentage Change)
2023 vs.
2022
Net operating revenues:
Inpatient
Outpatient and other
Net operating revenues
$
4,693.8
$
4,251.6
$
3,918.0
107.4
97.0
96.9
$
4,801.2
$
4,348.6
$
4,014.9
(Actual Amounts)
Discharges
229,480
211,116
197,639
Net patient revenue per discharge
$
20,454
$
20,139
$
19,824
Outpatient visits
Average length of stay (days)
Occupancy %
# of licensed beds
Occupied beds
Full-time equivalents (FTEs) - internal
Contract labor FTEs
Total FTEs*
Employees per occupied bed
120,835
138,644
161,070
12.4
72.1 %
10,778
7,771
25,850
425
26,275
3.38
12.7
70.9 %
10,356
7,342
24,080
547
24,627
3.35
12.8
70.0 %
9,924
6,947
22,834
359
23,193
3.34
10.4 %
10.7 %
10.4 %
8.7 %
1.6 %
(12.8) %
(2.4) %
1.7 %
4.1 %
5.8 %
7.4 %
(22.3) %
6.7 %
0.9 %
2022 vs.
2021
8.5 %
0.1 %
8.3 %
6.8 %
1.6 %
(13.9) %
(0.8) %
1.3 %
4.4 %
5.7 %
5.5 %
52.4 %
6.2 %
0.3 %
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* FTEs included in the above table represent our employees who participate in or support the operations of our
hospitals and include FTEs related to contract labor.
We actively manage the productive portion of our Salaries and benefits utilizing certain metrics, including employees
per occupied bed, or “EPOB.” This metric is determined by dividing the number of full-time equivalents, including full-time
equivalents from the utilization of contract labor, by the number of occupied beds during each period.
In the discussion that follows, we use “same-store” comparisons to explain the changes in certain performance metrics
and line items within our financial statements. We calculate same-store comparisons based on hospitals open throughout both
the full current period and prior periods presented. These comparisons include the financial results of market consolidation
transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on
our results of operations.
2023 Compared to 2022
Net Operating Revenues
Our consolidated Net operating revenues increased during 2023 compared to 2022 primarily due to increased volumes
and favorable pricing. Discharge growth included a 4.8% increase in same-store discharges. Discharge growth from new stores
during 2023 compared to 2022 resulted from our joint ventures in Shiloh, Illinois (February 2022), Cape Coral, Florida (June
2022), Moline, Illinois (August 2022), Grand Forks, North Dakota (August 2022), Naples, Florida (September 2022),
Knoxville, Tennessee (March 2023), Eau Claire, Wisconsin (March 2023), Owasso, Oklahoma (March 2023), Bowie, Maryland
(June 2023), and Columbus Georgia (September 2023), as well as wholly owned hospitals in St. Augustine, Florida (March
2022), Libertyville, Illinois (March 2022), Lakeland, Florida (May 2022), Jacksonville, Florida (June 2022), and Clermont,
Florida (April 2023).
Growth in net patient revenue per discharge in 2023 compared to 2022 primarily resulted from an increase in
reimbursement rates partially offset by an increase in revenue reserves, the resumption of sequestration on April 1, 2022 and the
change in patient mix. Revenue reserves increased during 2023 compared to 2022 as a result of an approximate $22 million
reserve recorded in the fourth quarter of 2023 related to appeals pending before the Departmental Appeals Board and various
federal district courts. For additional details on this reserve, see Item 1A, Risk Factors, “Reimbursement Risks,” and Note 1,
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Summary of Significant Accounting Policies, “Net Operating Revenues,” to the accompanying consolidated financial
statements.
Salaries and Benefits
Salaries and benefits are the most significant cost to us and represent an investment in our most important asset: our
employees. Salaries and benefits include all amounts paid to full- and part-time employees who directly participate in or
support the operations of our hospitals, including all related costs of benefits provided to employees. It also includes amounts
paid for contract labor.
Salaries and benefits increased in 2023 compared to 2022 primarily due to salary and benefit cost increases for our
employees and increased patient volumes, including an increase in the number of FTEs as a result of our development activities.
Salaries and benefits decreased as a percent of Net operating revenues during 2023 compared to 2022 primarily due to
decreases in both contract labor and sign-on and shift bonuses partially offset by the increase in revenue reserves discussed
above. Total contract labor and sign-on and shift bonuses were $137.0 million in 2023 as compared to $204.3 million in 2022.
Other Operating Expenses
Other operating expenses include costs associated with managing and maintaining our hospitals. These expenses
include such items as contract services, non-income related taxes, professional fees, utilities, insurance, and repairs and
maintenance.
Other operating expenses increased during 2023 compared 2022 primarily due to increased provider taxes of
approximately $15 million and higher costs resulting from our development activities. Other operating expenses decreased as a
percent of Net operating revenues during 2023 compared to 2022 primarily due to higher volumes.
Supplies
Supplies expense includes all costs associated with supplies used while providing patient care. Specifically, these costs
include personal protective equipment (“PPE”), pharmaceuticals, food, syringes, bandages, and other similar items.
Supplies increased during 2023 compared to 2022 primarily due to higher costs for food and medical supplies.
General and Administrative Expenses
General and administrative expenses primarily include administrative expenses such as information technology
services, human resources, corporate accounting, legal services, and internal audit and controls that are managed from our home
office in Birmingham, Alabama. These expenses also include stock-based compensation expenses.
General and administrative expenses increased in terms of dollars and as a percent of Net operating revenues during
2023 compared to 2022 primarily due to higher incentive compensation costs and the mark-to-market adjustments on our non-
qualified deferred compensation plan.
Depreciation and Amortization
Depreciation and amortization increased during 2023 compared to 2022 due to our capital investments throughout
2022 and 2023. Depreciation and amortization in 2023 included $6.1 million related to the accelerated amortization of the
remaining carrying value of certificate of need (“CON”) assets in South Carolina. In May 2023, the governor of South Carolina
signed into law S.164, which repealed the requirement of certain healthcare providers to obtain and/or maintain a CON.
See “Executive Overview” section of this Item for information related to our development activity. We expect
Depreciation and amortization to increase going forward as a result of our recent and ongoing capital investments.
Interest Expense and Amortization of Debt Discounts and Fees
The decrease in Interest expense and amortization of debt discounts and fees in 2023 compared to 2022 primarily
resulted from the $20.5 million consent solicitation fee paid to bond holders in June 2022 related to the Spin Off of Enhabit,
lower interest rate on our revolving credit facility, and the extinguishment of the term loan facilities in June 2022. Cash paid for
interest approximated $148 million and $178 million in 2023 and 2022, respectively. For additional information, see Note 10,
Long-term Debt, to the accompanying consolidated financial statements.
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Provision for Income Tax Expense
Our Provision for income tax expense increased in 2023 compared to 2022 primarily due to higher Income from
continuing operations before income tax expense.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) included provisions relating to
net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction
limitations, technical corrections to tax depreciation methods for qualified improvement property, and deferral of employer
payroll taxes. The CARES Act did not materially impact our effective tax rate for the year ended December 31, 2023 and 2022,
although it impacted the timing of cash payments for taxes.
Our cash payments for income taxes approximated $107 million and $50 million, net of refunds, in 2023 and 2022,
respectively. These payments were based on estimates of taxable income. We estimate we will pay approximately $145 million
to $165 million of cash income taxes, net of refunds, in 2024. These payments are expected to primarily result from federal and
state income tax expenses based on estimates of taxable income for 2024. In 2023 and 2022, current income tax expense was
$128.3 million and $72.2 million, respectively.
In certain jurisdictions, we do not expect to generate sufficient income to use all of the available state net operating
losses and foreign tax credits prior to their expiration. This determination is based on our evaluation of all available evidence in
these jurisdictions including results of operations during the preceding three years, our forecast of future earnings, and prudent
tax planning strategies. It is possible we may be required to increase or decrease our valuation allowance at some future time if
our forecast of future earnings varies from actual results on a consolidated basis or in the applicable tax jurisdiction, if the
timing of future tax deductions differs from our expectations, or pursuant to changes in state and foreign tax laws and rates.
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See Note 16, Income Taxes, to the accompanying consolidated financial statements and the “Critical Accounting
Estimates” section of this Item.
Net Income Attributable to Noncontrolling Interests
The increase in Net income attributable to noncontrolling interests during 2023 compared to 2022 resulted from
increased profitability from certain existing joint venture hospitals partially offset by the ramp up of new joint venture de novo
locations and a $2.2 million reduction to Net income attributable to noncontrolling interests related to the accelerated
amortization of the remaining carrying value of our CON assets in South Carolina (discussed above). See the “Executive
Overview” section of this Item for additional information on our joint venture de novo locations.
Impact of Inflation
The impact of inflation on the Company will be primarily in the area of labor costs. The healthcare industry is labor
intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace.
There can be no guarantee we will not experience increases in the cost of labor, as the need for clinical healthcare professionals
is expected to grow. In addition, increases in healthcare costs are typically higher than inflation and impact our costs under our
employee benefit plans. Managing these costs remains a significant challenge and priority for us.
Suppliers pass along rising costs to us in the form of higher prices. For example, we experienced higher prices for our
medical supplies (including PPE) and food as a result of the COVID-19 pandemic, and we continue to experience higher costs
in the recent inflationary environment. Our supply chain efforts and our continual focus on monitoring and actively managing
medical supplies and pharmaceutical costs have enabled us to accommodate increased pricing related to supplies and other
operating expenses over the past few years. However, we cannot predict our ability to cover future cost increases including
increase in the cost of PPE.
It should be noted that we have little or no ability to pass on these increased costs associated with providing services to
Medicare and Medicaid patients due to federal and state laws that establish fixed reimbursement rates.
See Item 1A, Risk Factors, for additional information.
Relationships and Transactions with Related Parties
Related party transactions were not material to our operations in 2023, 2022, or 2021, and therefore, are not presented
as a separate discussion within this Item.
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Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving
credit facility.
The objectives of our capital structure strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing
and achieving those objectives allow us to support the execution of our operating and strategic plans and weather temporary
disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our
unrestricted Cash and cash equivalents and our available borrowing capacity. Maintaining flexibility in our capital structure is a
function of, among other things, the amount of debt maturities in any given year, the options for debt prepayments without
onerous penalties, and limiting restrictive terms and maintenance covenants in our debt agreements.
We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to
2025. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and
we have significant availability under our revolving credit facility. We continue to generate strong cash flows from operations,
and we have significant flexibility with how we choose to invest our cash and return capital to shareholders.
See Note 10, Long-term Debt, to the accompanying consolidated financial statements, for additional information.
Current Liquidity
As of December 31, 2023, we had $69.1 million in Cash and cash equivalents. This amount excludes $35.1 million in
Restricted cash and $126.2 million of restricted marketable securities ($37.6 million included in Other current assets and $88.6
million included in Other long-term assets in our consolidated balance sheet). Our restricted assets pertain primarily to
obligations associated with our captive insurance company, as well as obligations we have under agreements with joint venture
partners. See Note 5, Cash and Marketable Securities, to the accompanying consolidated financial statements.
In addition to Cash and cash equivalents, as of December 31, 2023, we had approximately $968 million available to us
under our revolving credit facility. Our credit agreement governs the substantial majority of our senior secured borrowing
capacity and contains a leverage ratio and an interest coverage ratio as financial covenants. Our leverage ratio is defined in our
credit agreement as the ratio of consolidated total debt (less cash on hand) to Adjusted EBITDA for the trailing four quarters. In
calculating the leverage ratio under our credit agreement, we are permitted to use pro forma Adjusted EBITDA, the calculation
of which includes historical income statement items and pro forma adjustments, subject to certain limitations, resulting from (1)
dispositions and repayments or incurrence of debt and (2) investments, acquisitions, mergers, amalgamations, consolidations
and other operational changes to the extent such items or effects are not yet reflected in our trailing four-quarter financial
statements. Our interest coverage ratio is defined in our credit agreement as the ratio of Adjusted EBITDA to consolidated
interest expense, excluding the amortization of financing fees, for the trailing four quarters. As of December 31, 2023, the
maximum leverage ratio requirement per our credit agreement was 4.75x and the minimum interest coverage ratio requirement
was 3.0x, and we were in compliance with these covenants. Based on Adjusted EBITDA for 2023 and the interest rate in effect
under our credit agreement during the three-month period ended December 31, 2023, if we had drawn on the first day and
maintained the maximum amount of outstanding draws under our revolving credit facility for the entire year, we would still be
in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements.
On February 21, 2024, Change Healthcare, a subsidiary of UnitedHealth Group that acts as an intermediary for
processing our payment claims for all payors, notified us of a cybersecurity incident. In response to the incident, both we and
Change Healthcare severed those business service connections between our systems and Change Healthcare’s. The Change
Healthcare incident has not affected our operations, except our ability to submit payment claims. In the event the Change
Healthcare service is not restored in a timely fashion, we may experience payment collection delays as we turn to alternative
channels to submit claims. As of the date hereof, the incident has affected six business days of billings and could, depending on
the timing of Change Healthcare restoring its service or our full implementation of alternative claims submission arrangements,
result in an increase in our patient accounts receivable balances and a decrease in our Net cash provided by operating activities
in the first quarter of 2024. We would expect to fund any increase in working capital resulting from the billing and payment
disruption through cash on hand and draws on our revolving credit facility, which had an available balance of approximately
$968 million as of the date hereof.
We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until
2027, and our bonds all mature in 2025 and beyond. See the “Contractual Obligations” section below for information related to
our contractual obligations as of December 31, 2023.
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We anticipate we will continue to generate strong cash flows from operations that, together with availability under our
revolving credit facility, will allow us to invest in growth opportunities and continue to improve our existing business. We also
will continue to consider additional shareholder value-enhancing strategies such as repurchases of our common stock and
distribution of common stock dividends, including the potential growth of the quarterly cash dividend on our common stock,
recognizing that these actions may increase our leverage ratio. See also the “Authorizations for Returning Capital to
Stakeholders” section of this Item.
See Item 1A, Risk Factors, for a discussion of risks and uncertainties facing us.
Sources and Uses of Cash
The following table shows the cash flows provided by or used in operating, investing, and financing activities of
continuing operations (in millions):
For the Year Ended December 31,
2023
2022
2021
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
$
866.8 $
653.5 $
(602.8)
(197.2)
(623.5)
(660.8)
(630.8) $
564.7
(547.1)
(229.9)
(212.3)
F
O
R
M
1
0
K
-
Increase (decrease) in cash, cash equivalents, and restricted cash
$
66.8 $
2023 Compared to 2022
Operating activities. The increase in Net cash provided by operating activities of continuing operations during 2023
compared to 2022 primarily resulted from an increase in Net income which was driven by growth in Net operating revenues,
and an increase in payroll accruals.
Investing activities. The decrease in Net cash used in investing activities of continuing operations during 2023
compared to 2022 primarily resulted from decreased purchases of restricted investments.
Financing activities. The decrease in Net cash used in financing activities of continuing operations during 2023
compared to 2022 primarily resulted from a decrease in net debt payments and dividends paid on common stock. Net debt
payments in 2022 included the full repayment of both the $250 million outstanding balance of the revolving credit facility and
approximately $236 million of the term loan as part of the Spin Off. See Note 10, Long-term Debt, to the accompanying
consolidated financial statements, for additional information related to our debt, and the “Authorizations for Returning Capital
to Stakeholders” section of this Item for additional information related to our dividends.
Contractual Obligations
Our consolidated contractual obligations as of December 31, 2023 are as follows (in millions):
Total
Current
Long-term
$
2,372.5 $
3.2 $
2,369.3
578.8
505.1
300.2
146.3
117.9
46.3
37.0
40.3
460.9
458.8
263.2
106.0
$
3,902.9 $
244.7 $
3,658.2
Long-term debt, excluding finance lease obligations (a)
Interest on long-term debt (b)
Finance lease obligations (c)
Operating lease obligations (d)
Purchase obligations (e)
Total
(a)
(b)
Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further
explained in Note 10, Long-term Debt, to the accompanying consolidated financial statements.
Interest on our fixed rate debt is presented using the stated interest rate. Interest pertaining to our bonds is included to their
respective ultimate maturity dates. Interest related to finance lease obligations is excluded from this line (see Note 8, Leases, and
Note 10, Long-term Debt, to the accompanying consolidated financial statements). Amounts exclude amortization of debt discounts,
amortization of loan fees, or fees for lines of credit that would be included in interest expense in our consolidated statements of
comprehensive income.
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(c) Amounts include interest portion of future minimum finance lease payments.
(d) We lease approximately 9% of our hospitals as well as other property and equipment under operating leases in the normal course of
business. Amounts include interest portion of future minimum operating lease payments. For more information, see Note 8, Leases,
to the accompanying consolidated financial statements.
(e)
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Encompass
Health and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable
price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable
without penalty. Our purchase obligations primarily relate to software licensing and support and medical equipment. Purchase
obligations are not recognized in our consolidated balance sheet.
Our capital expenditures include costs associated with our hospital renovation program, de novo projects, capacity
expansions, technology initiatives, and building and equipment upgrades and purchases. During the year ended December 31,
2023, we made capital expenditures of approximately $583 million for property, equipment, and intangible assets. During 2024,
we expect to spend approximately $580 million to $610 million for capital expenditures using cash on hand and borrowings
under our revolving credit facility. Approximately $185 million to $195 million of this budgeted amount is considered
nondiscretionary expenditures, which we may refer to in other filings as “maintenance” expenditures. Actual amounts spent will
be dependent upon the timing of development projects.
Authorizations for Returning Capital to Stakeholders
In October 2022, February 2023, May 2023, July 2023, and October 2023, our board of directors declared cash
dividends of $0.15 per share that were paid in January 2023, April 2023, July 2023, October 2023, and January 2024,
respectively. We expect quarterly dividends to be paid in January, April, July, and October. However, the actual declaration of
any future cash dividends, and the setting of record and payment dates as well as the per share amounts, will be at the discretion
of our board of directors after consideration of various factors, including our capital position and alternative uses of funds. Cash
dividends are expected to be funded using cash flows from operations, cash on hand, and availability under our revolving credit
facility.
The terms of our credit agreement allow us to declare and pay cash dividends on our common stock so long as: (1) we
are not in default under our credit agreement, and (2) either (a) our senior secured leverage ratio (as defined in our credit
agreement) remains less than or equal to 2x and our leverage ratio (as defined in our credit agreement) remains less than or
equal to 4.50x or (b) our leverage ratio remains in compliance with the leverage ratio covenant and there is capacity under the
Available Amount as defined in the credit agreement. The terms of our Senior Notes (defined below) indenture allow us to
declare and pay cash dividends on our common stock so long as (1) we are not in default, (2) the consolidated coverage ratio (as
defined in the indenture) exceeds 2x or we are otherwise allowed under the indenture to incur debt, and (3) we have capacity
under the indenture’s restricted payments covenant to declare and pay dividends. See Note 10, Long-term Debt, to the
accompanying consolidated financial statements.
On July 24, 2018, our board approved resetting the aggregate common stock repurchase authorization to $250 million.
As of December 31, 2023, approximately $198 million remained under this authorization. The repurchase authorization does
not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our
board of directors. Subject to certain terms and conditions, including a maximum price per share and compliance with federal
and state securities and other laws, the repurchases may be made from time to time in open market transactions, privately
negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under
the Securities Exchange Act of 1934, as amended.
Supplemental Guarantor Financial Information
Our indebtedness under our credit agreement and the the 5.75% Senior Notes due 2025, 4.50% Senior Notes due 2028,
4.75% Senior Notes due 2030, and 4.625% Senior Notes due 2031, (collectively, the “Senior Notes”) are guaranteed by certain
consolidated subsidiaries. These guarantees are full and unconditional and joint and several, subject to certain customary
conditions for release. The Senior Notes are guaranteed on a senior, unsecured basis by all of our existing and future
subsidiaries that guarantee borrowings under our credit agreement and other capital markets debt. The other subsidiaries of
Encompass Health do not guarantee the Senior Notes (such subsidiaries are referred to as the “non-guarantor subsidiaries”).
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Summarized financial information is presented below for Encompass Health, the parent company, and the subsidiary
guarantors on a combined basis after elimination of intercompany transactions and balances among Encompass Health and the
subsidiary guarantors and does not include investments in and equity in the earnings of non-guarantor subsidiaries.
