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MarketScreener Homepage  >  Equities  >  Nyse  >  Encompass Health Corporation    EHC

ENCOMPASS HEALTH CORPORATION

(EHC)
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ENCOMPASS HEALTH : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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07/31/2020 | 12:49pm EDT
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") relates to Encompass Health Corporation and its
subsidiaries and should be read in conjunction with our condensed consolidated
financial statements included under Part I, Item 1, Financial Statements
(Unaudited), of this report. In addition, the following MD&A should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2019, Part II, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, Part I, Item 1, Business, and
Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year
ended December 31, 2019 filed on February 27, 2020 (collectively, the "2019 Form
10­K").
This MD&A is designed to provide the reader with information that will assist in
understanding our condensed consolidated financial statements, the changes in
certain key items in those financial statements from period to period, and the
primary factors that accounted for those changes, as well as how certain
accounting principles affect our condensed consolidated financial statements.
See "Cautionary Statements Regarding Forward-Looking Statements" on page ii of
this report for a description of important factors that could cause actual
results to differ from expected results. See also Item 1A, Risk Factors, of this
report and to the 2019 Form 10­K.
Executive Overview
Our Business
We are a national leader in integrated healthcare services, offering both
facility-based and home-based patient care through our network of inpatient
rehabilitation hospitals, home health agencies, and hospice agencies. As of
June 30, 2020, our national footprint includes 39 states and Puerto Rico. As
discussed in this Item, "Segment Results of Operations," we manage our
operations in two operating segments which are also our reportable segments:
(1) inpatient rehabilitation and (2) home health and hospice. For additional
information about our business, see Item 1, Business, of the 2019 Form 10­K.
Inpatient Rehabilitation
We are the nation's largest owner and operator of inpatient rehabilitation
hospitals in terms of patients treated and discharged, revenues, and number of
hospitals. We provide specialized rehabilitative treatment on both an inpatient
and outpatient basis. We operate hospitals in 35 states and Puerto Rico, with
concentrations in the eastern half of the United States and Texas. As of
June 30, 2020, we operate 136 inpatient rehabilitation hospitals and manage
three inpatient rehabilitation units through management contracts. Our inpatient
rehabilitation segment represents approximately 77% of our Net operating
revenues for the three and six months ended June 30, 2020.
Home Health and Hospice
Our home health business is the nation's fourth largest provider of
Medicare-certified skilled home health services in terms of revenues. Our home
health services include a comprehensive range of Medicare-certified home nursing
services to adult patients in need of care. These services include, among
others, skilled nursing, physical, occupational, and speech therapy, medical
social work, and home health aide services. Our hospice business is the nation's
eleventh largest provider of Medicare-certified hospice services in terms of
revenues. We provide hospice services to terminally ill patients and their
families that address patients' physical needs, including pain control and
symptom management, and to provide emotional and spiritual support. As of
June 30, 2020, we provide home health services in 245 locations and provide
hospice services in 83 locations across 31 states, with concentrations in the
Southeast and Texas. In addition, one of these home health agencies operates as
a joint venture that we account for using the equity method of accounting. Our
home health and hospice segment represents approximately 23% of our Net
operating revenues for the three and six months ended June 30, 2020.
2020 Overview
During the three and six months ended June 30, 2020, Net operating revenues
decreased (5.4)% and (0.1)%, respectively, over the same periods of 2019 due
primarily to decreased volumes in both segments. As discussed in the "Results of
Operations" section, through February 2020, both of our segments were
experiencing strong volume growth. In mid-March, we began to experience declines
in volume due to conditions resulting from the novel coronavirus disease 2019
("COVID-19") pandemic, reaching a low point in mid-April and rebounding in May
and June to pre-pandemic levels for home health starts of care and hospice
admissions and 95% of the pre-pandemic levels for inpatient rehabilitation
patient census. See also the "Segment Results of Operations" sections of this
Item for additional volume and pricing information.


