Encompass Health Raises Full-Year Guidance After Strong Q2 Performance
The rehabilitation hospital operator reported 9.6% revenue growth and increased adjusted EPS by 10.7%, while announcing expanded capacity plans following North Carolina's CON repeal.
Strong Quarter Drives Guidance Increase
Encompass Health Corporation reported second quarter 2026 results that exceeded expectations, prompting the company to raise its full-year guidance for the second time this year. Revenue grew 9.6% year-over-year, while adjusted EBITDA increased 9.2% to $348 million and adjusted earnings per share rose 10.7% (earnings call, 2026-08-06).
The revenue increase was driven by 5.6% discharge growth and a 3.9% increase in net revenue per discharge, with CEO Mark Tarr attributing the pricing improvement to "higher patient acuity" (earnings call, 2026-08-06). The company continues to see "very solid growth in medically-complex categories, including stroke and brain injury," according to CFO Douglas Coltharp (earnings call, 2026-08-06).
Quality Metrics and Labor Trends
The $12 billion market cap company maintained strong clinical outcomes, with a Q2 discharge acuity rate of 84.7% and discharge to acute care rate of 8.4%, both exceeding industry averages (earnings call, 2026-08-06). Patient outcomes were supported by increased participation in career ladder programs that help nurses attain advanced certifications.
Premium labor costs, comprising contract labor and shift bonuses, declined $2.6 million year-over-year to $25 million, while contract labor as a percentage of total FTEs improved 20 basis points to 1.1% (earnings call, 2026-08-06). However, salaries, wages, and benefits per FTE increased 3.4%, partly reflecting career ladder participation.
Aggressive Capacity Expansion
Encompass Health opened two new hospitals totaling 90 beds in the quarter and added 10 beds to existing facilities. Through the first half of 2026, the company opened three hospitals with 139 beds and added 54 beds to existing hospitals (earnings call, 2026-08-06).
Looking ahead, the company plans to open five additional hospitals with 250 beds and add 100 to 150 beds to existing facilities by year-end. The pipeline of announced projects beyond 2026 currently includes 13 hospitals with 606 beds (earnings call, 2026-08-06).
North Carolina Expansion Opportunity
North Carolina's repeal of its Certificate of Need law for inpatient rehabilitation care, effective October 1, 2026, presents significant growth opportunities. Tarr called it "a great result for the citizens of North Carolina" and noted the company has identified 15 priority markets with three real estate parcels under contract (earnings call, 2026-08-06). The first North Carolina opening is anticipated in late 2028 or early 2029.
Updated Guidance and Capital Allocation
The company raised full-year 2026 guidance to net operating revenue of $6.41 billion to $6.49 billion, adjusted EBITDA of $1.365 billion to $1.395 billion, and adjusted EPS of $6.02 to $6.25 (earnings call, 2026-08-06). The guidance incorporates a projected 2.3% Medicare rate increase for Q4 based on CMS's July 30 final rule.
Encompass Health repurchased approximately 704,000 shares for $74.2 million in Q2, bringing year-to-date repurchases to 1.4 million shares and $145.8 million. The company announced an increased share repurchase authorization to $1 billion and raised its quarterly dividend to $0.21 per share (earnings call, 2026-08-06). Net leverage stood at 1.9x at quarter end.
This article was generated by MarginX from the earnings call on 2026-08-06. It is not investment advice.