Net operating revenues
Intercompany revenues generated from non-guarantor subsidiaries
Total net operating revenues
Operating expenses
Intercompany expenses incurred in transactions with non-guarantor subsidiaries
Total operating expenses
Income from continuing operations
Net income
Net income attributable to Encompass Health
Total current assets
Property and equipment, net
Goodwill
Intercompany receivable due from non-guarantor subsidiaries
Other noncurrent assets
Total noncurrent assets
Total current liabilities
Long-term debt, net of current portion
Other noncurrent liabilities
Total noncurrent liabilities
Adjusted EBITDA
For the Year Ended
December 31, 2023
(In Millions)
$
$
$
$
$
$
$
3,034.3
91.3
3,125.6
2,660.7
33.6
2,694.3
219.7
207.7
207.7
F
O
R
M
1
0
K
-
As of December 31,
2023
(In Millions)
$
$
$
$
$
$
562.2
2,219.0
902.6
193.8
468.7
3,784.1
496.1
2,604.7
339.5
2,944.2
Management believes Adjusted EBITDA as defined in our credit agreement is a measure of our ability to service our
debt and our ability to make capital expenditures. We reconcile Adjusted EBITDA to Net cash provided by operating activities
and to Net income.
We use Adjusted EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on a
consolidated basis is important in analyzing our liquidity because it is the key component of certain material covenants
contained within our credit agreement, which is discussed in more detail in Note 10, Long-term Debt, to the accompanying
consolidated financial statements. These covenants are material terms of the credit agreement. Noncompliance with these
financial covenants under our credit agreement—our interest coverage ratio and our leverage ratio—could result in our lenders
requiring us to immediately repay all amounts borrowed. If we anticipated a potential covenant violation, we would seek relief
from our lenders, which would have some cost to us, and such relief might be on terms less favorable to us than those in our
existing credit agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under our credit
agreement from engaging in certain activities, such as incurring additional indebtedness, paying common stock dividends,
making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to our assessment
of our liquidity.
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In general terms, the credit agreement definition of Adjusted EBITDA, therein referred to as “Adjusted Consolidated
EBITDA,” allows us to add back to consolidated Net income interest expense, income taxes, and depreciation and amortization
and then add back to consolidated Net income (1) all unusual or nonrecurring items reducing consolidated Net income (of which
only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations, (3) non-ordinary
course fees, costs and expenses incurred with respect to any litigation or settlement, (4) share-based compensation expense, (5)
costs and expenses associated with changes in the fair value of marketable securities, (6) costs and expenses associated with the
issuance or prepayment of debt, and acquisitions, and (7) any restructuring charges and certain pro forma cost savings and
synergies related to transactions and initiatives, which in the aggregate are not in excess of 25% of Adjusted Consolidated
EBITDA. We also subtract from consolidated Net income all unusual or nonrecurring items to the extent they increase
consolidated Net income.
Under the credit agreement, the Adjusted EBITDA calculation does not require us to deduct net income attributable to
noncontrolling interests or gains on fair value adjustments of hedging and equity instruments, disposal of assets, and
development activities. It also does not allow us to add back losses on fair value adjustments of hedging instruments or unusual
or nonrecurring cash expenditures in excess of $10 million. These items and amounts, in addition to the items falling within the
credit agreement’s “unusual or nonrecurring” classification, may occur in future periods, but can vary significantly from period
to period and may not directly relate to, or be indicative of, our ongoing liquidity or operating performance. Accordingly, the
Adjusted EBITDA calculation presented here includes adjustments for them.
Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles in the
United States of America, and the items excluded from Adjusted EBITDA are significant components in understanding and
assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for Net income or cash
flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in
accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be
comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the
policies and procedures described in Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated
financial statements.
Our Adjusted EBITDA was as follows (in millions):
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
For the Year Ended December 31,
2023
2022
2021
Net cash provided by operating activities
$
850.8 $
705.8 $
143.5
4.6
3.2
(111.0)
(9.5)
(1.6)
128.3
(50.3)
16.0
(2.2)
(0.7)
175.7
(15.5)
2.9
(93.6)
(9.7)
(4.0)
72.2
30.4
(52.3)
—
7.4
715.8
164.3
3.8
3.4
(103.2)
(7.8)
(2.6)
84.5
109.9
(151.1)
—
(0.6)
$
971.1 $
819.3 $
816.4
Interest expense and amortization of debt discounts and fees
Gain (loss) on sale of investments, excluding impairments
Equity in net income of nonconsolidated affiliates
Net income attributable to noncontrolling interests in continuing operations
Amortization of debt-related items
Distributions from nonconsolidated affiliates
Current portion of income tax expense
Change in assets and liabilities
Cash used in (provided by) operating activities of discontinued operations
State regulatory change impact on noncontrolling interests
Change in fair market value of equity securities
Adjusted EBITDA
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Reconciliation of Net Income to Adjusted EBITDA
Net income
Loss (income) from discontinued operations, net of tax, attributable to
Encompass Health
Net income attributable to noncontrolling interests included in continuing
operations
Provision for income tax expense
Interest expense and amortization of debt discounts and fees
Loss on early extinguishment of debt
Loss on disposal or impairment of assets
Depreciation and amortization
Stock-based compensation
State regulatory change impact on noncontrolling interests
Change in fair market value of equity securities
Adjusted EBITDA
For the Year Ended December 31,
2023
2022
2021
$
463.0 $
365.9 $
517.2
12.0
(15.2)
(114.1)
(111.0)
132.2
143.5
—
9.8
273.9
50.6
(2.2)
(93.6)
100.1
175.7
1.4
4.8
243.6
29.2
—
(0.7)
971.1 $
7.4
819.3 $
$
(103.2)
101.9
164.3
1.0
1.2
219.6
29.1
—
(0.6)
816.4
F
O
R
M
1
0
K
-
For additional information see the “Results of Operations” section of this Item.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of
our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect
the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates,
and judgments on historical experience, current trends, and other factors we believe to be relevant at the time we prepared our
consolidated financial statements. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments
to ensure our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future
events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and
such differences could be material.
Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, to the
accompanying consolidated financial statements. We believe the following accounting estimates are the most critical to aid in
fully understanding and evaluating our reported financial results, as they require our most difficult, subjective, or complex
judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have
reviewed these critical accounting estimates and related disclosures with the audit committee of our board of directors.
Revenue Recognition
We recognize net operating revenue in the reporting period in which we perform the service based on our best estimate
of the transaction price for the type of service provided to the patient. Our estimate of the transaction price includes estimates of
price concessions for such items as contractual allowances (principally for patients covered by Medicare, Medicare Advantage,
Medicaid, and other third-party payors), potential adjustments that may arise from payment and other reviews, and uncollectible
amounts. See Note 1, Summary of Significant Accounting Policies, “Net Operating Revenues,” to the accompanying
consolidated financial statements of this report for a complete discussion of our revenue recognition policies.
Our patient accounting systems calculate contractual allowances on a patient-by-patient basis based on the rates in
effect for each primary third-party payor. Certain other factors that are considered and could influence the estimated transaction
price are assumed to remain consistent with the experience for patients discharged in similar time periods for the same payor
classes, and additional adjustments are provided to account for these factors.
Management continually reviews the revenue transaction price estimation process to consider and incorporate updates
to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and
renewals. In addition, laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses
that could be material.
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Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-
party payors, which are often subject to interpretation and review, we may receive reimbursement for healthcare services
authorized and provided that is different from our estimates, and such differences could be material. However, we continually
review the amounts actually collected in subsequent periods in order to determine the amounts by which our estimates differed.
Historically, such differences have not been material from either a quantitative or qualitative perspective.
The collection of outstanding receivables from third-party payors and patients is our primary source of cash and is
critical to our operating performance. Our primary collection risks relate to patient responsibility amounts and claims reviews
conducted by MACs or other contractors.
The table below shows a summary of our net accounts receivable balances as of December 31, 2023 and 2022.
Information on the concentration of total patient accounts receivable by payor class can be found in Note 1, Summary of
Significant Accounting Policies, “Accounts Receivable,” to the accompanying consolidated financial statements.
Current:
0 - 30 Days
31 - 60 Days
61 - 90 Days
91 - 120 Days
120 + Days
Patient accounts receivable
Other accounts receivable
Noncurrent patient accounts receivable
Accounts receivable
As of December 31,
2023
2022
(In Millions)
$
444.5 $
66.5
23.9
14.1
50.8
599.8
11.8
611.6
20.9
$
632.5 $
381.9
48.0
22.0
16.3
56.6
524.8
12.0
536.8
73.3
610.1
Changes in general economic conditions (such as increased unemployment rates or periods of recession), business
office operations, payor mix, or trends in federal or state governmental and private employer healthcare coverage could affect
our collection of accounts receivable. Our collection risks include patient accounts for which the primary insurance carrier has
paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and co-payments)
remain outstanding, pre-payment claim reviews by our respective MACs, and reimbursement claims audits by governmental or
other payors and their agents. As of December 31, 2023 and 2022, $21.0 million and $73.6 million, respectively, of our patient
accounts receivable represented denials that were under review or audit. If actual results are not consistent with our assumptions
and judgments, we may be exposed to gains or losses that could be material. See Note 1, Summary of Significant Accounting
Policies, “Net Operating Revenues” and “Accounts Receivable,” to the accompanying consolidated financial statements of this
report.
Self-Insured Risks
We are self-insured for certain losses related to professional liability, general liability, and workers’ compensation
risks. Although we obtain third-party insurance coverage to limit our exposure to these claims, a substantial portion of our
professional liability, general liability, and workers’ compensation risks are insured through a wholly owned insurance
subsidiary. See Note 11, Self-Insured Risks, to the accompanying consolidated financial statements for a more complete
discussion of our self-insured risks.
Our self-insured liabilities contain uncertainties because management must make assumptions and apply judgment to
estimate the ultimate cost of reported claims and claims incurred but not reported as of the balance sheet date. Our reserves and
provisions for professional liability, general liability, and workers’ compensation risks are based largely upon semi-annual
actuarial calculations prepared by third-party actuaries.
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Periodically, we review our assumptions and the valuations provided by third-party actuaries to determine the
adequacy of our self-insurance reserves. The following are certain of the key assumptions and other factors that significantly
influence our estimate of self-insurance reserves: historical claims experience; trending of loss development factors; trends in
the frequency and severity of claims; coverage limits of third-party insurance; demographic information; statistical confidence
levels; medical cost inflation; payroll dollars; and hospital patient census.
The time period to resolve claims can vary depending upon the jurisdiction, the nature, and the form of resolution of
the claims. The estimation of the timing of payments beyond a year can vary significantly. In addition, if current and future
claims differ from historical trends, our estimated reserves for self-insured claims may be significantly affected. Our self-
insurance reserves are not discounted.
Given the number of factors used to establish our self-insurance reserves, we believe there is limited benefit to
isolating any individual assumption or parameter from the detailed computational process and calculating the impact of
changing that single item. Instead, we believe the sensitivity in our reserve estimates is best illustrated by changes in the
statistical confidence level used in the computations. Using a higher statistical confidence level increases the estimated self-
insurance reserves. The following table shows the sensitivity of our recorded self-insurance reserves to the statistical confidence
level (in millions):
Net self-insurance reserves as of December 31, 2023:
As reported, with 50% statistical confidence level
With 70% statistical confidence level
148.1
157.9
F
O
R
M
1
0
K
-
We believe our efforts to improve patient safety and overall quality of care, as well as our efforts to reduce workplace
injuries, have helped contain our ultimate claim costs. See Note 11, Self-Insured Risks, to the accompanying consolidated
financial statements for additional information.
We believe our self-insurance reserves are adequate to cover projected costs. Due to the considerable variability that is
inherent in such estimates, there can be no assurance the ultimate liability will not exceed management’s estimates. If actual
results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.
Goodwill
Absent any impairment indicators, we evaluate goodwill for impairment as of October 1st of each year. We test
goodwill for impairment at the reporting unit level and are required to make certain subjective and complex judgments on a
number of matters, including assumptions and estimates used to determine the fair value of our inpatient rehabilitation reporting
unit. We assess qualitative factors in our reporting unit to determine whether it is necessary to perform the quantitative goodwill
impairment test. The quantitative impairment test is required only if we conclude it is more likely than not our reporting unit’s
fair value is less than its carrying amount.
If, based on our qualitative assessment, we were to believe we must perform the quantitative goodwill impairment test,
we would determine the fair value of the applicable reporting unit using generally accepted valuation techniques including the
income approach and the market approach. We would validate our estimates under the income approach by reconciling the
estimated fair value of the reporting unit determined under the income approach to our market capitalization and estimated fair
value determined under the market approach. Values from the income approach and market approach would then be evaluated
and weighted to arrive at the estimated aggregate fair value of the reporting unit.
The income approach includes the use of our reporting unit’s projected operating results and cash flows that are
discounted using a weighted-average cost of capital that reflects market participant assumptions. The projected operating results
use management’s best estimates of economic and market conditions over the forecasted period including assumptions for
pricing and volume, operating expenses, and capital expenditures. Other significant estimates and assumptions include cost-
saving synergies and tax benefits that would accrue to a market participant under a fair value methodology. The market
approach estimates fair value through the use of observable inputs, including the Company’s stock price.
See Note 1, Summary of Significant Accounting Policies, “Goodwill and Other Intangibles,” and Note 9, Goodwill and
Other Intangible Assets, to the accompanying consolidated financial statements for additional information.
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The following events and circumstances are certain of the qualitative factors we consider in evaluating whether it is
more likely than not the fair value of a reporting unit is less than its carrying amount:
• macroeconomic conditions, such as deterioration in general economic conditions, limitations on accessing capital,
or other developments in equity and credit markets;
•
•
•
•
industry and market considerations and changes in healthcare regulations, including reimbursement and
compliance requirements under the Medicare and Medicaid programs;
cost factors, such as an increase in labor, supply, or other costs;
overall financial performance, such as negative or declining cash flows or a decline in actual or forecasted revenue
or earnings;
other relevant company-specific events, such as material changes in management or key personnel or outstanding
litigation;
• material events, such as a change in the composition or carrying amount of each reporting unit’s net assets,
including acquisitions and dispositions;
•
•
consideration of the relationship of our market capitalization to our book value, as well as a sustained decrease in
our share price; and
length of time since most recent quantitative analysis.
In the fourth quarter of 2023, we performed our annual evaluation of goodwill and determined no adjustment to impair
goodwill was necessary. If actual results are not consistent with our assumptions and estimates, we may be exposed to goodwill
impairment charges. However, at this time, we continue to believe our inpatient rehabilitation unit is not at risk for any
impairment charges.
Income Taxes
We provide for income taxes using the asset and liability method. We also evaluate our tax positions and establish
assets and liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. See Note 1,
Summary of Significant Accounting Policies, “Income Taxes,” and Note 16, Income Taxes, to the accompanying consolidated
financial statements for a more complete discussion of income taxes and our policies related to income taxes.
The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are
often ambiguous. We are required to make many subjective assumptions and judgments regarding our income tax exposures.
Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our
subjective assumptions and judgments can materially affect amounts recognized in our consolidated financial statements.
The ultimate recovery of certain of our deferred tax assets is dependent on the amount and timing of taxable income
we will ultimately generate in the future, as well as other factors. A high degree of judgment is required to determine the extent
a valuation allowance should be provided against deferred tax assets. On a quarterly basis, we assess the likelihood of
realization of our deferred tax assets considering all available evidence, both positive and negative. Our operating performance
in recent years, the scheduled reversal of temporary differences, our forecast of taxable income in future periods in each
applicable tax jurisdiction, our ability to sustain a core level of earnings, and the availability of prudent tax planning strategies
are important considerations in our assessment. Our forecast of future earnings includes assumptions about patient volumes,
payor reimbursement, labor costs, hospital operating expenses, and interest expense. Based on the weight of available evidence,
we determine if it is more likely than not our deferred tax assets will be realized in the future.
Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions
and to apply judgment to estimate the exposures associated with our various filing positions which are periodically audited by
tax authorities. In addition, our effective income tax rate is affected by changes in tax law, the tax jurisdictions in which we
operate, and the results of income tax audits.
During the year ended December 31, 2023, we decreased our valuation allowance by $7.4 million. As of December 31,
2023, we had a remaining valuation allowance of $28.4 million which primarily related to unusable foreign tax credits
generated by our operations in Puerto Rico. We determined it was necessary to maintain a valuation allowance on our foreign
tax credits due to uncertainties related to our ability to utilize a portion of these credits before they expire. The amount of the
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valuation allowance has been determined based on the weight of all available evidence, as described above, including
management’s estimates of taxable income over the periods in which the related deferred tax assets will be recoverable.
Assessment of Loss Contingencies
We have legal and other contingencies that could result in significant losses upon the ultimate resolution of such
contingencies. See Note 1, Summary of Significant Accounting Policies, “Litigation Reserves,” and Note 18, Contingencies and
Other Commitments, to the accompanying consolidated financial statements for additional information.
We have provided for losses in situations where we have concluded it is probable a loss has been or will be incurred
and the amount of loss is reasonably estimable. A significant amount of judgment is involved in determining whether a loss is
probable and reasonably estimable due to the uncertainty involved in determining the likelihood of future events and estimating
the financial statement impact of such events. If further developments or resolution of a contingent matter are not consistent
with our assumptions and judgments, we may need to recognize a significant charge in a future period related to an existing
contingent matter.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial statements.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
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HCS, Ltd., our wholly owned insurance captive maintains positions in investment securities for other than trading
purposes, which, as of December 31, 2023, had a fair market value of approximately $126 million. Changes in the value of
these securities is recorded in the accompanying consolidated statements of comprehensive income. During the year ended
December 31, 2023, we recorded an unrealized gain of $1.3 million pertaining to these securities. For additional information,
see Note 5, Cash and Marketable Securities, and Note 13, Fair Value Measurements, to the accompanying consolidated
financial statements. Our primary exposure to market risk is to changes in interest rates on our variable rate long-term debt. We
use a sensitivity analysis model to evaluate the impact of interest rate changes on our variable rate debt. As of December 31,
2023, no amount was outstanding on our primary variable rate debt.
The fair value of our fixed rate debt is 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, and is summarized as follows (in
millions):
Financial Instrument:
5.75% Senior Notes due 2025
Carrying Value
Unamortized debt discount and fees
Principal amount
4.50% Senior Notes due 2028
Carrying Value
Unamortized debt discount and fees
Principal amount
4.75% Senior Notes due 2030
Carrying Value
Unamortized debt discount and fees
Principal amount
4.625% Senior Notes due 2031
Carrying Value
Unamortized debt discount and fees
Principal amount
December 31, 2023
Book Value Market Value
December 31, 2022
Book Value Market Value
$
348.5 $
— $
347.7 $
—
349.3
—
—
763.6
—
—
755.0
—
—
369.4
2.3
350.0
781.8
18.2
800.0
779.0
21.0
800.0
390.6
9.4
400.0
1.5
350.0
785.0
15.0
800.0
781.5
18.5
800.0
391.5
8.5
400.0
70
—
—
347.7
—
—
726.7
—
—
703.7
—
—
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Foreign operations, and the related market risks associated with foreign currencies, are currently, and have been,
insignificant to our financial position, results of operations, and cash flows. See also Note 10, Long-term Debt, and Note 13,
Fair Value Measurements, to the accompanying consolidated financial statements.
Item 8.
Financial Statements and Supplementary Data
Our consolidated financial statements and related notes are filed together with this report. See the index to financial
statements on page F-1 for a list of financial statements filed with this report.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by our management, including our
chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure
controls and procedures are designed to ensure that information required to be disclosed in reports we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. Based
on our evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2023, our
disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on its financial
statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our chief executive officer and chief
financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2023. In making this assessment, management used the criteria set forth in Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, the COSO framework.
Based on our evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2023, our
internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 has been audited
by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears
herein.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter
ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
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Item 9B.
Other Information
Insider Trading Arrangements
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None applicable.
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PART III
We expect to file a definitive proxy statement relating to our 2024 Annual Meeting of Stockholders (the “2024 Proxy
Statement”) with the United States Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days
after the end of our most recent fiscal year. Accordingly, certain information required by Part III has been omitted under
General Instruction G(3) to Form 10-K. Only the information from the 2024 Proxy Statement that specifically addresses
disclosure requirements of Items 10-14 below is incorporated by reference.
Item 10.
Directors and Executive Officers of the Registrant
The information required by Item 10 is hereby incorporated by reference from our 2024 Proxy Statement under the
captions “Items of Business Requiring Your Vote—Proposal 1—Election of Directors,” “Corporate Governance and Board
Structure—Corporate Governance—Code of Ethics,” —Insider Trading Policy,” “—Board Structure and Committees—Audit
Committee,” “—Board Composition and Director Nomination Process—Director Nominees Proposed by Stockholders,” and
“Executive Officers.”
Item 11.
Executive Compensation
The information required by Item 11 is hereby incorporated by reference from our 2024 Proxy Statement under the
captions “Corporate Governance and Board Structure—Compensation of Directors,” “Compensation and Human Capital
Committee Matters,” and “Executive Compensation,” except as to the information under the “Pay vs. Performance” caption
which is only required to be disclosed in the proxy statement pursuant to Item 402(v) of Regulation S-K.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference from our 2024 Proxy Statement under the
captions “Executive Compensation—Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and
Management.”
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is hereby incorporated by reference from our 2024 Proxy Statement under the
captions “Corporate Governance and Board Structure—Director Independence” and “Certain Relationships and Related
Transactions.”