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Our growth efforts thus far in 2020 related to our inpatient rehabilitation segment have included the following: • began operating our new 50-bed inpatient rehabilitation hospital in

          Murrieta, California in February 2020;


•         began operating a 40-bed inpatient rehabilitation hospital in
          Coralville, Iowa with our joint venture partner, University of
          Iowa Health Care, in June 2020;

• began operating our new 40-bed inpatient rehabilitation hospital in

Sioux Falls, South Dakota in June 2020;

• continued our capacity expansions by adding 53 new beds to existing

hospitals; and

• announced or continued the development of the following hospitals:



                             Number of New Beds
                           2020(1) 2021(1) 2022(1)
De novos:
Toledo, Ohio                 40       -       -
Cumming, Georgia              -      50       -
North Tampa, Florida          -      50       -
Stockbridge, Georgia          -      50       -
Greenville, South Carolina    -      40       -
Pensacola, Florida            -      40       -
Shreveport, Louisiana         -      40       -
Waco, Texas                   -      40       -
Libertyville, Illinois        -       -      60
St. Augustine, Florida        -       -      40
Lakeland, Florida             -       -      50
Clermont, Florida             -       -      50
Joint ventures:
San Angelo, Texas             -      40       -
Knoxville, Tennessee          -       -      73


(1) Certain development projects may be delayed due to the COVID-19 pandemic.
We also continued our growth efforts in our home health and hospice segment. We
acquired one home health location in Lynchburg, Virginia and began accepting
patients at our home health location in Sebring, Florida and our new hospice
location in Allen, Texas.
We continued our shareholder distributions during the six months ended June 30,
2020 by paying a quarterly cash dividend of $0.28 per share on our common stock
in January, April and July. On July 21, 2020, our board of directors declared a
cash dividend of $0.28 per share, payable on October 15, 2020 to stockholders of
record on October 1, 2020. In addition, prior to suspending our repurchases in
mid-March 2020, we repurchased 0.1 million shares of our common stock in the
open market for approximately $4.9 million. For additional information see the
"Liquidity and Capital Resources" section of this Item.
COVID-19 Pandemic
The rapid onset of the COVID-19 outbreak in the United States has resulted in
significant changes to our operating environment. The willingness and ability of
patients to seek healthcare services has been negatively affected by restrictive
measures, such as travel bans, social distancing, quarantines, and
shelter-in-place orders. Elective procedures have been postponed by physicians
and acute-care hospitals and limited by governmental order to preserve capacity
for the expected volume of COVID-19 patients and reduce the risk of the spread
of COVID-19. Patients recovering from elective surgeries have historically
represented approximately 15% of our home health admissions. While not a
significant percentage of our inpatient rehabilitation population, we treat
patients recovering from elective surgery with multiple comorbidities that
qualify for


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inpatient rehabilitation care. It is also believed that many in need of
treatment for more severe medical conditions chose not to seek care because of
fear of infection. These changes to the healthcare environment, along with the
factors noted in the "Results of Operations" section of this Item, caused
decreased patient volumes in both our inpatient rehabilitation and home health
and hospice segments beginning in mid-March. We are also experiencing supply
chain disruptions as a result of the COVID-19 pandemic, including increased
procurement timelines. We have experienced and are likely to continue to
experience significant price increases in medical supplies, particularly
personal protective equipment ("PPE"). Beginning in March 2020, we experienced
increased supply expenses due to higher utilization of PPE and increased
purchasing of other medical supplies and cleaning and sanitization materials.
The federal government began to undertake numerous legislative and regulatory
initiatives designed to provide relief to the healthcare industry during the
COVID-19 pandemic as described below in the "Key Challenges" section. These
initiatives have given our hospitals and agencies the types of enhanced
flexibilities they need to care for our patients and assist acute-care hospitals
in maintaining hospital capacity in the current environment. The COVID-19
pandemic is still rapidly evolving and much of its impact remains unknown and
difficult to predict, with the impact on our operations and financial
performance being dependent on numerous factors, including the nature of the
COVID-19 pandemic, such as its rate of spread, duration, and geographic
coverage; the legal, regulatory, and administrative developments related to the
pandemic at federal, state, and local levels; and our infectious disease
prevention and control efforts.
While the operating environment for healthcare providers is continuously
changing during this pandemic, we have taken the following steps to ensure the
safety and well-being of our patients and employees:
ü  Staying current with the Centers for Disease Control and Prevention's (the

"CDC") guidance on testing and the use of PPE, which is frequently updated ü Limiting visitors in our hospitals to primary caregivers who require training

in order to safely discharge a patient home ü Screening everyone entering our hospitals and self-screening all home health

and hospice employees ü Performing pre-visit telephone calls to assess risk factors within the home,

   including patient and caregiver health status
ü  Following social distancing recommendations in our therapy gyms and
   performing therapy in patient rooms, if needed
ü  Suspended most of the hospital-based outpatient services
ü  Implemented work-at-home policies for home office and certain field personnel
ü  Halted all non-essential travel


