Encompass Health Raises 2026 Outlook as Q3 EBITDA Climbs 15.5%

Encompass Health Corp. (NYSE: EHC) increased its 2026 revenue, adjusted EBITDA and adjusted earnings guidance after third-quarter results showed higher patient volumes, revenue per discharge and operating profitability. The inpatient rehabilitation hospital operator reported an 8.9% increase in quarterly revenue, while adjusted EBITDA rose 15.5% and adjusted earnings per share advanced 23.6%.

For the quarter ended September 30, net operating revenue reached $1.61 billion, up from $1.48 billion a year earlier. Inpatient revenue increased 9.9% to $1.57 billion, more than offsetting a 19.5% decline in other revenue to $40.4 million. Medicaid supplemental payments included in other revenue decreased by $10 million.

Adjusted EBITDA rose to $346.6 million from $300.1 million. Salaries and benefits increased in dollar terms to $840.7 million but declined to 52.2% of revenue from 53.1%. Total hospital operating expenses represented 20.2% of revenue, compared with 20.9% in the prior-year quarter.

GAAP diluted earnings per share from continuing operations attributable to Encompass Health were $1.51, up from $1.24. Adjusted EPS increased to $1.52 from $1.23. The adjusted measure excludes items that the company considers unrepresentative of ongoing operating performance.

Patient volumes and capacity expansion

Third-quarter discharges increased 5.7% to 69,605, consisting of 3.0% same-store growth and 2.7% new-store growth. Net patient revenue per discharge rose 4.0% to $22,543. Occupancy was 77.0%, up from 76.2% a year earlier, while licensed beds increased to 11,722 from 11,352.

The company opened a 50-bed hospital in Norristown, Pennsylvania, during the quarter, bringing year-to-date openings to four hospitals with 189 beds. It also added 31 beds to existing hospitals in the third quarter and 85 beds during the first nine months. Net pre-opening and ramp-up costs were $4.9 million for the quarter and $15.8 million year to date.

For the full year, Encompass Health expects eight new hospitals totaling 389 beds and between 145 and 190 additional beds at existing facilities. Related net pre-opening and ramp-up costs are projected at $20 million to $24 million, including expenses incurred in 2026 for facilities scheduled to open in 2027.

Guidance increased after third-quarter performance

As of October 28, Encompass Health expects 2026 net operating revenue of $6.45 billion to $6.50 billion, compared with its previous range of $6.41 billion to $6.49 billion. The company increased its adjusted EBITDA forecast to between $1.395 billion and $1.415 billion from $1.365 billion to $1.395 billion.

Adjusted EPS from continuing operations attributable to Encompass Health is now expected to range from $6.23 to $6.37, up from the prior forecast of $6.02 to $6.25.

The outlook assumes an approximately 2.3% Medicare pricing increase for the fourth quarter, managed-care pricing growth of 3.5% to 4.0%, and salary, wage and benefit costs per full-time equivalent rising 3.5% to 4.0%. Management expects bad-debt reserves to equal 2.0% to 2.5% of fourth-quarter revenue, along with an approximately 26% tax rate and a diluted share count of about 100 million.

Bad-debt reserves were 2.7% of third-quarter revenue, up from 1.9% a year earlier. Encompass Health attributed the increase primarily to billing and collection disruption following a system conversion in the second quarter of 2026.

Cash flow, capital deployment and leverage

Adjusted free cash flow increased 51.2% to $263.4 million in the quarter. For the first nine months, it rose 8.9% to $634.2 million. The company expects full-year adjusted free cash flow of $770 million to $865 million, with maintenance capital expenditures of $225 million to $240 million and net cash tax payments of $200 million to $220 million.

Encompass Health plans to spend $695 million to $755 million on capacity expansions and replacement inpatient rehabilitation facilities during 2026. Through September, it had spent $451.2 million on those projects.

The company repurchased 494,657 shares for $57.9 million during the third quarter and 1.91 million shares for $203.7 million in the first nine months. Its board increased the aggregate share-repurchase authorization to $1 billion in July, leaving approximately $955 million available at September 30. The quarterly cash dividend was increased to $0.21 per share from the $0.19 paid in July, with the new amount paid in October.

Total long-term debt was $2.60 billion at quarter-end, compared with $2.49 billion at the end of 2025. Encompass Health issued an additional $100 million of 5.875% senior notes due in 2034 during August. Debt to adjusted EBITDA was 1.9 times, while leverage net of cash was 1.8 times.

Regulatory and operating risks

The company identified reimbursement changes, labor availability and costs, tariffs, development activity and regulatory programs as factors that could cause actual results to differ from its projections. Beginning January 1, 2027, 108 Encompass Health inpatient rehabilitation facilities will be subject to the Centers for Medicare & Medicaid Services’ Review Choice Demonstration, including 75 hospitals added through an expansion announced in September 2026.

Encompass Health also has 89 hospitals in markets covered by CMS’s Transforming Episode Accountability Model, including 41 joint ventures. The company said 2% of its 2025 discharges fell within the model’s geographic, episode and payer parameters, limiting the portion of its current patient base directly covered by the program.