Item 14.
Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from our 2024 Proxy Statement under the
caption “Items of Business Requiring Your Vote—Proposal 2—Ratification of Appointment of Independent Registered Public
Accounting Firm.”
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Item 15.
Exhibits and Financial Statement Schedules
Financial Statements
PART IV
See the accompanying index on page F-1 for a list of financial statements filed as part of this report.
Financial Statement Schedules
None.
Exhibits
See Exhibit Index immediately following page F-49 of this report.
Item 16.
Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENCOMPASS HEALTH CORPORATION
By:
/s/ MARK J. TARR
Mark J. Tarr
President and Chief Executive Officer
Date: February 28, 2024
[Signatures continue on the following page]
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POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Patrick Darby his true and lawful
attorney-in-fact and agent with full power of substitution and re-substitution, for him in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
/s/ MARK J. TARR
Mark J. Tarr
/s/ DOUGLAS E. COLTHARP
Douglas E. Coltharp
/s/ ANDREW L. PRICE
Andrew L. Price
/s/ DONALD L. CORRELL
Donald L. Correll
/s/ GREG D. CARMICHAEL
Greg D. Carmichael
/s/ JOHN W. CHIDSEY
John W. Chidsey
/s/ Edward M. CHRISTIE III
Edward M. Christie III
/s/ JOAN E. HERMAN
Joan E. Herman
/s/ LESLYE G. KATZ
Leslye G. Katz
/s/ PATRICIA A. MARYLAND
Patricia A. Maryland
/s/ KEVIN J. O’CONNOR
Kevin J. O’Connor
/s/ CHRISTOPHER R. REIDY
Christopher R. Reidy
/s/ NANCY M. SCHLICHTING
Nancy M. Schlichting
/s/ TERRANCE WILLIAMS
Terrance Williams
Capacity
Date
President and Chief Executive Officer and Director
February 28, 2024
Executive Vice President and Chief Financial Officer
February 28, 2024
Chief Accounting Officer
February 28, 2024
Chairman of the Board of Directors
February 28, 2024
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February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
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Item 15.
Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended
December 31, 2023
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended
December 31, 2023
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2023
Notes to Consolidated Financial Statements
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F-5
F-6
F-7
F-8
F-10
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Encompass Health Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Encompass Health Corporation and its subsidiaries (the
“Company”) as of December 31, 2023 and 2022, and the related consolidated statements of comprehensive income, of
shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related
notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control
over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Patient Accounts Receivable - Contractual Allowances and Uncollectible Amounts
As described in Notes 1 and 6 to the consolidated financial statements, revenues are recognized (or measured) using the input
method as therapy, nursing, and auxiliary services are provided based on management’s estimate of the respective transaction
price. Management’s estimate of the transaction price includes estimates of price concessions for such items as contractual
allowances, potential adjustments that may arise from payment and other reviews, and uncollectible amounts. Revenues
recognized are subject to a number of elements which impact both the overall amount of revenue realized as well as the timing
of the collection of the related patient accounts receivable. Factors considered by management in determining the estimated
transaction price include the patient’s total length of stay for in-house patients, each patient’s discharge destination, the
proportion of patients with secondary insurance coverage and the level of reimbursement under that secondary coverage, and
the amount of charges that will be disallowed by payors. Management assumes these factors will remain consistent with the
experience for patients discharged in similar time periods for the same payor classes. The Company’s consolidated accounts
receivable balance is $632.5 million as of December 31, 2023. Management estimates the allowance for uncollectible amounts
based on the aging of accounts receivable, historical collection experience for each type of payor, and other relevant factors. As
disclosed by management, changes in general economic conditions are also considered.
The principal considerations for our determination that performing procedures relating to the valuation of patient accounts
receivable – contractual allowances and uncollectible amounts is a critical audit matter are the significant judgment by
management to estimate patient accounts receivable and the amount that will ultimately be collected under the terms of the
third-party payor contracts, which in turn led to significant auditor judgment and effort to evaluate the audit evidence obtained
related to the valuation of patient accounts receivable.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
valuation of patient accounts receivable related to contractual allowances and uncollectible amounts, which included controls
over management’s process, assumptions, and data used to estimate contractual allowances and uncollectible amounts and
determine patient accounts receivable. These procedures also included, among others, i) evaluating management’s process for
developing the estimate for contractual allowances and uncollectible amounts, ii) testing the completeness and accuracy of
underlying data used in the model, iii) evaluating the historical accuracy of management’s process for developing the estimate
of the amount which will ultimately be collected by comparing actual cash collections to the previously recorded patient
accounts receivable, and iv) developing an independent expectation of the amount expected to be collected by management.
Developing an independent expectation involved calculating the percentage of cash collections as compared to the recorded
patient accounts receivable balance for prior years and comparing that percentage to management’s collection expectation used
to determine the current year estimate for contractual allowances and uncollectible amounts.
Valuation of Patient Accounts Receivable - Denied Claims
As described in Note 1 to the consolidated financial statements, the Company’s Medicare claims have been subject to review by
Medicare Administrative Contractors (“MACs”) under various programs such as “widespread probes” and the Targeted Probe
and Educate initiative. The MACs reviews have resulted in denial of payment for claims billed under certain diagnosis codes.
While the Company generally appeals most of the denials of claims by the MACs, the Medicare appeals adjudication process,
which is administered by the Office of Medicare Hearings and Appeals (“OMHA”), has been subject to significant delay
resulting in a backlog of claims awaiting adjudication. As of December 31, 2023, there were approximately $38.3 million in
denied claims that were under review or audit. As disclosed in Note 1, the Company’s historical experience and success in the
adjudication of these appeals is a component of management’s estimate of the transaction price.
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The principal considerations for our determination that performing procedures relating to the valuation of patient accounts
receivable – denied claims is a critical audit matter are the significant judgment by management to estimate the ultimate
expected amount of collectible accounts receivable related to denied claims. This in turn led to a high degree of auditor
judgment and effort to evaluate the audit evidence obtained related to the valuation of such denied claims.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
valuation of patient accounts receivable related to denied claims, which included controls around the identification of denied
claims at period-end, as well as controls to assess the reasonableness of the success rate estimates. These procedures also
included, among others, i) evaluating management’s process for developing the estimate for collectible amounts related to
denied claims, as well as the relevance and use of the historical billing and collection data as an input to the valuation analysis,
ii) evaluating the reasonableness of management’s analysis and success rate estimate for denied claims by comparing it to the
Company’s adjudicated denied claim results, iii) performing testing over a sample of denied revenue transactions by inspecting
evidence that the claim was denied, and iv) performing testing over a sample of cash collections from the historical collection
data used in management’s estimation of collectability.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
February 28, 2024
We have served as the Company’s auditor since 2003.
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Encompass Health Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Net operating revenues
Operating expenses:
Salaries and benefits
Other operating expenses
Occupancy costs
Supplies
General and administrative expenses
Depreciation and amortization
Total operating expenses
Loss on early extinguishment of debt
Interest expense and amortization of debt discounts and fees
Other (income) expense
Equity in net income of nonconsolidated affiliates
Income from continuing operations before income tax expense
Provision for income tax expense
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net and comprehensive income
Less: Net income attributable to noncontrolling interests included in
continuing operations
Less: Net income attributable to noncontrolling interests included in
discontinued operations
Less: Net and comprehensive income attributable to noncontrolling
interests
Net and comprehensive income attributable to Encompass
Health
Weighted average common shares outstanding:
Basic
Diluted
Earnings per common share:
Basic earnings per share attributable to Encompass Health
common shareholders:
Continuing operations
Discontinued operations
Net income
Diluted earnings per share attributable to Encompass Health
common shareholders:
Continuing operations
Discontinued operations
Net income
Amounts attributable to Encompass Health:
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income attributable to Encompass Health
For the Year Ended December 31,
2023
2021
2022
(In Millions, Except Per Share Data)
$
4,801.2 $
4,348.6 $
4,014.9
2,600.1
719.1
56.3
218.3
201.7
273.9
4,069.4
—
143.5
(15.7)
(3.2)
607.2
132.2
475.0
(12.0)
463.0
2,393.3
670.4
54.7
202.1
154.3
243.6
3,718.4
1.4
175.7
5.2
(2.9)
450.8
100.1
350.7
15.2
365.9
2,127.3
595.9
59.0
184.2
169.5
219.6
3,355.5
1.0
164.3
(7.5)
(3.4)
505.0
101.9
403.1
114.1
517.2
(111.0)
(93.6)
(103.2)
—
(1.3)
(1.8)
(111.0)
(94.9)
(105.0)
$
352.0 $
271.0 $
412.2
99.5
101.3
99.2
100.4
99.0
100.2
$
$
$
$
$
$
3.63 $
(0.12)
3.51 $
3.59 $
(0.12)
3.47 $
2.58 $
0.14
2.72 $
2.56 $
0.14
2.70 $
3.02
1.13
4.15
2.99
1.12
4.11
364.0 $
(12.0)
352.0 $
257.1 $
13.9
271.0 $
299.9
112.3
412.2
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Encompass Health Corporation and Subsidiaries
Consolidated Balance Sheets
Assets
As of December 31,
2023
2022
(In Millions, Except Share Data)
$
$
$
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable
Prepaid expenses
Other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Other long-term assets
Total assets(1)
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt
Current operating lease liabilities
Accounts payable
Accrued payroll
Accrued interest payable
Other current liabilities
Total current liabilities
Long-term debt, net of current portion
Long-term operating lease liabilities
Self-insured risks
Deferred income tax liabilities
Other long-term liabilities
Total liabilities(1)
Commitments and contingencies
Redeemable noncontrolling interests
Shareholders’ equity:
Encompass Health shareholders’ equity:
Common stock, $.01 par value; 200,000,000 shares authorized; issued: 115,416,676 in 2023;
114,775,056 in 2022
Capital in excess of par value
Accumulated income
Treasury stock, at cost (15,163,909 shares in 2023 and 14,992,125 shares in 2022)
Total Encompass Health shareholders’ equity
Noncontrolling interests
Total shareholders’ equity
Total liabilities(1) and shareholders’ equity
$
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69.1 $
35.1
611.6
34.5
91.5
841.8
3,301.0
208.5
1,281.3
278.2
191.6
6,102.4 $
24.8 $
24.1
170.0
207.5
42.6
187.4
656.4
2,687.8
196.1
131.8
87.0
46.1
3,805.2
42.0
1.2
1,787.0
406.5
(547.2)
1,647.5
607.7
2,255.2
6,102.4 $
21.8
31.6
536.8
34.9
92.1
717.2
2,939.2
212.5
1,263.2
282.3
222.1
5,636.5
25.2
25.6
132.9
168.3
42.8
181.1
575.9
2,741.8
199.7
128.5
83.0
45.7
3,774.6
35.6
1.1
1,730.2
115.7
(536.7)
1,310.3
516.0
1,826.3
5,636.5
(1)
Our consolidated assets as of December 31, 2023 and December 31, 2022 include total assets of variable interest entities of $207.7 million and $207.8
million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of December 31, 2023 and
December 31, 2022 include total liabilities of the variable interest entities of $42.2 million and $47.9 million, respectively. See Note 4, Variable Interest
Entities.
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Encompass Health Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
December 31, 2020
Net income
Receipt of treasury stock
Dividends declared ($1.12 per share)
Stock-based compensation
Distributions declared
Capital contributions from consolidated affiliates
Other
December 31, 2021
Net income
Receipt of treasury stock
Dividends declared ($0.86 per share)
Stock-based compensation
Distributions declared
Capital contributions from consolidated affiliates
Spin off of Enhabit, Inc.
Other
December 31, 2022
Net income
Receipt of treasury stock
Dividends declared ($0.60 per share)
Stock-based compensation
Distributions declared
Capital contributions from consolidated affiliates
Other
December 31, 2023
Encompass Health Common Shareholders
Number of
Common
Shares
Outstanding
Common
Stock
Capital in
Excess of
Par Value
Accumulated
(Deficit)
Income
(In Millions)
Treasury
Stock
Noncontrolling
Interests
Total
99.4 $
—
(0.2)
—
—
—
—
0.3
99.5
—
(0.1)
—
—
—
—
—
0.4
99.8
—
(0.1)
—
—
—
—
0.6
100.3 $
1.1 $ 2,326.6 $
—
—
—
—
—
—
—
1.1
—
—
—
—
—
—
—
—
1.1
—
—
—
—
—
—
0.1
1.2 $ 1,787.0 $
—
—
(83.8)
32.8
—
—
14.0
2,289.6
—
—
(11.1)
31.7
—
—
(595.7)
15.7
1,730.2
—
—
0.5
50.6
—
—
5.7
(242.3) $ (497.4) $
412.2
—
(28.1)
—
—
—
—
141.8
271.0
—
(75.2)
—
—
—
(221.9)
—
115.7
352.0
—
(61.2)
—
—
—
—
—
(16.4)
—
—
—
—
(7.4)
(521.2)
—
(7.7)
—
—
—
—
—
(7.8)
(536.7)
—
(8.2)
—
—
—
—
(2.3)
406.5 $ (547.2) $
96.0
—
—
—
(87.8)
72.5
(17.0)
445.7
87.7
—
—
—
(99.5)
100.1
(28.4)
10.4
516.0
102.7
—
—
—
(110.0)
100.5
(1.5)
382.0 $ 1,970.0
508.2
(16.4)
(111.9)
32.8
(87.8)
72.5
(10.4)
2,357.0
358.7
(7.7)
(86.3)
31.7
(99.5)
100.1
(846.0)
18.3
1,826.3
454.7
(8.2)
(60.7)
50.6
(110.0)
100.5
2.0
607.7 $ 2,255.2
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Encompass Health Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net income
Loss (income) from discontinued operations, net of tax
Adjustments to reconcile net income to net cash provided by operating activities —
Depreciation and amortization
Amortization of debt-related items
Loss on early extinguishment of debt
Equity in net income of nonconsolidated affiliates
Distributions from nonconsolidated affiliates
Stock-based compensation
Deferred tax expense
Other, net
Changes in assets and liabilities, net of acquisitions —
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued payroll
Other liabilities
Net cash (used in) provided by operating activities of discontinued operations
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, equipment, and intangible assets
Purchases of restricted investments
Other, net
Net cash used in investing activities of discontinued operations
Net cash used in investing activities
For the Year Ended December 31,
2023
2022
2021
(In Millions)
$
463.0 $
12.0
365.9 $
517.2
(15.2)
(114.1)
273.9
243.6
219.6
9.5
—
(3.2)
1.6
50.6
3.9
5.2
9.7
1.4
(2.9)
4.0
29.2
27.9
20.3
(22.4)
(16.9)
6.1
11.8
39.2
15.6
(16.0)
375.8
850.8
(583.1)
(23.0)
3.3
—
8.0
2.3
(31.2)
7.4
52.3
355.1
705.8
(584.1)
(35.2)
(4.2)
(3.5)
(602.8)
(627.0)
7.8
1.0
(3.4)
2.6
29.1
17.4
(2.6)
(39.5)
(41.8)
15.6
(30.4)
(13.8)
151.1
312.7
715.8
(545.7)
(9.0)
7.6
(119.2)
(666.3)
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Consolidated Statements of Cash Flows (Continued)
Cash flows from financing activities:
Principal payments on debt, including pre-payments
Principal borrowings on notes
Borrowings on revolving credit facility
Payments on revolving credit facility
Principal payments under finance lease obligations
Debt amendment and issuance costs
Dividends paid on common stock
Distributions paid to noncontrolling interests of consolidated affiliates
Taxes paid on behalf of employees for shares withheld
Contributions from noncontrolling interests of consolidated affiliates
Other, net
Net cash provided by (used in) financing activities of discontinued operations
Net cash used in financing activities
Increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of year
Cash, cash equivalents, and restricted cash at end of year
$
For the Year Ended December 31,
2023
2022
2021
(In Millions)
(7.2)
20.0
60.0
(115.0)
(41.1)
(0.1)
(60.4)
(114.7)
(8.2)
68.3
1.2
—
(197.2)
50.8
53.4
104.2 $
(345.8)
(214.5)
11.8
240.0
(385.0)
(19.2)
(24.1)
(99.0)
(96.6)
(7.3)
64.1
0.3
515.1
(145.7)
(66.9)
120.3
53.4 $
—
300.0
(100.0)
(44.6)
—
(112.2)
(101.1)
(14.6)
57.2
(0.1)
(10.2)
(240.1)
(190.6)
310.9
120.3
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period
$
21.8 $
49.4 $
185.6
Restricted cash at beginning of period
Restricted cash included in other long-term assets at beginning of period
Cash, cash equivalents, and restricted cash in discontinued operations at
beginning of period
Cash, cash equivalents, and restricted cash at beginning of period
Cash and cash equivalents at end of period
Restricted cash at end of period
Restricted cash included in other long-term assets at end of period
Cash, cash equivalents, and restricted cash in discontinued operations at end of
period
31.6
—
—
62.5
0.4
8.0
$
$
53.4 $
120.3 $
69.1 $
21.8 $
35.1
—
—
31.6
—
—
63.9
21.5
39.9
310.9
49.4
62.5
0.4
8.0
Cash, cash equivalents, and restricted cash at end of period
$
104.2 $
53.4 $
120.3
Supplemental cash flow information:
Cash (paid) received during the year for —
Interest
Income tax refunds
Income tax payments
Supplemental schedule of noncash investing and financing activities:
Accrued purchases of property, equipment, and intangible assets
Joint venture contributions
$
$
(147.7) $
2.7
(109.3)
(178.4) $
1.0
(51.2)
(168.4)
1.8
(131.4)
26.7 $
32.2
(3.5) $
28.6
6.9
15.2
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies:
Organization and Description of Business—
Encompass Health Corporation, incorporated in Delaware in 1984, including its subsidiaries, is a provider of inpatient
rehabilitation services. We operate hospitals in 37 states and Puerto Rico, with concentrations in Florida and Texas. As of
December 31, 2023, we operate 161 inpatient rehabilitation hospitals. We are the sole owner of 98 of these hospitals. We retain
50.0% to 97.5% ownership in the remaining 63 jointly owned hospitals.
Basis of Presentation and Consolidation—
The accompanying consolidated financial statements of Encompass Health and its subsidiaries were prepared in
accordance with generally accepted accounting principles in the United States of America and include the assets, liabilities,
revenues, and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control, and,
when applicable, entities in which we have a controlling financial interest. Certain prior year amounts may have been
reclassified for comparative purposes to conform to the current-year financial statement presentation.
We use the equity method to account for our investments in entities we do not control, but where we have the ability to
exercise significant influence over operating and financial policies. Consolidated Net income attributable to Encompass Health
includes our share of the net earnings of these entities. The difference between consolidation and the equity method impacts
certain of our financial ratios because of the presentation of the detailed line items reported in the consolidated financial
statements for consolidated entities compared to a one line presentation of equity method investments.
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We eliminate all significant intercompany accounts and transactions from our financial results.
Variable Interest Entities—
Any entity considered a variable interest entity (“VIE”) is evaluated to determine which party is the primary
beneficiary and thus should consolidate the VIE. This analysis is complex, involves uncertainties, and requires significant
judgment on various matters. In order to determine if we are the primary beneficiary of a VIE, we must determine what
activities most significantly impact the economic performance of the entity, whether we have the power to direct those
activities, and if our obligation to absorb losses or receive benefits from the VIE could potentially be significant to the VIE.
Use of Estimates and Assumptions—
The preparation of our consolidated financial statements in conformity with GAAP requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions are used for, but not limited to: (1) revenue reserves for contractual adjustments and
uncollectible amounts; (2) fair value of acquired assets and assumed liabilities in business combinations; (3) asset impairments,
including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; (6) economic lives and fair value of
leased assets; (7) income tax valuation allowances; (8) uncertain tax positions; (9) fair value of stock options and restricted
stock containing a market condition; (10) fair value of redeemable noncontrolling interests; (11) reserves for self-insured
healthcare plans; (12) reserves for professional, workers’ compensation, and comprehensive general insurance liability risks;
and (13) contingency and litigation reserves. Future events and their effects cannot be predicted with certainty; accordingly, our
accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated
financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and
as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may
employ outside experts to assist in our evaluation, as considered necessary. Actual results could differ from those estimates.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Risks and Uncertainties—
As a healthcare provider, we are required to comply with extensive and complex laws and regulations at the federal,
state, and local government levels. These laws and regulations relate to, among other things:
•
•
•
•
•
•
•
licensure, certification, and accreditation;
policies, either at the national or local level, delineating what conditions must be met to qualify for reimbursement
under Medicare (also referred to as coverage requirements);
coding and billing for services;
requirements of the 60% compliance threshold under The Medicare, Medicaid and State Children’s Health
Insurance Program (SCHIP) Extension Act of 2007;
relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws;
quality of medical care;
use and maintenance of medical supplies and equipment;
• maintenance and security of patient information and medical records;
•
•
•
•
minimum staffing;
acquisition and dispensing of pharmaceuticals and controlled substances;
pricing transparency and similar consumer protection rules; and
disposal of medical and hazardous waste.