We also continue to take actions to enhance our operational and financial flexibility and ensure our long-term sustainability. Our executive team voluntarily reduced their base compensation for six months. In addition, we have: ü secured secondary sources of PPE and other medical supplies, at times paying

   premium prices;
ü  aligned staffing with patient demand;
ü  amended our senior credit facility in April 2020 (primarily provided covenant

relief due to disruptions from the COVID-19 pandemic); ü issued an additional $300 million of our 4.50% Senior Notes due 2028 (the

"2028 Notes") and an additional $300 million of our 4.75% Senior Notes due

2030 (the "2030 Notes") in May 2020; ü developed plans for reducing capital expenditures; and ü suspended our authorized share repurchase program in mid-March.



After lengthy consideration, we developed plans to manage labor costs in
response to lower patient volumes via furloughs, changes to compensation
structures and workforce reductions.
Given the rapidly changing operating conditions related to the COVID-19
pandemic, we cannot accurately estimate the effects it may have on our full-year
2020 financial results.
Business Outlook
Notwithstanding the current impacts from the COVID-19 pandemic, we remain
optimistic regarding the intermediate and long-term prospects for both of our
business segments. 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. Even


                                       27
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more specifically, the average age of our 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, post-acute services. In
addition, we believe we can address the demand for facility-based and home-based
post-acute care services in markets where we currently do not have a presence by
constructing or acquiring new hospitals and by acquiring or opening home health
and hospice agencies in those extremely fragmented industries.
We are a leading provider of integrated healthcare services, offering both
facility-based and home-based patient care through our network of inpatient
rehabilitation hospitals, home health agencies, and hospice agencies. We are
committed to delivering high-quality, cost-effective, integrated patient care
across the healthcare continuum with a primary focus on the post-acute sector.
As the nation's largest owner and operator of inpatient rehabilitation hospitals
in terms of patients treated and discharged, revenues, and number of hospitals,
we believe we differentiate ourselves from our competitors based on the quality
of our clinical outcomes, our cost-effectiveness, our financial strength, and
our extensive application of technology. As the fourth largest provider of
Medicare-certified skilled home health services in terms of revenues, we believe
we differentiate ourselves from our competitors by the application of a highly
integrated technology platform, our ability to manage a variety of care
pathways, and a proven track record of consummating and integrating
acquisitions.
Although the healthcare industry is currently engaged in addressing the
healthcare crisis caused by the COVID-19 pandemic, the industry also 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 short-term goal is to serve our communities and provide the best care
possible during the COVID-19 pandemic. Our long-term 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 2023. We continue to have a strong, well-capitalized balance
sheet, including a substantial portfolio of owned real estate and significant
availability under our revolving credit facility. For these and other reasons,
we believe we will be able to adapt to changes in reimbursement, sustain our
business model, and grow through acquisition and consolidation opportunities as
they arise. See also Item 1, Business, "Competitive Strengths" and "Strategy and
2020 Strategic Priorities" in the 2019 Form 10­K.
Key Challenges
Healthcare is a highly-regulated industry facing many well-publicized regulatory
and reimbursement challenges. The industry also is facing uncertainty associated
with the efforts to identify and implement workable coordinated care and
integrated delivery payment models as well as post-acute site neutrality in
Medicare reimbursement. The Medicare reimbursement systems for both inpatient
rehabilitation and home health are undergoing significant changes. The future of
many aspects of healthcare regulation remains uncertain. Successful healthcare
providers are those able to adapt to changes in the regulatory and operating
environments, build strategic relationships across the healthcare continuum, and
consistently provide high-quality, cost-effective care. We believe we have the
necessary capabilities - change agility, strategic relationships, quality of
patient outcomes, cost effectiveness, and ability to capitalize on growth
opportunities - to adapt to and succeed in a dynamic, highly regulated industry,
and we have a proven track record of doing so. For a detailed discussion of the
challenges we face, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Executive Overview-Key
Challenges" to the 2019 Form 10­K.
As we continue to execute our business plan, the following are some of the
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 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 and agencies. Ensuring continuous compliance with extensive

laws and regulations is an operating requirement for all healthcare

providers. See Item 1, Business, "Regulation," Item 1A, Risk Factors,

and Item 7, Management's Discussion and Analysis of Financial Condition

          and Results of Operations, "Executive Overview-Key Challenges," to the
          2019 Form 10­K 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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•         Changes to Our Operating Environment Resulting from the COVID-19
          pandemic. As discussed above, the COVID-19 pandemic has resulted in
          significant changes to our operating environment. In March 2020, the
          federal government began to undertake numerous legislative and

regulatory initiatives designed to provide relief to the healthcare

industry during the COVID-19 pandemic.