In the future, changes in these laws or regulations or the manner in which they are enforced could subject our current
or past practices to allegations of impropriety or illegality or could require us to make changes in our hospitals, equipment,
personnel, services, capital expenditure programs, operating procedures, contractual arrangements, and patient admittance
practices.
If we fail to comply with applicable laws and regulations, we could be required to return portions of reimbursements
deemed after the fact to have not been appropriate. We could also be subjected to liabilities, including (1) criminal penalties,
(2) civil penalties, including monetary penalties and the loss of our licenses to operate one or more of our hospitals, and
(3) exclusion or suspension of one or more of our hospitals from participation in the Medicare, Medicaid, and other federal and
state healthcare programs which, if lengthy in duration and material to us, could potentially trigger a default under our credit
agreement. 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. Specifically, reductions in reimbursements, substantial damages, and other remedies
assessed against us could have a material adverse effect on our business, financial position, results of operation, and cash flows.
Even the assertion of a violation, depending on its nature, could have a material adverse effect upon our stock price or
reputation and could cost us significant time and expense to defend.
Historically, the United States Congress and some state legislatures have periodically proposed significant changes in
regulations governing the healthcare system. Many of these changes have resulted in limitations on the increases in and, in
some cases, significant roll-backs or reductions in the levels of payments to healthcare providers for services under many
government reimbursement programs. There can be no assurance that future governmental initiatives will not result in
reimbursement freezes and reductions, or reimbursement increases that are less than the increases we experience in our costs of
operation. Because we receive a significant percentage of our revenues from Medicare, such changes in legislation might have a
material adverse effect on our financial position, results of operations, and cash flows.
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In addition, there are increasing pressures from many third-party payors to control healthcare costs and to reduce or
limit increases in reimbursement rates for medical services. Our relationships with managed care and nongovernmental third-
party payors are generally governed by negotiated agreements. These agreements set forth the amounts we are entitled to
receive for our services. We could be adversely affected in some of the markets where we operate if we are unable to negotiate
and maintain favorable agreements with third-party payors.
Our third-party payors may also, from time to time, request audits of the amounts paid, or to be paid, to us. We could
be adversely affected in some of the markets where we operate if the auditing payor alleges substantial overpayments were
made to us due to coding errors or lack of documentation to support medical necessity determinations.
As discussed in Note 18, Contingencies and Other Commitments, we are a party to a number of lawsuits. We cannot
predict the outcome of litigation filed against us. Substantial damages or other monetary remedies assessed against us could
have a material adverse effect on our business, financial position, results of operations, and cash flows.
Net Operating Revenues—
Our Net operating revenues disaggregated by payor source are as follows (in millions):
Medicare
Medicare Advantage
Managed care
Medicaid
Other third-party payors
Workers’ compensation
Patients
Other income
Total
Year Ended December 31,
2022
2021
2023
$
3,126.1 $
2,843.1 $
2,589.6
776.1
531.4
190.7
41.8
25.8
14.9
94.4
654.6
505.2
183.3
39.5
24.7
16.6
81.6
609.6
484.5
163.1
46.0
23.1
19.3
79.7
$
4,801.2 $
4,348.6 $
4,014.9
We record Net operating revenues on an accrual basis using our best estimate of the transaction price for the type of
service provided to the patient. Our estimate of the transaction price includes estimates of price concessions for such items as
contractual allowances, potential adjustments that may arise from payment and other reviews, and uncollectible amounts. Our
accounting systems calculate contractual allowances on a patient-by-patient basis based on the rates in effect for each primary
third-party payor. Adjustments related to payment reviews by third-party payors or their agents are based on our historical
experience and success rates in the claims adjudication process. Estimates for uncollectible amounts are based on the aging of
our accounts receivable, our historical collection experience for each type of payor, and other relevant factors.
Management continually reviews the revenue transaction price estimation process to consider and incorporate updates
to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and
renewals. Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-
party payors, which are often subject to interpretation, we may receive reimbursement for healthcare services authorized and
provided that is different from our estimates, and such differences could be material. In addition, laws and regulations
governing the Medicare and Medicaid programs are complex, subject to interpretation, and are routinely modified for provider
reimbursement. All healthcare providers participating in the Medicare and Medicaid programs are required to meet certain
financial reporting requirements. Federal regulations require submission of annual cost reports covering medical costs and
expenses associated with the services provided under each hospital provider number to program beneficiaries. Annual cost
reports required under the Medicare and Medicaid programs are subject to routine audits, which may result in adjustments to
the amounts ultimately determined to be due to Encompass Health under these reimbursement programs. These audits often
require several years to reach the final determination of amounts earned under the programs. If actual results are not consistent
with our assumptions and judgments, we may be exposed to gains or losses that could be material.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The Centers for Medicare & Medicaid Services (“CMS”) has been granted authority to suspend payments, in whole or
in part, to Medicare providers if CMS possesses reliable information an overpayment, fraud, or willful misrepresentation exists.
If CMS suspects payments are being made as the result of fraud or misrepresentation, CMS may suspend payment at any time
without providing prior notice to us. The initial suspension period is limited to 180 days. However, the payment suspension
period can be extended almost indefinitely if the matter is under investigation by the United States Department of Health and
Human Services Office of Inspector General (the “HHS-OIG”) or the United States Department of Justice (the “DOJ”).
Therefore, we are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid
programs, the possible length of the suspension period, or the potential cash flow impact of a payment suspension. Any such
suspension would adversely impact our financial position, results of operations, and cash flows.
Pursuant to legislative directives and authorizations from Congress, CMS has developed and instituted various
Medicare audit programs under which CMS contracts with private companies to conduct claims and medical record audits. As a
matter of course, we undertake significant efforts through training and education to ensure compliance with Medicare
requirements. However, audits have in the past led and may in the future lead to assertions we have been underpaid or overpaid
by Medicare or submitted improper claims in some instances. Audits also require us to incur additional costs to respond to
requests for records and defend the validity of payments and claims, and ultimately require us to refund any amounts
determined to have been overpaid. In some circumstances auditors assert the authority to extrapolate denial rationales to large
pools of claims not actually audited, which could increase the impact of the audit. We cannot predict when or how these audit
programs will affect us.
Medicare Administrative Contractors (“MACs”), under programs known as “widespread probes,” have conducted pre-
payment claim reviews of our Medicare billings and in some cases denied payment for certain diagnosis codes. We dispute, or
“appeal,” most of these denials. As discussed above, our historical experience and success in the adjudication of these appeals is
a component of our estimate of transaction price. The Medicare appeals adjudication process is administered by the Office of
Medicare Hearings and Appeals (“OMHA”) and has been subject to significant delay resulting in a backlog of claims awaiting
adjudication. Beginning in March 2020, OMHA increased the frequency of hearings and the number of claims set at each
hearing, which we believe adds to the substantive and procedural deficiencies in the appeals process. During 2022, the backlog
of “widespread probe” claims adjudicated by the administrative law judge (“ALJ”) continued and were substantially resolved.
This OMHA practice resulted in a reduction in our success in the adjudication of these appeals, but have increased the pace of
recovery of these claims. We have appealed certain adverse ALJ rulings to the Department Appeals Board (“DAB”), the final
level of administrative review. As of December 31, 2023, approximately $31 million in denied claims are awaiting review at the
DAB. In addition, we have appealed approximately $7 million in claims denied by the DAB pending review by the United
States district courts as of December 31, 2023.
During the fourth quarter of 2023, we recorded an additional reserve totaling $21.9 million related to appeals pending
before the DAB and several federal district courts. The increase in reserve was driven primarily by an increase in unfavorable
adjudication outcomes experienced at the DAB during the second half of 2023 and largely offsets the remaining net carrying
value of these claims. These appeals relate primarily to claims denied prior to 2018. This adjustment does not impact our
reserve methodology for ongoing claims audit programs, including TPE and IRF RCD (defined and discussed below). We will
continue to pursue ongoing appeals before the DAB and federal district courts where economically beneficial.
Under CMS’s Targeted Probe and Educate (“TPE”) program, MACs use data analysis to identify healthcare providers
with high claim error rates and items and services that have high national error rates. Once a MAC selects a provider for claims
review, the initial volume of claims review is limited to 20 to 40 claims. The TPE program includes up to three rounds of
claims review if necessary with corresponding provider education and a subsequent period to allow for improvement. If results
do not improve sufficiently after three rounds, the MAC may refer the provider to CMS for further action, which may include
extrapolation of error rates to a broader universe of claims or referral to a UPIC or RAC (defined below). We cannot predict the
impact of the TPE program on our ability to collect claims on a timely basis.
On December 14, 2020, CMS announced a five-year review choice demonstration for inpatient rehabilitation services
(the “IRF RCD”). The IRF RCD began in Alabama in August 2023. CMS intends to expand this demonstration to
Pennsylvania, Texas, and California but has not yet announced the timing for doing so. The IRF RCD affects the process in
which we submit, and receive reimbursement for, Medicare claims. Under the IRF RCD, 100% of Medicare reimbursement
claims are reviewed for compliance with applicable coverage and clinical documentation requirements. We elected to
participate initially in the pre-claim review option under IRF RCD. The pre-claim review request with required documentation
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Notes to Consolidated Financial Statements
must be submitted and reviewed before the final claim is submitted for payment. If a certain percentage of the claims reviewed
are found to be valid, the inpatient rehabilitation facility (“IRF”) may then opt out of the 100% review. That percentage will
initially be 80% or greater for the first six-month period and eventually increases to 90% or greater in subsequent review cycles.
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 random sample. As of year end 2023, we cannot be certain our claim validation rate will continue to exceed the
required percentage for each review cycle, nor can we predict the impact, if any, the IRF RCD may have on our volumes or the
collectability of our Medicare claims over its five-year term and ultimately our financial position, results of operations, and cash
flows.
In connection with CMS approved and announced Recovery Audit Contractors (“RACs”) audits related to IRFs, we
received requests from 2013 to 2023 to review certain patient files for discharges occurring from 2010 to 2023. These RAC
audits are focused on identifying Medicare claims that may contain improper payments. RAC contractors must have CMS
approval before conducting these focused reviews which cover issues ranging from billing documentation to medical
necessity. Medical necessity is an assessment by an independent physician of a patient’s ability to tolerate and benefit from
intensive multi-disciplinary therapy provided in an IRF setting.
CMS has also established other types of contractors, including the Unified Program Integrity Contractors (“UPICs”)
and the Supplemental Medical Review Contractor (“SMRC”). The UPICs conduct audits with a focus on potential fraud and
abuse issues. Like the RACs, the UPICs conduct audits and have the ability to refer matters to the HHS-OIG or the DOJ. Unlike
RACs, however, UPICs do not receive a specific financial incentive based on the amount of the error as a result of UPIC audits.
We have, from time to time, received UPIC record requests which have resulted in claim denials on paid claims. We have
appealed substantially all UPIC denials arising from these audits using the same process we follow for appealing other denials
by contractors. As of December 31, 2023, we have appealed $18.0 million of overpayment determination related to one UPIC
audit to the DAB, challenging both the denials and the improper use of extrapolation. It is not possible to predict when this
matter will be resolved or the ultimate outcome. The SMRC conducts nationwide medical reviews of Medicare claims to
determine compliance with coverage, coding, payment, and billing requirements. During the first quarter of 2023, the SMRC
initiated a review of claims from March 2020 through December 2020 totaling approximately $21 million. We have received
initial results for the claims under review and, as of December 31, 2023, approximately 87% of these have been approved with
approximately $3 million under appeal.
To date, the Medicare claims that are subject to these post-payment audit requests represent less than 1% of our
Medicare patient discharges from 2010 to 2023. Because we have confidence in the medical judgment of both the referring and
admitting physicians who assess the treatment needs of their patients, we have appealed substantially all claim denials arising
from these audits using the same process we follow for appealing denials by MACs. Due to the delays announced by CMS in
the related adjudication process discussed above, we believe the resolution of any claims that are subsequently denied as a
result of these claim audits could take several years. In addition, because we have limited experience with UPICs and RACs in
the context of claims reviews of this nature, we cannot provide assurance as to the timing or outcomes of these disputes. As
such, we make estimates for these claims based on our historical experience and success rates in the claims adjudication
process, which is the same process we follow for denials by MACs. During 2023, 2022, and 2021, our adjustment to Net
operating revenues for claims that are part of this post-payment claims review process was not material.
Our performance obligations relate to contracts with a duration of less than one year. Therefore, we elected to apply
the optional exemption to not disclose the aggregate amount of the transaction price allocated to performance obligations that
are unsatisfied or partially unsatisfied at the end of the reporting period. These unsatisfied or partially unsatisfied performance
obligations primarily relate to services provided at the end of the reporting period.
We are subject to changes in government legislation that could impact Medicare payment levels and changes in payor
patterns that may impact the level and timing of payments for services rendered.
Net operating revenues are recognized over time as the services are provided to the patient. The performance
obligation is the rendering of services to the patient during the term of their inpatient stay. Revenues are recognized (or
measured) using the input method as therapy, nursing, and auxiliary services are provided based on our estimate of the
respective transaction price. Revenues recognized are subject to a number of elements which impact both the overall amount of
revenue realized as well as the timing of the collection of the related accounts receivable. Factors considered in determining the
estimated transaction price include the patient’s total length of stay for in-house patients, each patient’s discharge destination,
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Notes to Consolidated Financial Statements
the proportion of patients with secondary insurance coverage and the level of reimbursement under that secondary coverage,
and the amount of charges that will be disallowed by payors. Such additional factors are assumed to remain consistent with the
experience for patients discharged in similar time periods for the same payor classes.
Cash and Cash Equivalents—
Cash and cash equivalents include highly liquid investments with maturities of three months or less when purchased.
Carrying values of Cash and cash equivalents approximate fair value due to the short-term nature of these instruments.
We maintain amounts on deposit with various financial institutions, which may, at times, exceed federally insured
limits. However, management periodically evaluates the credit-worthiness of those institutions, and we have not experienced
any losses on such deposits.
Marketable Securities—
We record all equity securities with readily determinable fair values and for which we do not exercise significant
influence at fair value and record the change in fair value for the reporting period in our consolidated statements of
comprehensive income.
Accounts Receivable—
We report accounts receivable from services rendered at their estimated transaction price which takes into account
price concessions from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans,
commercial insurance companies, workers’ compensation programs, employers, and patients. Our accounts receivable are
concentrated by type of payor. The concentration of patient service accounts receivable by payor class, as a percentage of total
patient service accounts receivable, is as follows:
Medicare
Managed care and other discount plans, including Medicare Advantage
Medicaid
Other third-party payors
Workers' compensation
Patients
Total
As of December 31,
2023
2022
57.6 %
32.3 %
4.0 %
2.7 %
2.5 %
0.9 %
57.9 %
31.1 %
4.4 %
3.4 %
2.2 %
1.0 %
100.0 %
100.0 %
While revenues and accounts receivable from the Medicare program are significant to our operations, we do not
believe there are significant credit risks associated with this government agency. We do not believe there are any other
significant concentrations of revenues from any particular payor that would subject us to any significant credit risks in the
collection of our accounts receivable.
Accounts requiring collection efforts are reviewed via system-generated work queues that automatically stage (based
on age and size of outstanding balance) accounts requiring collection efforts for patient account representatives. Collection
efforts include contacting the applicable party (both in writing and by telephone), providing information (both financial and
clinical) to allow for payment or to overturn payor decisions to deny payment, and arranging payment plans with self-pay
patients, among other techniques. When we determine all in-house efforts have been exhausted or it is a more prudent use of
resources, accounts may be turned over to a collection agency.
The collection of outstanding receivables from Medicare, managed care payors, other third-party payors, and patients
is our primary source of cash and is critical to our operating performance. While it is our policy to verify insurance prior to a
patient being admitted, there are various exceptions that can occur. Such exceptions include instances where we are (1) unable
to obtain verification because the patient’s insurance company was unable to be reached or contacted, (2) a determination is
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made that a patient may be eligible for benefits under various government programs, such as Medicaid, and it takes several
days, weeks, or months before qualification for such benefits is confirmed or denied, and (3) the patient is transferred to our
hospital from an acute care hospital without having access to a credit card, cash, or check to pay the applicable patient
responsibility amounts (i.e., deductibles and co-payments).
Our primary collection risks relate to patient responsibility amounts and claims reviews conducted by MACs or other
contractors. Patient responsibility amounts include accounts for which the patient was the primary payor or the primary
insurance carrier has paid the amounts covered by the applicable agreement, but patient co-payment amounts remain
outstanding. Changes in the economy, such as increased unemployment rates or periods of recession, can further exacerbate our
ability to collect patient responsibility amounts.
If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that
could be material. Changes in general economic conditions, business office operations, payor mix, or trends in federal or state
governmental and private employer healthcare coverage could affect our collection of accounts receivable, financial position,
results of operations, and cash flows.
Property and Equipment—
We report land, buildings, improvements, vehicles, and equipment at cost, net of accumulated depreciation and
amortization and any asset impairments. We depreciate our assets using the straight-line method over the shorter of the
estimated useful life of the assets or life of the underlying leases. Useful lives are generally as follows:
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Buildings
Leasehold improvements
Vehicles
Furniture, fixtures, and equipment
Years
10 to 30
2 to 15
5
3 to 10
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and
betterments that increase the estimated useful life of an asset. We capitalize pre-acquisition costs when they are directly
identifiable with a specific property, the costs would be capitalizable if the property were already acquired, and acquisition of
the property is probable. We capitalize interest expense on major construction and development projects while in progress.
We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from
service. In the case of sale, retirement, or disposal, the asset cost and related accumulated depreciation balances are removed
from the respective accounts, and the resulting net amount, less any proceeds, is included as a component of income from
continuing operations in the consolidated statements of comprehensive income. However, if the sale, retirement, or disposal
involves a discontinued operation, the resulting net amount, less any proceeds, is included in the results of discontinued
operations.
Leases—
We determine if an arrangement is a lease or contains a lease at inception and perform an analysis to determine
whether the lease is an operating lease or a finance lease. We measure right-of-use assets and lease liabilities at the lease
commencement date based on the present value of the remaining lease payments. As most of our leases do not provide a
readily determinable implicit rate, we estimate an incremental borrowing rate based on the credit quality of the Company and
by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of
collateral over the term of each lease. We use this rate to discount the remaining lease payments in measuring the right-of-use
asset and lease liability. We use the implicit rate when readily determinable. We recognize lease expense for operating leases
on a straight-line basis over the lease term. For our finance leases, we recognize amortization expense from the amortization of
the right-of-use asset and interest expense on the related lease liability. Certain of our lease agreements contain annual
escalation clauses based on changes in the Consumer Price Index. The changes to the Consumer Price Index, as compared to
our initial estimate at the lease commencement date, are treated as variable lease payments and recognized in the period in
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Notes to Consolidated Financial Statements
which the obligation for those payments was incurred. In general, we do not account for lease and non-lease components
separately for purposes of establishing right-of-use assets and lease liabilities.
Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheets. We
recognize lease expense for these leases on a straight-line basis over the lease term.
Goodwill and Other Intangible Assets—
We are required to test our goodwill and indefinite-lived intangible asset for impairment at least annually, absent some
triggering event that would accelerate an impairment assessment. Absent any impairment indicators, we perform this
impairment testing as of October 1st of each year. We recognize an impairment charge for any amount by which the carrying
amount of the asset exceeds its implied fair value. We present an impairment charge as a separate line item within income from
continuing operations in the consolidated statements of comprehensive income, unless the impairment is associated with a
discontinued operation. In that case, we include the impairment charge, on a net-of-tax basis, within the results of discontinued
operations.
We assess qualitative factors in our single reporting unit to determine whether it is necessary to perform the
quantitative impairment test. If, based on this qualitative assessment, we were to believe we must perform the quantitative
impairment test, we would determine the fair value of our reporting unit using generally accepted valuation techniques
including the income approach and the market approach. The income approach includes the use of our reporting unit’s
discounted projected operating results and cash flows. This approach includes many assumptions related to pricing and volume,
operating expenses, capital expenditures, discount factors, tax rates, etc. Changes in economic and operating conditions
impacting these assumptions could result in goodwill impairment in future periods. We reconcile the estimated fair value of our
reporting unit to our market capitalization. When we dispose of a hospital, goodwill is allocated to the gain or loss on
disposition using the relative fair value methodology.
We assess qualitative factors related to our indefinite-lived intangible asset to determine whether it is necessary to
perform the quantitative impairment test. If, based on this qualitative assessment, we were to believe we must perform the
quantitative impairment test, we would determine the fair value of our indefinite-lived intangible asset using generally accepted
valuation techniques including the relief-from-royalty method. This method is a form of the income approach in which value is
equated to a series of cash flows and discounted at a risk-adjusted rate. It is based on a hypothetical royalty, calculated as a
percentage of forecasted revenue, that we would otherwise be willing to pay to use the asset, assuming it were not already
owned. This approach includes assumptions related to pricing and volume, as well as a royalty rate a hypothetical third party
would be willing to pay for use of the asset. When making our royalty rate assumption, we consider rates paid in arms-length
licensing transactions for assets comparable to our asset.
We amortize the cost of intangible assets with finite useful lives over their respective estimated useful lives to their
estimated residual value. As of December 31, 2023, none of our finite useful lived intangible assets has an estimated residual
value. We also review these assets for impairment whenever events or changes in circumstances indicate we may not be able to
recover the asset’s carrying amount.
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The range of estimated useful lives and the amortization basis for our intangible assets, excluding goodwill, are
generally as follows:
Certificates of need
Licenses
Noncompete agreements
Trade names:
Encompass
All other
Internal-use software
Market access assets
Estimated Useful Life
and Amortization Basis
10 to 30 years using straight-line basis
10 to 20 years using straight-line basis
1 to 18 years using straight-line basis
indefinite-lived asset
10 to 20 years using straight-line basis
3 to 7 years using straight-line basis
20 years using accelerated basis
We capitalize the costs of obtaining or developing internal-use software, including external direct costs of material and
services and certain directly related payroll costs. Amortization begins when the internal-use software is ready for its intended
use. Costs incurred during the preliminary project and post-implementation stages, as well as maintenance and training costs,
are expensed as incurred.
Our market access assets are valued using discounted cash flows under the income approach. The value of the market
access assets is attributable to our ability to gain access to and penetrate an acquired facility’s historical market patient base. To
determine this value, we first develop a debt-free net cash flow forecast under various patient volume scenarios. The debt-free
net cash flow is then discounted back to present value using a discount factor, which includes an adjustment for company-
specific risk. As noted in the above table, we amortize these assets over 20 years using an accelerated basis that reflects the
pattern in which we believe the economic benefits of the market access will be consumed.
Impairment of Long-Lived Assets and Other Intangible Assets—
We assess the recoverability of long-lived assets (excluding goodwill and our indefinite-lived asset) and identifiable
acquired intangible assets with finite useful lives, whenever events or changes in circumstances indicate we may not be able to
recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the
carrying amount of the asset to the expected net future cash flows to be generated by that asset, or, for identifiable intangibles
with finite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be
recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with finite useful
lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of
impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the
fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised
values. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report
long-lived assets to be disposed of by sale as held for sale and recognize those assets in the balance sheet at the lower of
carrying amount or fair value less cost to sell, and we cease depreciation.
Financing Costs—
We amortize financing costs using the effective interest method over the expected life of the related debt. Excluding
financing costs related to our revolving line of credit (which are included in Other long-term assets), financing costs are
presented as a direct deduction from the face amount of the financings. The related expense is included in Interest expense and
amortization of debt discounts and fees in our consolidated statements of comprehensive income.
We accrete discounts and amortize premiums using the effective interest method over the expected life of the related
debt, and we report discounts or premiums as a direct deduction from, or addition to, the face amount of the financing. The
related income or expense is included in Interest expense and amortization of debt discounts and fees in our consolidated
statements of comprehensive income.
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Fair Value Measurements—
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions market participants would use in pricing an asset or liability.
The basis for these assumptions establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value as follows:
•
•
•
Level 1 – Observable inputs such as quoted prices in active markets;
Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three
valuation techniques are as follows:
• Market approach – Prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities;
•
•
Cost approach – Amount that would be required to replace the service capacity of an asset (i.e., replacement cost);
and
Income approach – Techniques to convert future cash flows to a single present amount based on market
expectations (including present value techniques, option-pricing models, and lattice models).
Our financial instruments consist mainly of cash and cash equivalents, restricted cash, restricted marketable securities,
accounts receivable, accounts payable, letters of credit, and long-term debt. The carrying amounts of cash and cash equivalents,
restricted cash, accounts receivable, and accounts payable approximate fair value because of the short-term maturity of these
instruments. The fair value of our letters of credit is deemed to be the amount of payment guaranteed on our behalf by third-
party financial institutions. We determine the fair value of our long-term debt using quoted market prices, when available, or
discounted cash flows based on various factors, including maturity schedules, call features, and current market rates.
On a recurring basis, we are required to report our restricted marketable securities at fair value. The fair values of our
restricted marketable securities are determined based on quoted market prices in active markets or quoted prices, dealer
quotations, or alternative pricing sources supported by observable inputs in markets that are not considered to be active.
In addition, there are assets and liabilities that are not required to be reported 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. The fair value of our property and equipment is determined using discounted cash flows and
significant unobservable inputs, unless there is an offer to purchase such assets, which could be the basis for determining fair
value. The fair value of our intangible assets, excluding goodwill, is determined using discounted cash flows and significant
unobservable inputs. The fair value of our investments in nonconsolidated affiliates is determined using quoted prices in private
markets, discounted cash flows or earnings, or market multiples derived from a set of comparables. The fair value of our assets
and liabilities of discontinued operations is determined using discounted cash flows and significant unobservable inputs unless
there is an offer to purchase such assets and liabilities, which would be the basis for determining fair value. The fair value of
our goodwill is determined using discounted projected operating results and cash flows, which involve significant unobservable
inputs.
See also the “Redeemable Noncontrolling Interests” section of this note.
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Notes to Consolidated Financial Statements
Noncontrolling Interests in Consolidated Affiliates—
The consolidated financial statements include all assets, liabilities, revenues, and expenses of less-than-100%-owned
affiliates we control. Accordingly, we have recorded noncontrolling interests in the earnings and equity of such entities. We
record adjustments to noncontrolling interests for the allocable portion of income or loss to which the noncontrolling interests
holders are entitled based upon their portion of the subsidiaries they own. Distributions to holders of noncontrolling interests
are adjusted to the respective noncontrolling interests holders’ balance.
Redeemable Noncontrolling Interests—
Certain of our joint venture agreements contain provisions that allow our partners to require us to purchase their
interests in the joint venture at fair value at certain points in the future. Because these noncontrolling interests provide for
redemption features that are not solely within our control, we classify them as Redeemable noncontrolling interests outside of
permanent equity in our consolidated balance sheets. At the end of each reporting period, we compare the carrying value of the
Redeemable noncontrolling interests to their estimated redemption value. If the estimated redemption value is greater than the
current carrying value, the carrying value is adjusted to the estimated redemption value, with the adjustments recorded through
equity in the line item Capital in excess of par value.
The fair value of our Redeemable noncontrolling interests in our joint venture entities is determined primarily using
the income approach. The income approach includes the use of the joint venture entities’ projected operating results and cash
flows discounted using a rate that reflects market participant assumptions for the applicable joint venture entity, or Level 3
inputs. The projected operating results use management’s best estimates of economic and market conditions over the forecasted
periods including assumptions for pricing and volume, operating expenses, and capital expenditures.
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Share-Based Payments—
Encompass Health has shareholder-approved stock-based compensation plans that provide for the granting of stock-
based compensation to certain employees and directors. All share-based payments to employees are recognized in the financial
statements based on their estimated grant-date fair value and amortized on a straight-line basis over the applicable requisite
service period.
Litigation Reserves—
We accrue for loss contingencies associated with outstanding litigation for which management has determined it is
probable a loss contingency exists and the amount of loss can be reasonably estimated. If the accrued amount associated with a
loss contingency is greater than $5.0 million, we also accrue estimated future legal fees associated with the loss contingency.
This requires management to estimate the amount of legal fees that will be incurred in the defense of the litigation. These
estimates are based on our expectations of the scope, length to complete, and complexity of the claims. In the future, additional
adjustments may be recorded as the scope, length to complete, or complexity of outstanding litigation changes.
Advertising Costs—
We expense costs of print, radio, television, and other advertisements as incurred. Advertising expenses, primarily
included in Other operating expenses within the accompanying consolidated statements of comprehensive income, were $6.1
million, $6.3 million, and $5.6 million in each of the years ended December 31, 2023, 2022, and 2021, respectively.
Income Taxes—
We provide for income taxes using the asset and liability method. This approach recognizes the amount of income
taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of
events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are
adjusted to recognize the effects of changes in tax laws or enacted tax rates.
A valuation allowance is required when it is more likely than not some portion of the deferred tax assets will not be
realized. Realization is dependent on generating sufficient future taxable income in the applicable tax jurisdiction. On a
quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both
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positive and negative. Our most recent operating performance, the scheduled reversal of temporary differences, our forecast of
taxable income in future periods by jurisdiction, our ability to sustain a core level of earnings, and the availability of prudent tax
planning strategies are important considerations in our assessment.
We evaluate our tax positions and establish assets and liabilities in accordance with the applicable accounting guidance
on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the
progress of tax audits, and adjust them accordingly. We have used the with-and-without method to determine when we will
recognize excess tax benefits from stock-based compensation.
Encompass Health and its corporate subsidiaries file a consolidated federal income tax return. Some subsidiaries
consolidated for financial reporting purposes are not part of the consolidated group for federal income tax purposes and file
separate federal income tax returns. State income tax returns are filed on a separate, combined, or consolidated basis in
accordance with relevant state laws and regulations. Partnerships, limited liability companies, and other pass-through entities
we consolidate or account for using the equity method of accounting file separate federal and state income tax returns. We
include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the
remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of
the taxes. We included the activity of Enhabit, Inc. and its subsidiaries in our consolidated and combined tax filings for 2022 up
through the date of the Spin Off, which is defined and described in Note 2, Spin Off of Home Health and Hospice Business.
Subsequent to the Spin Off, Enhabit, Inc. and its subsidiaries are no longer included in our consolidated and combined filings.
Assets and Liabilities in and Results of Discontinued Operations—
We report the disposal of the component, or group of components, as discontinued operations only when it represents a
strategic shift that has, or will have, a major effect on our operations and financial results. In the period a component of an
entity has been disposed of or classified as held for sale, we reclassify the results of operations for current and prior periods into
a single caption titled (Loss) income from discontinued operations, net of tax. In addition, we classify the assets and liabilities
of those components as current and noncurrent assets and liabilities within Other current assets, Other long-term assets, Other
current liabilities, and Other long-term liabilities in our consolidated balance sheets. We also classify cash flows related to
discontinued operations as one line item within each category of cash flows in our consolidated statements of cash flows.
Earnings per Common Share—
The calculation of earnings per common share is based on the weighted-average number of our common shares
outstanding during the applicable period. The calculation for diluted earnings per common share recognizes the effect of all
potential dilutive common shares that were outstanding during the respective periods, unless their impact would be antidilutive.
The calculation of earnings per common share also considers the effect of participating securities. Stock-based compensation
awards that contain nonforfeitable rights to dividends and dividend equivalents, such as our restricted stock units, are
considered participating securities and are included in the computation of earnings per common share pursuant to the two-class
method. In applying the two-class method, earnings are allocated to both common stock shares and participating securities
based on their respective weighted-average shares outstanding for the period.
Treasury Stock—
Shares of common stock repurchased by us are recorded at cost as treasury stock. When shares are reissued, we use an
average cost method to determine cost. The difference between the cost of the shares and the re-issuance price is added to or
deducted from Capital in excess of par value. We account for the retirement of treasury stock as a reduction of retained
earnings.
Comprehensive Income—
Comprehensive income is comprised of Net income and changes in unrealized gains or losses on available-for-sale
securities and is included in the consolidated statements of comprehensive income.
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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
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
consolidated financial statements.
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We do not believe any other recently issued, but not yet effective, accounting standards will have a material effect on
our consolidated financial position, results of operations, or cash flows.
2.
Spin Off of Home Health and Hospice Business
On July 1, 2022, we completed the previously announced separation of our home health and hospice business through
the distribution (the “Spin Off”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc.
(“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record
Date”). The Spin Off was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The Spin Off was structured as a pro rata
distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as
of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result
of the Spin Off, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on
the New York Stock Exchange.
In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as
discontinued operations and, as such, have been excluded from continuing operations for the years ended December 31, 2022
and 2021. Our presentation of discontinued operations excludes any allocation of general corporate and overhead costs as well
as interest expense. Prior to July 1, 2022, we operated under two reporting segments. We now operate under a single reporting
segment. In anticipation of the Spin Off, Enhabit transferred the “Encompass” trade name (net book value of $104.2 million) to
us during the second quarter of 2022.
In connection with the Spin Off, on June 30, 2022, we entered into several agreements with Enhabit that govern the
relationship of the parties following the Spin Off, including a Separation and Distribution Agreement, a Transition Services
Agreement, a Tax Matters Agreement and an Employee Matters Agreement.
Under the terms of the arrangement, we have provided certain transition services to Enhabit predominately consisting
of certain finance, information technology, human resources, employee benefits and other administrative services. Some of
those services may be provided for a period of up to two years after the Spin Off. For the years ended December 31, 2023 and
2022, income related to these transition services was $2.9 million and $2.1 million, respectively. These amounts were reflected
as reductions to General and administrative expenses in our consolidated statements of comprehensive income.
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The following table presents the results of operations of Enhabit as discontinued operations (in millions):
Net operating revenue
Operating expenses:
Salaries and benefits
Other operating expenses
Occupancy costs
Supplies
General and administrative expenses
Depreciation and amortization
Total operating expenses
Interest expense and amortization of debt discounts and fees
Other income
Equity in net income of nonconsolidated affiliates
Income from discontinued operations before income taxes
Provision for income tax expense
Income from discontinued operations, net of tax
Less: Net income attributable to noncontrolling interests included in discontinued
operations
Net income attributable to Encompass Health included in discontinued
For the Year Ended December 31,
2022
2021
$
542.3 $
1,106.6
376.4
47.5
11.0
11.7
59.3
16.7
522.6
0.2
—
—
19.5
4.3
15.2
(1.3)
759.2
89.7
21.2
25.1
27.9
36.9
960.0
0.3
(4.8)
(0.6)
151.7
37.6
114.1
(1.8)
112.3
operations
$
13.9 $
Transaction costs of $56.7 million and $22.9 million incurred during the years ended December 31, 2022 and 2021,
respectively, are included in general and administrative expenses in the table above and in (Loss) income from discontinued
operations, net of tax, in the consolidated statements of comprehensive income. These charges primarily related to third-party
advisory, consulting, legal and professional services, that were associated with the Spin Off.
During 2023, we incurred legal costs of $15.8 million related to ongoing litigation against former executive officers of
our home health and hospice business. These costs are included in (Loss) income from discontinued operations, net of tax, in
the consolidated statements of comprehensive income.
3.
Business Combinations:
2023 Acquisitions
During 2023, we completed the following acquisitions, none of which were individually material to our financial
position, results of operations, or cash flows. Each acquisition was made to enhance our position and ability to provide inpatient
rehabilitation services to patients in the applicable geographic areas.
•
•
•
In March 2023, we acquired 50% of the operations of a 24-bed inpatient rehabilitation unit in Eau Claire, Wisconsin
when Hospital Sisters Health System contributed those operations to our existing joint venture.
In March 2023, we acquired 50% of the operations of a 48-bed inpatient rehabilitation unit in Knoxville, Tennessee
when Covenant Health contributed those operations to our existing joint venture.
In September 2023, we acquired 50% of the operations of a 29-bed inpatient rehabilitation unit in Columbus, Georgia
when Piedmont Healthcare, Inc. contributed those operations to our existing joint venture.
We accounted for these transactions under the acquisition method of accounting and reported the results of operations
of the acquired hospitals from the respective dates of acquisition. Assets acquired were recorded at their estimated fair values as
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of the acquisition date. Estimated fair values were based on various valuation methodologies including: an income approach
using discounted cash flow techniques for the noncompete intangible assets; an income approach utilizing the relief from
royalty method for the trade name intangible assets; and an income approach utilizing the excess earnings method for the
certificates of need intangible assets. The aforementioned income methods utilize management’s estimates of future operating
results and cash flows discounted using a weighted-average cost of capital. The excess of the fair value of the consideration
conveyed over the fair value of the assets acquired was recorded as goodwill. The goodwill reflects our expectations of our
ability to gain access to and penetrate the acquired units’ historical patient base and the benefits of being able to leverage
operational efficiencies with favorable growth opportunities based on positive demographic trends in these markets. The
goodwill recorded as a result of these transactions that is deductible for federal income tax purposes is $7.4 million.
The fair values recorded were based upon a preliminary valuation. Estimates and assumptions used in such valuation
are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The
primary areas of the preliminary valuation that are not yet finalized relate to the fair value of amounts for intangible assets and
the final amount of residual goodwill. We expect to continue to obtain information to assist us in determining the fair value of
the net assets acquired at the acquisition date during the measurement period.
The fair value of the assets acquired at the acquisition dates were as follows (in millions):
Property and equipment, net
Identifiable intangible assets:
Noncompete agreements (useful lives of 3 years)
Trade names (useful lives of 20 years)
Certificates of need (useful lives of 20 years)
Goodwill
Total assets acquired
Information regarding the net cash paid for the acquisitions during 2023 is as follows (in millions):
Fair value of assets acquired
Goodwill
Fair value of noncontrolling interest owned by joint venture partner
Net cash paid for acquisitions
Pro Forma Results of Operations
$
0.1
0.5
1.8
10.6
18.1
31.1
13.0
18.1
(31.1)
—
$
$
$
The following table summarizes the results of operations of the above mentioned acquisitions from the dates of
acquisitions included in our consolidated results of operations and the unaudited pro forma results of operations of the
combined entity had the dates of the acquisitions been January 1, 2022 (in millions):
Acquired entities only: Actual from acquisition date to December 31, 2023
Combined entity: Supplemental pro forma from 01/01/2023-12/31/2023 (unaudited)
Combined entity: Supplemental pro forma from 01/01/2022-12/31/2022 (unaudited)
$
— $
4,812.8
4,379.4
—
353.9
274.5
The information presented above is for illustrative purposes only and is not necessarily indicative of results that would
have been achieved if the acquisitions had occurred as of the beginning of our 2022 reporting period.
Net Operating
Revenues
Net Income
Attributable to
Encompass Health
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
2022 Acquisitions
During 2022, we completed the following acquisitions, none of which were individually material to our financial
position, results of operations, or cash flows. Each acquisition was made to enhance our position and ability to provide inpatient
rehabilitation services to patients in the applicable geographic areas.
•
•
•
In August 2022, we acquired 60% of the operations of a 23-bed inpatient rehabilitation unit in Grand Forks, North
Dakota when Altru Health System contributed those operations to our existing joint venture.
In August 2022, we acquired 50% of the operations of a 22-bed inpatient rehabilitation unit in Moline, Illinois when
Trinity Medical Center contributed those operations to our existing joint venture.
In December 2022, we acquired 50% of the operations of a 54-bed inpatient rehabilitation unit in Naples, Florida when
NCH Healthcare System contributed those operations to our joint venture.
We accounted for these transactions under the acquisition method of accounting and reported the results of operations
of the acquired hospitals from the respective dates of acquisition. Assets acquired were recorded at their estimated fair values as
of the acquisition date. Estimated fair values were based on an income approach using discounted cash flow techniques for the
noncompete intangible assets. The aforementioned income method utilizes management’s estimates of future operating results
and cash flows discounted using a weighted-average cost of capital. The excess of the fair value of the consideration conveyed
over the fair value of the assets acquired was recorded as goodwill. The goodwill reflects our expectations of our ability to gain
access to and penetrate the acquired hospitals’ historical patient base and the benefits of being able to leverage operational
efficiencies with favorable growth opportunities based on positive demographic trends in these markets. None of the goodwill
recorded as a result from these transactions is deductible for federal income tax purposes.
The fair value of the assets acquired at the acquisition dates were as follows (in millions):
Identifiable intangible assets:
Noncompete agreements (useful lives of 2 to 3 years)
Goodwill
Total assets acquired
Information regarding the net cash paid for the acquisitions during 2022 is as follows (in millions):
Fair value of assets acquired
Goodwill
Fair value of noncontrolling interest owned by joint venture partner
Net cash paid for acquisitions
$
$
$
$
0.9
26.2
27.1
0.9
26.2
(27.1)
—
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Pro Forma Results of Operations
The following table summarizes the results of operations of the above-mentioned acquisitions from the dates of
acquisitions included in our consolidated results of operations and the unaudited pro forma results of operations of the
combined entity had the dates of the acquisitions been January 1, 2021 (in millions):
Net Operating
Revenues
Net Income
Attributable to
Encompass Health
Acquired entities only: Actual from acquisition date to December 31, 2022
Combined entity: Supplemental pro forma from 01/01/2022-12/31/2022 (unaudited)
Combined entity: Supplemental pro forma from 01/01/2021-12/31/2021 (unaudited)
$
— $
4,369.0
4,039.8
—
273.7
415.3
The information presented above is for illustrative purposes only and is not necessarily indicative of results that would
have been achieved if the acquisitions had occurred as of the beginning of our 2021 period.