Temporary suspension of the automatic 2% reduction of Medicare program payments,
known as "sequestration"
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
for all healthcare providers. This automatic reduction, known as
"sequestration," began affecting payments received after April 1, 2013 and, as a
result of subsequent legislation, will continue through fiscal year 2030. On
March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and
Economic Security Act of 2020 (the "CARES Act"), which temporarily suspends the
automatic 2% reduction of Medicare claim reimbursements for the period of May 1
through December 31, 2020. At this time, we cannot reasonably estimate the total
impact of the suspension of sequestration on our revenues due to the ongoing
volume volatility in both segments (see "Results of Operations" section of this
Item). During the second quarter of 2020, the impact of the suspension of
sequestration on our inpatient rehabilitation and home health and hospice
revenues was $7.9 million and $3.7 million, respectively.
Payment of relief funds directly to healthcare providers

The CARES Act also authorized the cash distribution of relief funds from the
Department of Health and Human Services ("HHS") to healthcare providers. HHS
requires providers to submit an attestation accepting certain terms and
conditions. If a provider does not wish to comply with these terms and
conditions, the provider must remit the full payment to HHS. We informed HHS we
would not accept any of the CARES Act relief funds. We have repaid all of the
initial funds received and intend to return any additional funds received.
Temporary suspension of certain patient coverage criteria and documentation and
care requirements
The CARES Act and a series of waivers and guidance issued by the Centers for
Medicare and Medicaid Services ("CMS") suspend various Medicare patient coverage
criteria and documentation and care requirements. These efforts to provide
regulatory relief help to ensure patients continue to have adequate access to
care notwithstanding the burdens being placed on healthcare providers by the
COVID-19 pandemic.
Inpatient Rehabilitation. Medicare pays our inpatient rehabilitation hospitals a
fixed payment reimbursement amount per discharge under the inpatient
rehabilitation facility prospective payment system (the "IRF-PPS") based on the
patient's rehabilitation impairment category established by CMS 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, post-admission evaluations, and individual treatment planning that
all delineate the role of physicians in ordering and overseeing patient care.
The CARES Act regulatory relief includes the temporary suspension of the
requirement that patients must be able to tolerate a minimum of 3 hours of
therapy per day for 5 days per week. Additionally, CMS has waived certain of the
requirements that at least 60% of a facility's patients must have a diagnosis
from at least 1 of 13 specified medical conditions and the requirement for a
physician to conduct and document a post-admission evaluation. CMS has also
issued a waiver to permit the rehabilitation physician to conduct face-to-face
visits using telehealth.
Home Health and Hospice. Medicare pays home health benefits for patients
discharged from a hospital or patients otherwise suffering from chronic
conditions that require ongoing but intermittent skilled care. As a condition of
participation under Medicare, patients must be homebound (meaning unable to
leave their home without a considerable and taxing effort), require intermittent
skilled nursing, physical therapy or speech therapy services, or have a
continuing need for occupational therapy, and receive treatment under a plan of
care established and periodically reviewed by a physician. A physician must
document that he or she or a qualifying nurse practitioner has had a
face-to-face encounter with the patient and then certify to CMS that a patient
meets the eligibility requirements for the home health benefit. The CARES Act
includes a provision allowing nurse practitioners and physician assistants under
certain conditions to certify, establish and periodically review the plan of
care, as well as supervise the provision of items and services for beneficiaries
under the Medicare home health benefit and expands the use of telehealth.
Additionally, CMS expanded the