2021 Acquisitions
During 2021, we completed the following acquisitions, none of which were individually material to our financial
position, results of operations, or cash flows. Each acquisition was made to enhance our position and ability to provide inpatient
rehabilitation services to patients in the applicable geographic areas.
•
•
•
In April 2021, we acquired 51% of the operations of a 14-bed inpatient rehabilitation unit in San Angelo, Texas when
Shannon Medical contributed those operations to our existing joint venture entity.
In June 2021, we acquired 75% of the operations of a 16-bed inpatient rehabilitation unit in McKees Rocks,
Pennsylvania through our existing joint venture with Heritage Valley Health System, Inc. The acquisition was funded
using cash on hand.
In July 2021, we acquired 65% of the operations of a 22-bed inpatient rehabilitation unit in Odessa, Texas when
ECHD Ventures contributed those operations to our existing joint venture entity.
We accounted for these transactions under the acquisition method of accounting and reported the results of operations
of the acquired hospitals from its respective date of acquisition. Assets acquired were recorded at their estimated fair values as
of the acquisition date. Estimated fair values were based on various valuation methodologies including: an income approach
using primarily discounted cash flow techniques for the noncompete intangible assets and an income approach utilizing the
relief from royalty method for the trade name intangible asset. The aforementioned income methods utilize management’s
estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market
participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the assets acquired
was recorded as goodwill. The goodwill reflects our expectations of our ability to gain access to and penetrate the acquired
hospital’s historical patient base and the benefits of being able to leverage operational efficiencies with favorable growth
opportunities based on positive demographic trends in this market. None of the goodwill recorded as a result from these
transactions is deductible for federal income tax purposes.
The fair value of the assets acquired at the acquisition dates were as follows (in millions):
Identifiable intangible assets:
Noncompete agreements (useful lives of 3 to 5 years)
Trade name (useful life of 20 years)
Goodwill
Other long-term assets
Total assets acquired
$
1.0
0.3
8.8
0.1
$
10.2
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Information regarding the net cash paid for the acquisitions during 2021 is as follows (in millions):
Fair value of assets acquired
Goodwill
Fair value of noncontrolling interest owned by joint venture partner
Net cash paid for acquisitions
Pro Forma Results of Operations
$
$
1.4
8.8
(9.1)
1.1
The following table summarizes the results of operations of the above mentioned-acquisitions from their respective
dates of acquisition included in our consolidated results of operations and the unaudited pro forma results of operations of the
combined entity had the date of the acquisitions been January 1, 2021 (in millions):
Net Operating
Revenues
Net Income
Attributable to
Encompass Health
Acquired entities only: Actual from acquisition date to December 31, 2021
Combined entity: Supplemental pro forma from 01/01/2021-12/31/2021 (unaudited)
$
— $
4,021.1
—
412.5
The information presented above is for illustrative purposes only and is not necessarily indicative of results that would
have been achieved if the acquisitions had occurred as of the beginning of our 2021 period.
4.
Variable Interest Entities:
As of December 31, 2023 and December 31, 2022, we consolidated eight limited partnership-like entities that are VIEs
and of which we are the primary beneficiary. Our ownership percentages in these entities range from 50.0% to 75.0% as of
December 31, 2023. 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.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The carrying amounts and classifications of the consolidated VIEs’ assets and liabilities, which are included in our
consolidated balance sheets, are as follows (in millions):
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Other long-term assets
Total assets
Liabilities
Current liabilities:
Current portion of long-term debt
Current operating lease liabilities
Accounts payable
Accrued payroll
Other current liabilities
Total current liabilities
Long-term debt, net of current portion
Long-term operating lease liabilities
Total liabilities
As of December 31,
2023
2022
$
0.2 $
$
$
36.7
5.0
41.9
128.8
1.4
15.9
1.2
18.5
207.7 $
0.9 $
—
7.6
9.4
9.3
27.2
13.6
1.4
$
42.2 $
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0
K
-
0.2
34.0
6.7
40.9
129.0
1.7
15.9
1.5
18.8
207.8
0.8
0.4
7.0
8.2
15.7
32.1
14.5
1.3
47.9
5.
Cash and Marketable Securities:
The components of our investments as of December 31, 2023 are as follows (in millions):
Cash
Equity securities
Total
Cash & Cash
Equivalents
Restricted Cash
Restricted
Marketable
Securities
$
$
69.1 $
—
69.1 $
35.1 $
—
35.1 $
— $
126.2
126.2 $
Total
104.2
126.2
230.4
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The components of our investments as of December 31, 2022 are as follows (in millions):
Cash
Equity securities
Total
Restricted Cash—
Cash & Cash
Equivalents
Restricted Cash
Restricted
Marketable
Securities
$
$
21.8 $
—
21.8 $
31.6 $
—
31.6 $
— $
110.0
110.0 $
Total
53.4
110.0
163.4
Restricted cash consisted of the following (in millions):
Current:
Affiliate cash
Self-insured captive funds
Other
Total restricted cash
As of December 31,
2023
2022
$
$
17.7 $
17.1
0.3
35.1 $
12.9
17.3
1.4
31.6
Affiliate cash represents cash accounts maintained by joint ventures in which we participate where one or more of our
external partners requested, and we agreed, that the joint venture’s cash not be commingled with other corporate cash accounts
and be used only to fund the operations of those joint ventures. Self-insured captive funds represent cash held at our wholly
owned insurance captive, HCS, Ltd., as discussed in Note 11, Self-Insured Risks. These funds are committed to pay third-party
administrators for claims incurred and are restricted by insurance regulations and requirements. These funds cannot be used for
purposes outside HCS without the permission of the Cayman Islands Monetary Authority.
The classification of restricted cash held by HCS as current or noncurrent depends on the classification of the
corresponding claims liability.
Marketable Securities—
Restricted marketable securities at both balance sheet dates represent restricted assets held at HCS. HCS insures a
substantial portion of Encompass Health’s professional liability, workers’ compensation, and other insurance claims. These
funds are committed for payment of claims incurred, and the classification of these marketable securities as current or
noncurrent depends on the classification of the corresponding claims liability. As of December 31, 2023, $37.6 million of
restricted marketable securities are included in Other current assets and $88.6 million are included in Other long-term assets in
the consolidated balance sheet. As of December 31, 2022, $30.9 million of restricted marketable securities are included in
Other current assets and $79.1 million are included in Other long-term assets in the consolidated balance sheet. During the
years ended December 31, 2023, 2022, and 2021, $1.3 million, $(7.4) million, and $0.6 million, respectively, of unrealized net
gains (losses) were recognized in our consolidated statements of comprehensive income on marketable securities still held at the
reporting date.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
6.
Accounts Receivable:
Accounts receivable consists of the following (in millions):
Current:
Patient accounts receivable
Other accounts receivable
Noncurrent patient accounts receivable
Accounts receivable
As of December 31,
2023
2022
$
599.8 $
11.8
611.6
20.9
$
632.5 $
524.8
12.0
536.8
73.3
610.1
Because the resolution of claims that are part of Medicare audit programs can take several years, we review the patient
receivables that are part of this adjudication process to determine their appropriate classification as either current or noncurrent.
Amounts considered noncurrent are included in Other long-term assets in our consolidated balance sheets. See Note 1,
Summary of Significant Accounting Policies, “Net Operating Revenues,” for additional information.
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7.
Property and Equipment:
Property and equipment consists of the following (in millions):
Land
Buildings
Leasehold improvements
Vehicles
Furniture, fixtures, and equipment
Less: Accumulated depreciation and amortization
Construction in progress
Property and equipment, net
As of December 31,
2023
2022
$
294.0 $
286.1
3,402.8
3,019.8
316.8
5.3
723.3
281.5
4.5
647.2
4,742.2
4,239.1
(1,872.2)
(1,659.4)
2,870.0
431.0
2,579.7
359.5
$
3,301.0 $
2,939.2
As of December 31, 2023, approximately 67% of our consolidated Property and equipment, net held by Encompass
Health Corporation and its guarantor subsidiaries was pledged to the lenders under our credit agreement. See Note 10, Long-
term Debt, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity
and Capital Resources.”
Depreciation expense was $215.7 million, $187.3 million, and $160.4 million for the years ended December 31, 2023,
2022 and 2021, respectively. Interest capitalized was $13.5 million, $10.5 million, and $8.9 million for the years ended
December 31, 2023, 2022 and 2021, respectively.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
8.
Leases:
We lease real estate, vehicles, and equipment under operating and finance leases with non-cancelable terms generally
expiring at various dates through 2037. Our operating and finance leases generally have 1- to 25-year terms, with one or more
renewal options, primarily relating to our real estate leases, with terms to be determined at the time of renewal. The exercise of
such lease renewal options is at our sole discretion, and to the extent we are reasonably certain we will exercise a renewal
option, the years related to that option are included in our determination of the lease term for purposes of classifying and
measuring a given lease. Certain leases also include options to purchase the leased property.
The components of lease costs are as follows (in millions):
Operating lease cost
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease cost
Short-term and variable lease cost
Sublease income
Total lease cost
For the Year Ended December 31,
2021
2022
2023
$
40.9 $
38.7 $
46.7
25.7
26.2
51.9
2.9
(3.3)
92.4 $
27.5
29.0
56.5
5.2
(2.9)
97.5 $
28.0
30.7
58.7
3.1
(3.1)
105.4
$
Supplemental consolidated balance sheet information related to leases is as follows (in millions):
Assets
Operating lease
Finance lease (1)
Total leased assets
Liabilities
Current liabilities:
Operating lease
Finance lease
Noncurrent liabilities:
Operating lease
Finance lease
Total leased liabilities
Classification
Operating lease right-of-use assets
Property and equipment, net
Current operating lease liabilities
Current portion of long-term debt
Long-term operating lease liabilities
Long-term debt, net of current portion
As of December 31,
2023
2022
$
$
$
$
208.5 $
247.2
455.7 $
24.1 $
21.6
196.1
318.5
560.3 $
212.5
272.9
485.4
25.6
19.5
199.7
340.3
585.1
(1) Finance lease assets are recorded net of accumulated amortization of $171.6 million and $145.8 million as of December 31, 2023 and
2022, respectively.
F-31
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Weighted Average Remaining Lease Term
Operating lease
Finance lease
Weighted Average Discount Rate
Operating lease
Finance lease
Maturities of lease liabilities as of December 31, 2023 are as follows (in millions):
Year Ending December 31,
2024
2025
2026
2027
2028
2029 and thereafter
Total lease payments
Less: Interest portion
Total lease liabilities
As of December 31,
2023
2022
9.5 years
10.7 years
9.3 years
11.6 years
6.3 %
7.7 %
6.2 %
7.7 %
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Operating
Leases
Finance
Leases
$
37.0 $
39.2
37.4
35.6
34.6
116.4
300.2
(80.0)
$
220.2 $
46.3
47.0
47.9
47.4
46.4
270.1
505.1
(165.0)
340.1
Supplemental cash flow information related to our leases is as follows (in millions):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Finance leases
For the Year Ended December 31,
2023
2022
2021
$
39.0 $
40.5 $
27.1
41.1
29.7
19.2
$
26.2 $
48.7 $
21.4
1.0
45.0
31.0
44.6
26.9
46.4
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
9.
Goodwill and Other Intangible Assets:
The following table shows changes in the carrying amount of Goodwill (in millions):
Goodwill as of December 31, 2020
Acquisitions
Goodwill as of December 31, 2021
Acquisitions
Goodwill as of December 31, 2022
Acquisitions
Goodwill as of December 31, 2023
Amount
1,228.2
8.8
1,237.0
26.2
1,263.2
18.1
1,281.3
$
$
Goodwill increased in 2021, 2022 and 2023 as a result of our acquisitions of inpatient rehabilitation operations. For
additional information on these acquisitions, see Note 3, Business Combinations.
We performed impairment reviews as of October 1, 2023, 2022, and 2021 and concluded no Goodwill impairment
existed. As of December 31, 2023, we had no accumulated impairment losses related to Goodwill.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table provides information regarding our other intangible assets (in millions):
Gross Carrying
Amount
Accumulated
Amortization
Net
Certificates of need:
2023
2022
Licenses:
2023
2022
Noncompete agreements:
2023
2022
Trade name - Encompass:
2023
2022
Trade names - all other:
2023
2022
Internal-use software:
2023
2022
Market access assets:
2023
2022
Total intangible assets:
2023
2022
$
$
$
$
$
$
$
$
(43.1) $
(41.5)
(55.4) $
(54.3)
(62.0) $
(60.2)
77.8
78.9
10.3
11.4
4.7
6.0
— $
—
135.2
135.2
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K
-
120.9 $
120.4
65.7 $
65.7
66.7 $
66.2
135.2 $
135.2
39.3 $
37.5
(22.2) $
(20.8)
198.6 $
183.2
(166.4) $
(150.3)
13.2 $
13.2
(12.3) $
(12.0)
17.1
16.7
32.2
32.9
0.9
1.2
639.6 $
621.4
(361.4) $
(339.1)
278.2
282.3
Amortization expense for other intangible assets is as follows (in millions):
Amortization expense
For the Year Ended December 31,
2023
2022
2021
$
32.5 $
28.8 $
31.2
Total estimated amortization expense for our other intangible assets for the next five years is as follows (in millions):
Year Ending December 31,
Estimated
Amortization Expense
2024
2025
2026
2027
2028
$
21.3
15.7
13.3
11.6
10.8
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
10.
Long-term Debt:
Our long-term debt outstanding consists of the following (in millions):
Credit Agreement—
Advances under revolving credit facility
Bonds payable—
5.75% Senior Notes due 2025
4.50% Senior Notes due 2028
4.75% Senior Notes due 2030
4.625% Senior Notes due 2031
Other notes payable
Finance lease obligations
Less: Current portion
Long-term debt, net of current portion
As of December 31,
2023
2022
$
— $
55.0
348.5
785.0
781.5
391.5
66.0
340.1
347.7
781.8
779.0
390.6
53.1
359.8
2,712.6
(24.8)
2,767.0
(25.2)
$
2,687.8 $
2,741.8
The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter
(in millions):
Year Ending December 31,
2024
2025
2026
2027
2028
Thereafter
Total
Face Amount
Net Amount
$
24.8 $
381.9
29.2
43.2
831.7
1,445.3
$
2,756.1 $
24.8
380.5
29.2
43.2
816.8
1,418.1
2,712.6
As a result of the redemptions discussed below, we recorded a $1.4 million and $1.0 million Loss on early
extinguishment of debt in 2022 and 2021, respectively. There were no redemptions resulting in a Loss on early extinguishment
of debt during 2023.
Senior Secured Credit Agreement—
The credit agreement provides for a $1 billion revolving credit facility, with a $260 million letter of credit subfacility
and a swingline loan subfacility, all of which mature in October 2027. The credit agreement previously provided for a $270
million term loan commitment, the outstanding amount of which was repaid in June 2022.
Amounts drawn on the revolving credit facility bear interest at a rate per annum of, at our option, (1) secured overnight
financing rate (“SOFR”) or (2) the higher of (a) Barclays Bank PLC’s prime rate and (b) the federal funds rate plus 0.5%, in
each case, plus, in each case, an applicable margin that varies depending upon our leverage ratio. We are also subject to a
commitment fee of 0.25% or 0.30%, depending on our leverage ratio, per annum on the daily amount of the unutilized
commitments under the revolving credit facility. The current interest rate on SOFR borrowings under the credit agreement
includes a credit spread of 1.25%.
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Notes to Consolidated Financial Statements
The credit agreement contains affirmative and negative covenants and default and acceleration provisions, including a
minimum interest coverage ratio and a maximum leverage ratio. Under one such negative covenant, we are restricted from
paying common stock dividends, prepaying certain senior notes, making certain investments, and repurchasing preferred and
common equity unless (1) we are not in default under the terms of the credit agreement and (2) our senior secured leverage
ratio, as defined in the credit agreement, does not exceed 2x. In the event the senior secured leverage ratio exceeds 2x, these
payments are subject to a limit of $200 million plus the Available Amount, as defined in the credit agreement. Our obligations
under the credit agreement are secured by the current and future personal property of the Company and its subsidiary
guarantors. The maximum leverage ratio in the financial covenants is 4.75x as of December 31, 2023.
In June 2022, Enhabit distributed $566.6 million to Encompass Health who used it to fully repay both the $250 million
outstanding balance of the Encompass Health revolving credit facility and approximately $236 million of the Encompass Health
term loan. Currently, there are no term loan commitments under the credit agreement.
As of December 31, 2023, no amount was drawn under the revolving credit facility. As of December 31, 2022, $55
million were drawn under the revolving credit facility with an interest rate of 7.0%. As of December 31, 2023 and 2022, $31.9
million and $32.7 million, respectively, were being utilized under the letter of credit subfacility, which were being used in the
ordinary course of business to secure workers’ compensation and other insurance coverages and for general corporate purposes.
Bonds Payable—
Senior Notes
The Company’s 5.75% Senior Notes due 2025 (the “2025 Notes”), 4.50% Senior Notes due 2028 (the “2028 Notes”),
4.75% Senior Notes due 2030 (the “2030 Notes”), and 4.625% Senior Notes due 2031 (the “2031 Notes” and collectively the
“Senior Notes”) were issued pursuant to an indenture (the “Base Indenture”) dated as of December 1, 2009, as supplemented by
each Senior Notes’ respective supplemental indenture (together with the Base Indenture, the “Indenture”). Pursuant to the terms
of the Indenture, the Senior Notes are jointly and severally guaranteed on a senior, unsecured basis by all of our existing and
future subsidiaries that guarantee borrowings under our credit agreement and other capital markets debt. The Senior Notes are
senior, unsecured obligations of Encompass Health and rank equally with our other senior indebtedness, senior to any of our
subordinated indebtedness, and effectively junior to our secured indebtedness to the extent of the value of the collateral securing
such indebtedness.
Upon the occurrence of a change in control (as defined in the Indenture), each holder of the Senior Notes may require
us to repurchase all or a portion of the notes in cash at a price equal to 101% of the principal amount of the Senior Notes to be
repurchased, plus accrued and unpaid interest.
The Senior Notes contain covenants and default and acceleration provisions, that, among other things, limit our and
certain of our subsidiaries’ ability to (1) incur additional debt, (2) make certain restricted payments, (3) consummate specified
asset sales, (4) incur liens, and (5) merge or consolidate with another person.
On December 9, 2021, we announced the commencement of a consent solicitation of holders of the 2025 Notes, 2028
Notes, 2030 Notes, and 2031 Notes (collectively the “Notes”) for the adoption of certain amendments to the Indenture, which
provided us with greater flexibility in effecting the Spin Off discussed in Note 2, Spin Off of Home Health and Hospice
Business. Each Indenture contains restrictive covenants that, among other things, limit our ability and the ability of certain of
our subsidiaries to make certain asset dispositions, investments, and distributions to holders of our capital stock. The
amendments to the Indentures permit us, subject to the leverage ratio condition set forth below, to distribute to our equity
holders in one or more transactions (a “Distribution”) some or all of the common stock of a subsidiary that holds substantially
all of the assets of our home health and hospice business. We may make any such distribution so long as the Leverage Ratio (as
defined in each Indenture) is no more than 3.5 to 1.0 on a pro forma basis after giving effect thereto. The amendments also
reduce the capacity under our restricted payments builder basket under each existing Indenture for the 2028 Notes, 2030 Notes,
and 2031 Notes by $200 million and amends the definition of “Consolidated Net Income” to allow us to exclude from
Consolidated Net Income (a component of the Leverage Ratio) any fees, expenses or charges related to any Distribution and the
solicitation of consents from the holders of the Notes. In December 2021 and January 2022, we received the requisite consents
for the adoption of these amendments. Under the terms of the amendments, we agreed to pay the holders of the Notes a total of
$40.5 million, excluding fees. We paid $20.0 million and $20.5 million in January and June 2022, respectively.
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
2025 Notes
In September 2015, we issued $350 million of the 2025 Notes at par. The 2025 Notes mature on September 15, 2025
and bear interest at a per annum rate of 5.75%. Inclusive of financing costs, the effective interest rate on the 2025 Notes is
6.0%. Interest on the 2025 Notes is payable semiannually in arrears on March 15 and September 15. We may redeem the 2025
Notes at par, in whole or in part, at any time on or after September 15, 2023.
2028 and 2030 Notes
In September 2019, we issued $500 million of the 2028 Notes at par and $500 million of the 2030 Notes at par. Certain
of the proceeds from this offering were used to fund the purchase of equity rights from management investors of our former
home health and hospice business.
In May 2020, we issued an additional $300 million of the 2028 Notes at a price of 99.0% of the principal amount and
an additional $300 million of the 2030 Notes at a price of 98.5% of the principal amount, which resulted in approximately
$583 million in net proceeds. We used a portion of the net proceeds from this borrowing, together with cash on hand, to repay
borrowings under our revolving credit facility.