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definition of "homebound" to include patients needing skilled services who are
homebound due solely to their COVID-19 diagnosis or patients susceptible to
contract COVID-19.
Medicare pays hospice benefits for patients with life expectancies of six months
or less, as documented by the patient's physician(s). Medicare hospice
reimbursements to each provider are subject to a number of conditions of
participation. These conditions require, among others, the use of volunteers and
onsite visits to evaluate aids. Volunteers provide day-to-day administrative
and/or direct patient care services in an amount that, at a minimum, equals five
percent of the total patient care hours of all paid hospice employees and
contract staff. A nurse or other professional conducts an onsite visit every two
weeks to evaluate if aides are providing care consistent with the care plan. The
CARES Act includes the temporary waiver of the requirement to use volunteers and
to conduct a nurse visit every two weeks to evaluate aides, as well as the
expanded use of telehealth.
On March 30, 2020, CMS announced a pause of certain claims processing
requirements for the Home Health Review Choice Demonstration ("RCD") in
Illinois, Ohio, and Texas until the Public Health Emergency for the COVID-19
pandemic has ended. CMS has offered home health agencies the option of
continuing their participation in the RCD, which we have elected to do. On July
7, 2020, CMS announced it will discontinue exercising enforcement discretion and
resume the demonstration on August 31, 2020. In addition, the demonstration will
begin in North Carolina and Florida on August 31, 2020. We operate agencies
(representing approximately 44% of our home health Medicare claims) in these
five states.
On March 30th, CMS also suspended most medical reviews, including pre-payment
medical reviews by Medicare Administrative Contractors ("MACs") under the
Targeted Probe and Educate ("TPE") initiative and post-payment reviews conducted
by MACs, Supplemental Medical Review Contractors and Recovery Audit Contractors
until the Public Health Emergency for the COVID-19 pandemic has ended. However,
on July 7, 2020, CMS announced it will discontinue exercising enforcement
discretion and will resume medical reviews beginning on August 3, 2020.
These regulatory actions provide flexibility to our hospitals and agencies to
care for patients and assist acute-care hospitals in maintaining hospital
capacity during the COVID-19 pandemic when the otherwise applicable rules would
likely have constrained our ability to do so.
•         Changes to Our Operating Environment Resulting from Healthcare Reform.
          On April 16, 2020, CMS released its Notice of Proposed Rulemaking for
          Fiscal Year 2021 for inpatient rehabilitation facilities under the
          inpatient rehabilitation facility prospective payment system (the "2021
          Proposed IRF Rule"). The 2021 Proposed IRF Rule would implement a net
          2.5% market basket increase (market basket update of 2.9% reduced by a
          productivity adjustment of 0.4%) effective for discharges between

October 1, 2020 and September 30, 2021. The 2021 Proposed 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. The 2021
          Proposed IRF Rule would update case-mix group relative weights and
          average lengths of stay values. The 2021 Proposed IRF Rule would also
          remove the post-admission physician evaluation requirement for all IRF
          discharges beginning on or after October 1, 2020, codify certain
          inpatient rehabilitation coverage documentation requirements, and,

under certain conditions, allow the use of non-physician practitioners

to perform the IRF services and documentation requirements currently

required to be performed by the rehabilitation physician. Based on our

analysis that utilizes, among other things, the acuity of our patients

          over the six-month period ended March 31, 2020, our experience with
          outlier payments over this same time frame, and other factors, we
          believe the 2021 Proposed IRF Rule will result in a net increase to our
          Medicare payment rates of approximately 2.4% effective October 1, 2020.
          As discussed above and in the "Results of Operations" section of this

Item, during the second quarter of 2020 we experienced an increase in

the acuity of our patients as a result of the COVID-19 pandemic. This

change and potentially others resulting from the ongoing COVID-19

pandemic have not been considered in our estimate and could ultimately

          affect the net impact of the 2021 Proposed IRF Rule on our Medicare
          payment rates.


On June 25, 2020, CMS released its Notice of Proposed Rulemaking for Calendar
Year 2021 for home health agencies under the home health prospective payment
system (the "2021 Proposed HH Rule"). The 2021 Proposed HH Rule would implement
a net 2.7% market basket increase (market basket update of 3.1% reduced by a
productivity adjustment of 0.4%) and make changes to the underlying wage index
system. CMS did not propose a behavioral adjustment for 2021 due to lack of data
and the COVID-19 pandemic. Since we are currently in the first year under the
new payment system, CMS will not update the case-mix weights, low-utilization
payment adjustment thresholds or outlier fixed-dollar loss ratio due to lack of
sufficient data. The 2021 Proposed HH Rule


                                       30
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also would finalize the use of telecommunications technologies in providing care
to beneficiaries under the Medicare home health benefit beyond the COVID-19
pandemic, as long as the telecommunications technology meets certain criteria
and does not replace in-person visits. While we continue to review the details
of the 2021 Proposed HH Rule, we believe it will result in an increase to our
Medicare home health payment rates of approximately 2.6% effective for 30-day
payment periods ending on or after January 1, 2021.
•         Maintaining Strong Volume Growth. In addition to the factors described

in our 2019 Form 10­K and as discussed above, beginning in March, we

experienced significant volume decreases in both segments which we

believe resulted from a number of conditions related to the COVID-19

pandemic as discussed in the "Results of Operations" section of this

Item. While most of our markets have returned to pre-pandemic levels, a

          current or future resurgence of COVID-19 infections could cause
          disruptions to our volume growth.


•         Recruiting and Retaining High-Quality Personnel. See Item 1A, Risk
          Factors, to the 2019 Form 10­K for a discussion of competition for

staffing, shortages of qualified personnel, and other factors that may

          increase our labor costs. Additionally, our operations have been
          affected and may in the future be affected by staffing shortages where
          employees must self-quarantine due to exposure to COVID-19 or where
          employees are unavailable due to a lack of childcare or care for
          elderly family.


We remain confident in the prospects of both of our business segments 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 businesses. We have a proven track
record of working through difficult situations, and we believe in our ability to
overcome current and future challenges.
Results of Operations
Payor Mix
We derived consolidated Net operating revenues from the following payor sources:
                            Three Months Ended June 30,        Six Months Ended June 30,
                              2020               2019            2020             2019
Medicare                        65.8 %              74.9 %         69.8 %           75.4 %
Medicare Advantage              18.2 %              10.9 %         14.9 %           10.3 %
Managed care                     9.3 %               8.3 %          8.9 %            8.3 %
Medicaid                         3.6 %               2.8 %          3.3 %            2.8 %
Other third-party payors         0.9 %               0.9 %          0.9 %            0.9 %
Workers' compensation            0.4 %               0.6 %          0.5 %            0.7 %
Patients                         0.4 %               0.5 %          0.5 %            0.5 %
Other income                     1.4 %               1.1 %          1.2 %            1.1 %
Total                          100.0 %             100.0 %        100.0 %          100.0 %


Medicare as a percentage of revenue decreased during the three and six months
ended June 30, 2020 as compared to the same periods of 2019 primarily due to the
COVID-19 pandemic, as discussed below. Within the inpatient rehabilitation
segment, Medicare Advantage as a percentage of revenue increased during the
three and six months ended June 30, 2020 as compared to the same periods of 2019
due in part from suspension of prior authorization requirements. For additional
discussion by segment, see the "Segment Results of Operations" section of this
Item.
For additional information regarding our payors, see the "Sources of Revenues"
section of Item 1, Business, of the 2019 Form 10­K.


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Our Results For the three and six months ended June 30, 2020 and 2019, our consolidated results of operations were as follows:

                                  Three Months Ended June 30,        Percentage Change       Six Months Ended June 30,       Percentage Change
                                    2020               2019            2020 vs. 2019            2020             2019          2020 vs. 2019
                                                                   (In Millions, Except Percentage Change)
Net operating revenues        $     1,074.1$     1,135.0              (5.4 )%      $     2,256.1$ 2,259.0              (0.1 )%
Operating expenses:
Salaries and benefits                 651.9               622.9               4.7  %            1,331.0         1,243.7               7.0  %
Other operating expenses              148.3               149.8              (1.0 )%              307.9           299.9               2.7  %
Occupancy costs                        20.3                20.3                 -  %               40.5            39.9               1.5  %
Supplies                               50.6                41.7              21.3  %               96.3            81.8              17.7  %
General and administrative
expenses                               43.0                77.1             (44.2 )%               78.6           130.5             (39.8 )%
Depreciation and amortization          60.7                52.7              15.2  %              119.5           105.2              13.6  %
Government, class action, and
related settlements                       -                   -                 -  %                2.8               -               N/A
Total operating expenses              974.8               964.5               1.1  %            1,976.6         1,901.0               4.0  %
Loss on early extinguishment
of debt                                   -                 2.3            (100.0 )%                  -             2.3            (100.0 )%
Interest expense and
amortization of debt
discounts and fees                     45.8                37.7              21.5  %               89.0            74.9              18.8  %
Other income                           (5.8 )              (2.2 )           163.6  %               (3.9 )          (5.9 )           (33.9 )%
Equity in net income of
nonconsolidated affiliates             (0.7 )              (1.8 )           (61.1 )%               (1.5 )          (4.3 )           (65.1 )%
Income from continuing
operations before income tax
expense                                60.0               134.5             (55.4 )%              195.9           291.0             (32.7 )%
Provision for income tax
expense                                11.8                23.5             (49.8 )%               38.9            54.3             (28.4 )%
Income from continuing
operations                             48.2               111.0             (56.6 )%              157.0           236.7             (33.7 )%
Income (loss) from
discontinued operations, net
of tax                                  0.1                (0.1 )          (200.0 )%                  -            (0.6 )          (100.0 )%
Net income                             48.3               110.9             (56.4 )%              157.0           236.1             (33.5 )%
Less: Net income attributable
to noncontrolling interests           (14.8 )             (19.7 )           (24.9 )%              (36.5 )         (42.6 )           (14.3 )%
Net income attributable to
Encompass Health              $        33.5$        91.2             (63.3 )%      $       120.5$   193.5             (37.7 )%