The 2028 Notes mature on February 1, 2028. Inclusive of financing costs, the effective interest rate on the 2028 Notes
is 5.0%. Interest on the 2028 Notes is payable semiannually in arrears on February 1 and August 1. We may redeem the 2028
Notes, in whole or in part, at any time on or after February 1, 2023 at the redemption prices set forth below:
Period
2023
2024
2025 and thereafter
* Expressed in percentage of principal amount
Redemption
Price*
102.250 %
101.125 %
100.000 %
The 2030 Notes mature on February 1, 2030. Inclusive of financing costs, the effective interest rate on the 2030 Notes
is 5.2%. Interest on the 2030 Notes is payable semiannually in arrears on February 1 and August 1. We may redeem the 2030
Notes, in whole or in part, at any time on or after February 1, 2025 at the redemption prices set forth below:
Period
2025
2026
2027
2028 and thereafter
* Expressed in percentage of principal amount
Redemption
Price*
102.375 %
101.583 %
100.792 %
100.000 %
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
2031 Notes
In October 2020, we issued $400 million of the 2031 Notes at par. The 2031 Notes mature on April 1, 2031 and bear
interest at a per annum rate of 4.625%. Inclusive of financing costs, the effective interest rate on the 2031 Notes is 5.0%.
Interest is payable semiannually in arrears on April 1 and October 1 of each year. We may redeem the 2031 Notes, in whole or
in part, at any time on or after April 1, 2026 at the redemption prices set forth below:
Period
2026
2027
2028
2029 and thereafter
* Expressed in percentage of principal amount
Former 2023 Notes
Redemption
Price*
102.313 %
101.542 %
100.771 %
100.000 %
F
O
R
M
1
0
K
-
In March 2015, we issued $300 million of the 2023 Notes at par. In both April and June 2021, we redeemed
$100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the “Former 2023 Notes) using cash on
hand and capacity under our revolving credit facility. Pursuant to the terms of the Former 2023 Notes, these optional
redemptions were made at a price of par. In March 2022, we redeemed the remaining $100 million in outstanding principal
amount of the Former 2023 Notes using capacity under our revolving credit facility. Pursuant to the terms of the Former 2023
Notes, this optional redemption was made at a price of par. The Former 2023 Notes would have matured on March 15, 2023.
Inclusive of financing costs, the effective interest rate on the Former 2023 Notes was 5.4%. Interest on the Former 2023 Notes
was payable semiannually in arrears on March 15 and September 15.
Other Notes Payable—
Our notes payable consist of the following (in millions):
Sale/leaseback transactions involving real estate accounted
for as financings
Construction of new hospitals
Software contracts
Other notes payable
11.
Self-Insured Risks:
As of December 31,
2023
2022
Interest Rates
$
$
28.0 $
38.0
—
66.0 $
28.0
20.7
4.4
53.1
9.2% to 13.4%
5.0% to 5.5%
2.8%
We insure a substantial portion of our professional liability, general liability, and workers’ compensation risks through
a self-insured retention program (“SIR”) underwritten by our consolidated wholly owned offshore captive insurance subsidiary,
HCS, Ltd., which we fund via regularly scheduled premium payments. HCS is an insurance company licensed by the Cayman
Island Monetary Authority. We use HCS to fund the first $45 million for annual aggregate losses associated with general and
professional liability risks. Workers’ compensation exposures are capped on a per claim basis. Risks in excess of specified
limits per claim and in excess of our aggregate SIR amount are covered by unrelated commercial carriers.
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Table of Contents
Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table presents the changes in our self-insurance reserves (in millions):
Balance at beginning of period, gross
Less: Reinsurance receivables
Balance at beginning of period, net
Increase for the provision of current year claims
Decrease for the provision of prior year claims
Expenses related to discontinued operations
Payments related to current year claims
Payments related to prior year claims
Balance at end of period, net
Add: Reinsurance receivables
Balance at end of period, gross
2023
2022
2021
$
175.1 $
169.4 $
(32.3)
142.8
54.7
(10.5)
—
(8.1)
(30.8)
148.1
36.4
(30.0)
139.4
50.5
(8.2)
—
(7.1)
(31.8)
142.8
32.3
$
184.5 $
175.1 $
165.2
(28.3)
136.9
46.9
(6.8)
(0.2)
(7.0)
(30.4)
139.4
30.0
169.4
As of December 31, 2023 and 2022, $52.7 million and $46.6 million, respectively, of these reserves are included in
Other current liabilities in our consolidated balance sheets.
Provisions for these risks are based primarily upon actuarially determined estimates. These reserves represent the
unpaid portion of the estimated ultimate cost of all reported and unreported losses incurred through the respective consolidated
balance sheet dates. The reserves are estimated using individual case-basis valuations and actuarial analyses. Those estimates
are subject to the effects of trends in loss severity and frequency. The estimates are continually reviewed and adjustments are
recorded as experience develops or new information becomes known. The changes to the estimated ultimate loss amounts are
included in current operating results.
The reserves for these self-insured risks cover approximately 1,100 individual claims at December 31, 2023 and 2022,
and estimates for potential unreported claims. The time period required to resolve these claims can vary depending upon the
jurisdiction, the nature, and the form of resolution of the claims. The estimation of the timing of payments beyond a year can
vary significantly. Although considerable variability is inherent in reserve estimates, management believes the reserves for
losses and loss expenses are adequate; however, there can be no assurance the ultimate liability will not exceed management’s
estimates.
12.
Redeemable Noncontrolling Interests:
The following is a summary of the activity related to our Redeemable noncontrolling interests (in millions):
For the Year Ended December 31,
2022
2021
2023
Balance at beginning of period
$
35.6 $
42.2 $
Net income attributable to noncontrolling interests
Distributions declared
Change in fair value
Other
Spin off of Enhabit, Inc.
Balance at end of period
8.3
(1.1)
(0.8)
—
—
7.2
(5.3)
(3.4)
0.1
(5.2)
$
42.0 $
35.6 $
31.6
9.0
(8.0)
4.5
5.1
—
42.2
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Table of Contents
Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table reconciles the net income attributable to nonredeemable Noncontrolling interests, as recorded in
the shareholders’ equity section of the consolidated balance sheets, and the net income attributable to Redeemable
noncontrolling interests, as recorded in the mezzanine section of the consolidated balance sheets, to the Net income attributable
to noncontrolling interests presented in the consolidated statements of comprehensive income (in millions):
Net income attributable to nonredeemable noncontrolling interests
Net income attributable to redeemable noncontrolling interests
Net income attributable to noncontrolling interests
13.
Fair Value Measurements:
For the Year Ended December 31,
2023
2022
2021
$
$
102.7 $
87.7 $
8.3
7.2
96.0
9.0
111.0 $
94.9 $
105.0
F
O
R
M
1
0
K
-
Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):
As of December 31, 2023
Fair Value
Fair Value Measurements at Reporting Date Using
Quoted
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
$
126.2 $
4.0 $
122.2 $
Redeemable noncontrolling interests
As of December 31, 2022
42.0
—
—
Equity securities
$
110.0 $
3.7 $
106.3 $
Redeemable noncontrolling interests
35.6
—
—
—
42.0
—
35.6
M
I
M
I
(1)
The three valuation techniques are: market approach (M), cost approach (C), and income approach (I).
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 years ended December 31, 2023, 2022, and 2021, we did not record any material gains or losses
related to these assets.
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Table of Contents
Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
As discussed in Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” 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
consolidated balance sheets. The carrying amounts and estimated fair values for our other financial instruments are presented in
the following table (in millions):
As of December 31, 2023
Estimated
Carrying
Fair Value
Amount
As of December 31, 2022
Estimated
Carrying
Fair Value
Amount
Long-term debt:
Advances under revolving credit facility
$
— $
— $
55.0 $
5.75% Senior Notes due 2025
4.50% Senior Notes due 2028
4.75% Senior Notes due 2030
4.625% Senior Notes due 2031
Other notes payable
Financial commitments:
Letters of credit
348.5
785.0
781.5
391.5
66.0
349.3
763.6
755.0
369.4
66.0
347.7
781.8
779.0
390.6
53.1
55.0
347.7
726.7
703.7
342.2
53.1
—
31.9
—
32.7
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” and “Redeemable Noncontrolling Interests.”
14.
Share-Based Payments:
The Company has awarded employee stock-based compensation in the form of stock options and restricted stock
awards (“RSAs”) under the terms of share-based incentive plans designed to align employee and executive interests to those of
its stockholders. All employee stock-based compensation awarded during 2023, 2022, and 2021 was issued under the 2016
Omnibus Performance Incentive Plan, a stockholder-approved plan that reserves and provides for the grant of up to 16,860,765
shares of common stock after adjustment for the effect of the Spin Off. This plan allows for the grants of nonqualified stock
options, incentive stock options, restricted stock, stock appreciate rights, performance shares, performance share units, dividend
equivalents, restricted stock units (“RSUs”), and/or other stock-based awards. Stock-based compensation expense recognized in
continuing operations was $50.6 million, $29.2 million, and $29.1 million during 2023, 2022, and 2021, respectively. Stock-
based compensation expense classified as discontinued operations was $2.5 million and $3.6 million during 2022 and 2021,
respectively.
Stock Options—
Under our share-based incentive plans, officers and employees are given the right to purchase shares of Encompass
Health common stock at a fixed grant price determined on the day the options are granted. The terms and conditions of the
options, including exercise prices and the periods in which options are exercisable, are generally at the discretion of the
compensation and human capital committee of our board of directors. However, no options are exercisable beyond ten years
from the date of grant. Granted options vest over the awards’ requisite service periods, which are generally three years.
F-41
Table of Contents
Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The fair values of the options granted during the years ended December 31, 2023, 2022, and 2021 have been estimated
at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Expected volatility
Risk-free interest rate
Expected life (years)
Dividend yield
For the Year Ended December 31,
2023
2022
2021
28.5 %
4.2 %
6.9
1.1 %
28.3 %
1.7 %
7.8
1.9 %
28.4 %
1.1 %
7.1
1.9 %
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, the Black-Scholes option-pricing model requires the input of
highly subjective assumptions, including the expected stock price volatility. We estimate our expected term through an analysis
of actual, historical post-vesting exercise, cancellation, and expiration behavior by our officers and employees and projected
post-vesting activity of outstanding options. We calculate volatility based on the historical volatility of our common stock over
the period commensurate with the expected term of the options. The risk-free interest rate is the implied daily yield currently
available on U.S. Treasury issues with a remaining term closely approximating the expected term used as the input to the Black-
Scholes option-pricing model. We estimated our dividend yield based on our annual dividend rate and our stock price on the
dividend payment dates. Under the Black-Scholes option-pricing model, the weighted-average grant date fair value per share of
employee stock options granted during the years ended December 31, 2023, 2022, and 2021 was $19.23, $17.29, and $19.21,
respectively.
F
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1
0
K
-
A summary of our stock option activity and related information is as follows:
Shares
(In Thousands)
Weighted-
Average
Exercise Price
per Share
Weighted-
Average
Remaining Life
(Years)
Aggregate
Intrinsic Value
(In Millions)
Outstanding, December 31, 2022
Granted
Exercised
Outstanding, December 31, 2023
Exercisable, December 31, 2023
836 $
77
(60)
853
667
47.12
56.21
24.61
49.52
47.25
5.4 $
4.5
14.7
13.0
We recognized approximately $2.5 million, $1.2 million, and $2.2 million of compensation expense related to our
stock options for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, there was $0.5
million of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a
weighted-average period of 15 months. The total intrinsic value of options exercised during the years ended December 31,
2023, 2022, and 2021 was $2.5 million, $1.8 million, and $0.1 million, respectively.
Restricted Stock—
The RSAs granted in 2023, 2022, and 2021 included service-based awards and performance-based awards (that also
included a service requirement). These awards generally vest over a three-year requisite service period. For RSAs with a service
and/or performance requirement, the fair value of the RSA is determined by the closing price of our common stock on the grant
date. A portion of the RSAs granted in 2023 also includes a market condition for certain members of management. For awards
with a market condition, the fair value of the market condition component of the RSAs is determined using a lattice model.
Inputs into the model include the historical price volatility of our common stock, the historical volatility of the common stock
of the companies in the defined peer group, and the risk-free interest rate. Utilizing these inputs and potential future changes in
stock prices, multiple trials are run to determine the fair value.
F-42
Table of Contents
Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
A summary of our issued restricted stock awards is as follows (share information in thousands):
Nonvested shares at December 31, 2022
Granted
Vested
Forfeited
Nonvested shares at December 31, 2023
Weighted-
Average Grant
Date Fair Value
Shares
526 $
582
(367)
(35)
706
63.35
65.20
65.75
62.69
63.60
The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2022 and
2021 was $74.08 and $73.89 per share, respectively. We recognized approximately $46.6 million, $26.4 million, and
$24.9 million of compensation expense related to our restricted stock awards for the years ended December 31, 2023, 2022, and
2021, respectively. As of December 31, 2023, there was $38.3 million of unrecognized compensation expense related to
unvested restricted stock. This cost is expected to be recognized over a weighted-average period of 21 months. The remaining
unrecognized compensation expense for the performance-based awards may vary each reporting period based on changes in the
expected achievement of performance measures. The total fair value of shares vested during the years ended December 31,
2023, 2022, and 2021 was $24.3 million, $20.0 million, and $32.6 million, respectively. We accrue dividends on outstanding
RSAs, which are paid upon vesting.
Nonemployee Stock-Based Compensation Plans—
During the years ended December 31, 2023, 2022, and 2021, we provided incentives to our nonemployee members of
our board of directors through the issuance of RSUs out of our share-based incentive plans. RSUs are fully vested when
awarded and receive dividend equivalents in the form of additional RSUs upon the payment of a cash dividend on our common
stock. During the years ended December 31, 2023, 2022, and 2021, we issued 32,365, 22,469, and 24,043 RSUs, respectively,
with a fair value of $63.00, $67.42, and $84.83, respectively, per unit. We recognized approximately $1.5 million, $1.5 million,
and $2.0 million, respectively, of compensation expense upon their issuance in 2023, 2022, and 2021. There was no
unrecognized compensation related to unvested shares as of December 31, 2023. During the years ended 2023, 2022, and 2021,
we issued an additional 7,518, 11,976, and 8,577, respectively, of RSUs as dividend equivalents. As of December 31, 2023,
807,677 RSUs were outstanding. In addition to the above, we issued 130,406 additional RSUs in 2022 to current and former
members of our board of directors in connection with the Spin Off. Such adjusted awards preserved the same intrinsic value and
general terms and conditions (including vesting) as were in place immediately prior to the adjustments.
15.
Employee Benefit Plans:
Substantially all Encompass Health employees are eligible to enroll in Encompass Health-sponsored healthcare plans,
including coverage for medical and dental benefits. Our primary healthcare plans are national plans administered by third-party
administrators. We are self-insured for these plans. During 2023, 2022, and 2021, costs associated with these plans, net of
amounts paid by employees, approximated $186.2 million, $174.5 million, and $166.0 million, respectively.
The Encompass Health Corporation 401(k) Retirement Plan (the “401(k) Plan”) is a qualified 401(k) savings plan. The
401(k) Plan allows eligible employees to contribute up to 100% of their pay on a pre-tax basis into their individual retirement
account in the plan subject to the normal maximum limits set annually by the Internal Revenue Service. Encompass Health
employees who are at least 21 years of age are eligible to participate in the 401(k) Plan and all contributions to the plan are in
the form of cash. Encompass Health’s employer matching contribution under the 401(k) Plan is 50% of the first 6% of each
participant’s elective deferrals, which vest 100% after three years of service. Participants are always fully vested in their own
contributions.
Employer contributions to the 401(k) Plan approximated $31.3 million, $28.7 million, and $26.4 million in 2023,
2022, and 2021, respectively. In 2023, 2022, and 2021, approximately $1.1 million, $1.4 million, and $1.1 million, respectively,
from forfeited accounts were used to fund the matching contributions in accordance with the terms of the 401(k) Plan.
F-43
Table of Contents
Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Senior Management Bonus Program—
We maintain a Senior Management Bonus Program to reward senior management for performance based on a
combination of corporate or regional goals for all periods presented. The corporate and regional goals are approved on an
annual basis by our board of directors as part of our routine budgeting and financial planning process. The program applies to
persons who join the Company in, or are promoted to, senior management positions. In 2024, we expect to pay approximately
$28.6 million under the program for the year ended December 31, 2023. In March 2023 and 2022, we paid $14.5 million and
$23.4 million, respectively, under the program for the years ended December 31, 2022 and 2021.
16.
Income Taxes:
The significant components of the Provision for income tax expense related to continuing operations are as follows (in
millions):
Current:
Federal
State and other
Total current expense
Deferred:
Federal
State and other
Total deferred expense
F
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M
1
0
K
-
For the Year Ended December 31,
2023
2022
2021
$
101.7 $
58.7 $
26.6
128.3
(0.7)
4.6
3.9
13.5
72.2
17.9
10.0
27.9
63.7
20.8
84.5
14.4
3.0
17.4
Total income tax expense related to continuing operations
$
132.2 $
100.1 $
101.9
A reconciliation of differences between the federal income tax at statutory rates and our actual income tax expense on
our income from continuing operations, which include federal, state, and other income taxes, is presented below:
Tax expense at statutory rate
Increase (decrease) in tax rate resulting from:
State and other income taxes, net of federal tax benefit
Increase (decrease) in valuation allowance
Noncontrolling interests
Share-based windfall tax benefits
Other, net
Income tax expense
For the Year Ended December 31,
2023
2022
2021
21.0 %
21.0 %
21.0 %
4.1 %
0.3 %
(4.0) %
— %
0.4 %
21.8 %
4.0 %
0.6 %
(4.4) %
— %
1.0 %
22.2 %
4.0 %
(0.6) %
(4.3) %
(0.6) %
0.7 %
20.2 %
The Provision for income tax expense in 2023 and 2022 was greater than the federal statutory rate primarily due to
state and other income tax expense and a gross increase in valuation allowance, offset by the impact of noncontrolling interests.
The Provision for income tax expense in 2021 was less than the federal statutory rate primarily due to the impact of
noncontrolling interests, the decrease in valuation allowance and share-based windfall tax benefits, offset by state and other
income tax expense. See Note 1, Summary of Significant Accounting Policies, “Income Taxes,” for a discussion of the
allocation of income or loss related to pass-through entities, which is referred to as the impact of noncontrolling interests in this
discussion.
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Table of Contents
Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) included provisions relating to
net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction
limitations, technical corrections to tax depreciation methods for qualified improvement property and deferral of employer
payroll taxes. The CARES Act did not materially impact our effective tax rate for the years ended December 31, 2023, 2022,
and 2021, although it impacted the timing of cash payments for taxes.
Deferred income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available NOLs.
The significant components of our deferred tax assets and liabilities are presented in the following table (in millions):
Deferred income tax assets:
Net operating loss
Insurance reserve
Stock-based compensation
Revenue reserves
Operating lease liabilities
Other accruals
Tax credits
Total deferred income tax assets
Less: Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities:
Intangibles
Operating lease right-of-use assets
Property, net
Carrying value of partnerships
Other
Total deferred income tax liabilities
Net deferred income tax liabilities
As of December 31,
2023
2022
$
23.1 $
20.1
21.4
7.6
8.8
26.2
14.6
121.8
(28.4)
93.4
(62.6)
(7.8)
(18.1)
(91.7)
(0.2)
(180.4)
$
(87.0) $
36.9
19.1
16.1
—
6.6
24.8
12.4
115.9
(35.8)
80.1
(61.2)
(5.5)
(15.9)
(80.2)
(0.3)
(163.1)
(83.0)
We have state NOLs of $21.7 million that expire in various amounts at varying times through 2034. For the years
ended December 31, 2023 and 2022, the net decrease in our valuation allowance was $7.4 million and $7.3 million,
respectively. The decrease in our valuation allowance in 2023 and 2022 related primarily to the expiration of state NOLs.
As of December 31, 2023, we have a remaining valuation allowance of $28.4 million. This valuation allowance
remains recorded primarily due to unusable foreign tax credits generated by our operations in Puerto Rico. We determined it
was necessary to maintain a valuation allowance on our foreign tax credits due to uncertainties related to our ability to utilize a
portion of these credits before they expire. The amount of the valuation allowance has been determined based on the weight of
all available evidence, as described above, including management’s estimates of taxable income over the periods in which the
related deferred tax assets will be recoverable.
Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense.
Interest recorded as part of our income tax provision during 2023, 2022, and 2021 was not material. Accrued interest income
related to income taxes as of December 31, 2023 and 2022 was not material.
In December 2016, we signed an agreement with the IRS to participate in their Compliance Assurance Process
(“CAP”) for the 2017 tax year and have renewed this agreement each year since. CAP is a program in which we and the IRS
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Encompass Health Corporation and Subsidiaries
Notes to Consolidated Financial Statements
endeavor to agree on the treatment of significant tax positions prior to the filing of our federal income tax returns. In June 2023,
the IRS issued a no change letter effectively closing our 2021 tax year audit. Thus, the statute of limitations has expired, or we
have settled, federal income tax examinations with the IRS for all tax years through 2021.
The IRS is currently examining the 2022 tax year. For tax year 2023, we were accepted into CAP under the new
“Bridge Phase” of the program. The Bridge Phase is essentially a suspension of IRS review of our books and records for the tax
year. Per the IRS, the Bridge Phase is reserved for taxpayers whose risk of noncompliance does not support the continued use
of IRS resources. Generally, these are taxpayers who have few, if any, material issues, are expected to receive a Full
Acceptance Letter in their most recent CAP program phase, and continue to satisfy the CAP eligibility and suitability
requirements. In February 2024, the IRS offered, and we accepted, admission into the IRS Bridge Plus Pilot program for the
years 2023 and 2024. Under this program, we are required to provide additional documentation (including a draft return) to the
IRS prior to filing our return. The IRS performs a risk assessment review of this documentation and provides recommendations
to us. We then file our return and submit a post-filing representation that our return was filed consistent with the documentation
provided and the IRS recommendations (if any). After further review, the IRS then issues either a full or partial acceptance
letter. Our state income tax returns are also periodically examined by various regulatory taxing authorities. We are not currently
under audit by any state.
For the tax years that remain open under the applicable statutes of limitations, management considered potential
unrecognized tax benefits and determined there are no material unrecognized tax benefits that would impact prior years’ income
taxes.
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Notes to Consolidated Financial Statements
17.
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):
Basic:
Numerator:
Income from continuing operations
Less: Net income attributable to noncontrolling interests included in continuing
operations
Less: Income from continuing operations allocated to participating securities
Income from continuing operations attributable to Encompass Health common
shareholders
(Loss) income from discontinued operations, net of tax
Less: Net income attributable to noncontrolling interests included in discontinued
operations
Less: Income from discontinued operations allocated to participating securities
(Loss) income from discontinued operations attributable to Encompass Health
common shareholders
For the Year Ended December 31,
2022
2021
2023
$
475.0 $
350.7 $
403.1
(111.0)
(2.4)
361.6
(12.0)
—
—
(93.6)
(1.1)
256.0
15.2
(1.3)
(0.1)
(12.0)
13.8
(103.2)
(1.1)
298.8
114.1
(1.8)
(0.7)
111.6
410.4
Net income attributable to Encompass Health common shareholders
$
349.6 $
269.8 $
Denominator:
Basic weighted average common shares outstanding
99.5
99.2
99.0
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations
Discontinued operations
Net income
Diluted:
Numerator:
Income from continuing operations
Less: Net income attributable to noncontrolling interests included in continuing
operations
Income from continuing operations attributable to Encompass Health common
shareholders
(Loss) income from discontinued operations, net of tax
Less: Net income attributable to noncontrolling interests included in discontinued
operations
(Loss) income from discontinued operations attributable to Encompass Health
common shareholders
$
$
3.63 $
2.58 $
(0.12)
0.14
3.51 $
2.72 $
3.02
1.13
4.15
$
475.0 $
350.7 $
403.1
(111.0)
(93.6)
(103.2)
364.0
(12.0)
257.1
15.2
299.9
114.1
—
(1.3)
(1.8)
(12.0)
13.9
112.3
412.2
Net income attributable to Encompass Health common shareholders
$
352.0 $
271.0 $
Denominator:
Diluted weighted average common shares outstanding
101.3
100.4
100.2
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations
Discontinued operations
Net income
$
$
3.59 $
2.56 $
(0.12)
0.14
3.47 $
2.70 $
2.99
1.12
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Notes to 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):
Basic weighted average common shares outstanding
Restricted stock awards, dilutive stock options, and restricted stock units
Diluted weighted average common shares outstanding
For the Year Ended December 31,
2021
2022
2023
99.5
1.8
101.3
99.2
1.2
100.4
99.0
1.2
100.2
Options to purchase approximately 0.3 million, 0.4 million, and 0.2 million shares of common stock were outstanding
during December 31, 2023, 2022, and 2021, respectively, but were not included in the computation of diluted weighted-average
shares because to do so would have been antidilutive.
In February 2014, our board of directors approved an increase in our common stock repurchase authorization from
$200 million to $250 million. On July 24, 2018, the Company's board approved resetting the aggregate common stock
repurchase authorization to $250 million. The repurchase authorization does not require the repurchase of a specific number of
shares, has an indefinite term, and is subject to termination at any time by our board of directors. There were no repurchases of
our common stock during 2023, 2022 or 2021.
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In July 2019, our board of directors approved an increase in our quarterly dividend and declared a cash dividend of
$0.28 per share. The cash dividend of $0.28 per common share was declared and paid in each quarter through July 2022. In July
2022, our board of directors revised our quarterly dividend in response to the Spin Off and declared a cash dividend of $0.15
per share. The cash dividend of $0.15 per common share was declared and paid in each quarter through January 2024. Future
dividend payments are subject to declaration by our board of directors.
18.
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.
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 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 HHS-OIG and CMS 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, or
may result in, Encompass Health refunding amounts to Medicare or other federal healthcare programs.
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Notes to Consolidated Financial Statements
Other Commitments—
We are a party to service and other contracts in connection with conducting our business. Minimum amounts due
under these agreements are $40.3 million in 2024, $21.4 million in 2025, $20.0 million in 2026, $17.9 million in 2027, $11.7
million in 2028, and $35.0 million thereafter. These contracts primarily relate to software licensing and support.
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EXHIBIT INDEX
Effective as of January 1, 2018, we changed our name to Encompass Health Corporation. By operation of law, any
reference to “HealthSouth” in these exhibits should be read as “Encompass Health” as set forth in the Exhibit List below.
No.
2.1.1
2.1.2
2.1.3
2.1.4
3.1.1
3.1.2
3.2
4.1.1
4.1.2
4.1.3
4.1.4
4.1.5
4.1.6
4.1.7
Description
Separation and Distribution Agreement, dated as of June 30, 2022, by and between Encompass Health Corporation
and Enhabit, Inc. (incorporated by reference to Exhibit 2.1 to Encompass Health’s Current Report on Form 8-K filed
on July 7, 2022).
Transition Services Agreement, dated as of June 30, 2022, by and between Encompass Health Corporation and
Enhabit, Inc. (incorporated by reference to Exhibit 2.2 to Encompass Health’s Current Report on Form 8-K filed on
July 7, 2022).
Tax Matters Agreement, dated as of June 30, 2022, by and between Encompass Health Corporation and Enhabit, Inc.
(incorporated by reference to Exhibit 2.3 to Encompass Health’s Current Report on Form 8-K filed on July 7, 2022).
Employee Matters Agreement, dated as of June 30, 2022, by and between Encompass Health Corporation and
Enhabit, Inc. (incorporated by reference to Exhibit 2.4 to Encompass Health’s Current Report on Form 8-K filed on
July 7, 2022).
Amended and Restated Certificate of Incorporation of Encompass Health Corporation, effective as of January 1,
2018 (incorporated by reference to Exhibit 3.1 to Encompass Health’s Current Report on Form 8-K filed on October
25, 2017).
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Certificate of Designations of 6.50% Series A Convertible Perpetual Preferred Stock, as filed with the Secretary of
State of the State of Delaware on March 7, 2006 (incorporated by reference to Exhibit 3.1 to Encompass Health’s
Current Report on Form 8-K filed on March 9, 2006).
Amended and Restated Bylaws of Encompass Health Corporation, effective as of December 8, 2022 (incorporated
by reference to Exhibit 3.1 to Encompass Health’s Current Report on Form 8-K filed on December 13, 2022).
Indenture, dated as of December 1, 2009, between Encompass Health Corporation and Wells Fargo Bank, National
Association, as trustee and successor in interest to The Bank of Nova Scotia Trust Company of New York, relating
to Encompass Health’s outstanding senior notes (incorporated by reference to Exhibit 4.7.1 to Encompass Health’s
Annual Report on Form 10-K filed on February 23, 2010).
First Supplemental Indenture, dated December 1, 2009, among Encompass Health Corporation, the Subsidiary
Guarantors (as defined therein) and Wells Fargo Bank, National Association, as trustee and successor in interest to
The Bank of Nova Scotia Trust Company of New York (incorporated by reference to Exhibit 4.7.2 to Encompass
Health’s Annual Report on Form 10-K filed on February 23, 2010).
Second Supplemental Indenture, dated as of October 7, 2010, among Encompass Health Corporation, the guarantors
party thereto and Wells Fargo Bank, National Association, as trustee and successor in interest to The Bank of Nova
Scotia Trust Company of New York (incorporated by reference to Exhibit 4.2 to Encompass Health’s Current Report
on Form 8-K filed on October 12, 2010).
Third Supplemental Indenture, dated October 7, 2010, among Encompass Health Corporation, the Subsidiary
Guarantors (as defined therein) and Wells Fargo Bank, National Association, as trustee and successor in interest to
The Bank of Nova Scotia Trust Company of New York (incorporated by reference to Exhibit 4.3 to Encompass
Health’s Current Report on Form 8-K filed on October 12, 2010).
Fourth Supplemental Indenture, dated September 11, 2012, among Encompass Health Corporation, the Subsidiary
Guarantors (as defined therein) and Wells Fargo Bank, National Association, as trustee and successor in interest to
The Bank of Nova Scotia Trust Company of New York (incorporated by reference to Exhibit 4.2 to Encompass
Health’s Current Report on Form 8-K filed on September 11, 2012).
Fifth Supplemental Indenture, dated as of March 12, 2015, among Encompass Health Corporation, the guarantors
party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to
Encompass Health’s Current Report on Form 8-K filed on March 12, 2015).
Sixth Supplemental Indenture, dated as of August 7, 2015, among Encompass Health Corporation, the guarantors
party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.4 to
Encompass Health’s Current Report on Form 8-K filed on August 12, 2015).
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4.1.8
4.1.9
Seventh Supplemental Indenture, dated as of September 16, 2015, among Encompass Health Corporation, the
guarantors party thereto and Wells Fargo Bank, National Association, as trustee and successor in interest to The
Bank of Nova Scotia Trust Company of New York, relating to Encompass Health’s 5.75% Senior Notes due 2025
(incorporated by reference to Exhibit 4.2 to Encompass Health’s Current Report on Form 8-K filed on September 21,
2015).
Eighth Supplemental Indenture dated as of September 18, 2019, among Encompass Health Corporation, the
guarantors party thereto and Wells Fargo Bank, National Association, as trustee, relating to the 4.500% Notes due
2028 (incorporated by referenced to Exhibit 4.2 to the Encompass Health’s Current Report on Form 8-K filed on
September 18, 2019).
4.1.10 Ninth Supplemental Indenture dated as of September 18, 2019, among Encompass Health Corporation, the
guarantors party thereto and Wells Fargo Bank, National Association, as trustee, relating to the 4.750% Notes due
2030 (incorporated by referenced to Exhibit 4.3 to the Encompass Health’s Current Report on Form 8-K filed on
September 18, 2019).
4.1.11 Tenth Supplemental Indenture, dated as of October 5, 2020, among Encompass Health Corporation, the guarantors
party thereto and Wells Fargo Bank, National Association, as trustee, relating to the 4.625% Notes due 2031
(incorporated by reference to Exhibit 4.2 to the Encompass Health’s Current Report on Form 8-K filed on October 5,
2020).
4.1.12 Eleventh Supplemental Indenture, dated as of December 15, 2021, among Encompass Health Corporation, the
guarantors party thereto and Wells Fargo Bank, National Association, as trustee, relating to the 5.75% Notes due
2025 (incorporated by reference to Exhibit 4.3 to the Encompass Health’s Current Report on Form 8-K filed on
December 17, 2021).
4.1.13 Twelfth Supplemental Indenture, dated as of January 24, 2022, among Encompass Health Corporation, the
guarantors party thereto and Wells Fargo Bank, National Association, as trustee, relating to the 4.500% Notes due
2028, 4.750% Notes due 2030 and 4.625% Notes due 2031 (incorporated by reference to Exhibit 4.5 to the
Encompass Health’s Current Report on Form 8-K filed on January 25, 2022).
4.2
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (Common
Stock)(incorporated by reference to Exhibit 4.2 to Encompass Health's Annual Report on Form 10-K filed on
February 27, 2020).
10.1.1 Encompass Health Corporation Amended and Restated 2004 Director Incentive Plan (incorporated by reference to
Exhibit 10.12.1 to Encompass Health’s Annual Report on Form 10-K filed on March 29, 2006).+
10.1.2 Form of Restricted Stock Unit Agreement (Amended and Restated 2004 Director Incentive Plan)(incorporated by
reference to Exhibit 10.12.2 to Encompass Health’s Annual Report on Form 10-K filed on March 29, 2006).+
10.2
10.3
10.4
10.5
10.6
Form of Indemnity Agreement entered into between Encompass Health Corporation and the directors of Encompass
Health (incorporated by reference to Exhibit 10.31 to Encompass Health’s Annual Report on Form 10-K filed on
June 27, 2005).+
Encompass Health Corporation Fifth Amended and Restated Change in Control Benefits Plan (incorporated by
reference to Exhibit 10.3 to Encompass Health’s Annual Report on Form 10-K filed on February 27, 2023).+
Description of the Encompass Health Corporation Senior Management Bonus and Long-Term Incentive Plans
(incorporated by reference to the section captioned “Executive Compensation – Compensation Discussion and
Analysis – Elements of Executive Compensation” in Encompass Health’s Definitive Proxy Statement on
Schedule 14A filed on April 4, 2022).+
Description of the annual compensation arrangement for non-employee directors of Encompass Health Corporation
(incorporated by reference to the section captioned “Corporate Governance and Board Structure – Compensation of
Directors” in Encompass Health’s Definitive Proxy Statement on Schedule 14A, filed on April 4, 2022).+
Encompass Health Corporation Fifth Amended and Restated Executive Severance Plan (incorporated by reference to
Exhibit 10.2 to Encompass Health’s Quarterly Report on Form 10-Q filed on October 31, 2018).+
10.7.1 Encompass Health Corporation Nonqualified Retirement Plan (incorporated by reference to Exhibit 10.8 to
Encompass Health's Annual Report on Form 10-K filed on February 27, 2020).+
10.7.2 First Amendment to the Encompass Health Corporation Nonqualified Retirement Plan (incorporated by reference to
Exhibit 10.8.2 to Encompass Health’s Annual Report on Form 10-K filed on February 27, 2023).+
10.8.1 Form of Non-Qualified Stock Option Agreement (Amended and Restated 2008 Equity Incentive Plan)(incorporated
by reference to Exhibit 10.10.3 to Encompass Health’s Annual Report on Form 10-K filed on February 22, 2017).+
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10.8.2 Form of Restricted Stock Unit Award (Amended and Restated 2008 Equity Incentive Plan)(incorporated by
reference to Exhibit 10.1.5 to Encompass Health’s Quarterly Report on Form 10-Q filed on August 4, 2011).+
10.9
Encompass Health Corporation Directors’ Deferred Stock Investment Plan (incorporated by reference to Exhibit
10.15 to Encompass Health’s Annual Report on Form 10-K filed on February 19, 2013).+
10.10.1 Encompass Health Corporation 2016 Omnibus Performance Incentive Plan (incorporated by reference to
Exhibit 10.1.1 to Quarterly Report on Form 10-Q filed on July 29, 2016).+
10.10.2 Form of Non-Qualified Stock Option Agreement (2016 Omnibus Performance Incentive Plan)(incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 12, 2016).+
10.10.3 Form of Restricted Stock Award (2016 Omnibus Performance Incentive Plan)(incorporated by reference to
Exhibit 10.1.3 to Quarterly Report on Form 10-Q filed on July 29, 2016).+
10.10.4 Form of Performance Share Unit Award (2016 Omnibus Performance Incentive Plan)(incorporated by reference to
Exhibit 10.1.4 to Quarterly Report on Form 10-Q filed on July 29, 2016).+
10.10.5 Form of Restricted Stock Unit Award (2016 Omnibus Performance Incentive Plan)(incorporated by reference to
Exhibit 10.1.5 to Quarterly Report on Form 10-Q filed on July 29, 2016).+
10.11
10.12
Second Amended and Restated Collateral and Guarantee Agreement, dated November 25, 2019, by and among
Encompass Health Corporation, certain of its subsidiaries, and Barclays Bank PLC, as collateral agent (incorporated
by reference to Exhibit 10.2 to Encompass Health’s Current Report on Form 8-K filed on December 2, 2019).
Sixth Amended and Restated Credit Agreement, dated October 7, 2022, by and among Encompass Health
Corporation, certain of its subsidiaries, Barclays Bank PLC, as administrative agent and collateral agent, and various
other lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
October 13, 2022).
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19
Encompass Health Corporation Insider Trading Policy.
21.1
Subsidiaries of Encompass Health Corporation.
22.1
Subsidiary Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize Securities
of the Registrant.
23.1
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
24.1
Power of Attorney (included as part of signature page).
31.1
31.2
32.1
32.2
97
101
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Encompass Health Corporation Compensation Recoupment Policy.
Sections of the Encompass Health Corporation Annual Report on Form 10-K for the year ended December 31, 2023,
formatted in XBRL (eXtensible Business Reporting Language), submitted in the following files:
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
+ Management contract or compensatory plan or arrangement.
* Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment. The nonpublic
information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
Board of Directors
Executive Officers
Stockholder Information
MARK J. TARR
President and Chief Executive Officer
DOUGLAS E. COLTHARP
Executive Vice President and
Chief Financial Officer
PATRICK DARBY
Executive Vice President,
General Counsel and Secretary
ELISSA J. CHARBONNEAU, D.O.
Chief Medical Officer
ANDREW L. PRICE
Chief Accounting Officer
EDMUND M. FAY
Senior Vice President and Treasurer
DONALD L. CORRELL *
Chairman of the Board
Encompass Health Corporation
Chief Executive Officer and Co-founder
Water Capital Partners, LLC
GREG D. CARMICHAEL
Executive Chairman
Fifth Third Bancorp
EDWARD M. CHRISTIE, III
President and Chief Executive Officer
Spirit Airlines, Inc.
JOHN W. CHIDSEY *
Chief Executive Officer
Subway Restaurants
JOAN E. HERMAN
President and Chief Executive Officer
Herman & Associates, LLC
LESLYE G. KATZ
Former Senior Vice President
and Chief Financial Officer
IMS Health, Inc.
PATRICIA A. MARYLAND
Director
Surgery Partners, Inc.
Privia Health Group, Inc.
KEVIN O’CONNOR
Senior Vice President and
Chief Legal Officer
Carrier Global Corporation
CHRISTOPHER R. REIDY
Director
Embecta Corp.
NANCY M. SCHLICHTING
Director
Walgreens Boots Alliance, Inc.
Baxter International, Inc.
MARK J. TARR
President and Chief Executive Officer
Encompass Health Corporation
TERRANCE WILLIAMS
President and Chief Executive Officer
TruStage Financial Group, Inc.
*RETIRING AND NOT STANDING
FOR RE-ELECTION IN 2024.
PRINCIPAL CORPORATE OFFICES
Encompass Health Corporation
9001 Liberty Parkway
Birmingham, AL 35242
205.967.7116
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PricewaterhouseCoopers LLP
569 Brookwood Village, Suite 851
Birmingham, AL 35209
TRANSFER AGENT AND REGISTRAR
Written requests:
Computershare
P.O. Box 43006
Providence, RI 02940-3006
By overnight delivery:
150 Royall Street, Suite 101
Canton, MA 02021
1.877.456.7913 (U.S.)
1.781.575.4686 (non-U.S.)
web.queries@computershare.com
STOCK LISTING
Encompass Health Corporation common
stock trades on the New York Stock
Exchange under the symbol “EHC.”
STOCKHOLDER INFORMATION
AND INQUIRIES
Stockholders and investors seeking
information concerning stock
ownership or Encompass Health
generally are invited to contact
Encompass Health’s Investor Relations
by calling 205.969.4600 or sending an
email to investorrelations@
encompasshealth.com.
Information concerning Encompass
Health can also be obtained through our
website at www.encompasshealth.com.
ANNUAL MEETING
OF STOCKHOLDERS
The annual meeting will be held on
May 2, 2024 at 11:00 a.m., central time,
at our corporate headquarters, 9001
Liberty Parkway, Birmingham, Alabama
35242.
CERTIFICATIONS
Our chief executive officer and chief
financial officer have filed with the
Securities and Exchange Commission
the certifications required by Section
302 of the Sarbanes-Oxley Act of
2002 as Exhibits 31.1 and 31.2 to
the Company’s Annual Report on
Form 10-K for the fiscal year ended
December 31, 2023.
©2023:Encompass Health Corporation:W633942