              Operating Expenses as a % of Net Operating Revenues
                                       Three Months Ended June 30,        Six Months Ended June 30,
                                          2020              2019            2020              2019
Operating expenses:
Salaries and benefits                      60.7 %             54.9 %         59.0 %             55.1 %
Other operating expenses                   13.8 %             13.2 %         13.6 %             13.3 %
Occupancy costs                             1.9 %              1.8 %          1.8 %              1.8 %
Supplies                                    4.7 %              3.7 %          4.3 %              3.6 %
General and administrative expenses         4.0 %              6.8 %          3.5 %              5.8 %
Depreciation and amortization               5.7 %              4.6 %          5.3 %              4.7 %
Government, class action, and
related settlements                           - %                - %          0.1 %                - %
Total operating expenses                   90.8 %             85.0 %         87.6 %             84.2 %




                                       32
--------------------------------------------------------------------------------


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 and home
health and hospice locations open throughout both the full current periods 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.
Net Operating Revenues
Our consolidated Net operating revenues decreased in the three and six months
ended June 30, 2020 over the same periods of 2019 primarily due to decreased
volumes in both segments partially offset by favorable pricing in our inpatient
rehabilitation segment. See additional discussion in the "Segment Results of
Operations" section of this Item.
During January and February 2020, both segments were exhibiting strong
year-over-year volume growth. Beginning in mid-March, we experienced decreased
volumes in both segments which we believe resulted from a number of conditions
related to the COVID-19 pandemic including: lower acute-care hospital censuses
due to the deferral of elective surgeries and shelter-in-place orders,
restrictive visitation policies in place at acute-care hospitals that severely
limit access to patients and caregivers by our clinical rehabilitation liaisons
and care transition coordinators, lock down of assisted living facilities, and
heightened anxiety among patients and their family members regarding the risk of
exposure to COVID-19 during acute-care and post-acute care treatment. We believe
these factors have contributed to a decline in new patients for all of our
business lines, a longer length of stay in the inpatient rehabilitation segment,
and fewer visits per episode in home health. Additionally, the decrease in
visits per episode which lead to an increase in low utilization payment
adjustments, or "LUPAs," together with a decrease in institutional admissions
negatively impacted home health pricing.
As shown below, inpatient rehabilitation patient census and home health starts
of care reached a low point the week ended April 12 (Easter weekend). By the end
of June, inpatient rehabilitation patient census rebounded to 95% of
pre-pandemic levels and home health starts of care rebounded to pre-pandemic
levels. Hospice admissions quickly returned to pre-pandemic levels following an
initial drop in March 2020. Monthly, year-over-year volume results were as
follows:
                                             2020 vs. 2019
                                   April      May      June      Q2
Inpatient Rehabilitation
Total discharges                  (20.9)%   (11.8)%    1.3%    (10.7)%
Same-store discharges             (22.8)%   (13.8)%   (1.0)%   (12.8)%

Home Health and Hospice Home health total admissions (23.5)% (8.2)% 8.4% (7.9)% Home health same-store admissions (31.9)% (17.4)% (2.3)% (17.3)% Hospice total admissions

           27.8%     28.4%    57.3%     37.3%

Hospice same-store admissions (1.3)% (1.0)% 23.7% 6.7%



                        Inpatient Rehabilitation - Patient Census 

Information

February 29, 2020March 31, 2020April 12, 2020April 29, 2020June 3, 2020July 1, 2020July 22, 2020

      6,782           5,342          5,139          5,989         6,453    

6,506 6,448

© Edgar Online, source Glimpses

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