Encompass Health Corporation Aktie

Good morning, everyone, and welcome to Encompass Health's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Third Quarter 2026 Earnings Call. Before we begin, if you do not already have a copy, the third quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com.

On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements, such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K, the Form 10-K for the year ended December 31, 2025, and the Form 10-Q for the quarters ended March 31, 2026, June 30, 2026, and September 30, 2026, when filed.

We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website.

I would like to remind everyone that we will adhere to the 1 question and 1 follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to President and Chief Executive Officer, Mark Tarr.

Mark, thank you, and good morning, everyone. We're very pleased with our third quarter results. As revenue grew 8.9%, adjusted EBITDA increased 15.5% and adjusted EPS increased 23.6%. For the first 9 months of 2026, revenue rose 9.2%, adjusted EBITDA increased 11.9% and adjusted EPS was up 17%.

Based primarily on our Q3 results, we are again raising our guidance for 2026. We achieved these results while once again delivering outstanding patient outcomes. Our Q3 discharge to community rate was 84.7%, discharge to acute rate was 8.4% and discharge to SNF rate was 6.2%.

Our performance on each of these quality metrics continues to exceed industry averages. Our hospitals continue to be recognized for the outstanding clinical care we provide. Newsweek recently named Encompass Health as America's most awarded leader in inpatient rehabilitation for the seventh consecutive year.

Also, NRC Health, a leading provider of patient experience data, recognized Encompass Health with the 2026 NRC Health Excellence and Patient Experience Award for the second consecutive year, placing us among the top 3 large health systems nationwide for patient experience. Our investments in professional growth and development programs for our clinicians continue to enhance our abilities to serve high-acuity medically complex patients.

Encompass Health holds 408 Joint Commission disease-specific certifications, including 150 Joint Commission stroke certifications. This represents approximately 65% of total stroke certifications among all providers. In August 2026, the American Heart Association and American Stroke Association reaffirmed the importance of inpatient rehabilitation facilities in their updated 2026 stroke rehabilitation guideline, recommending IRF care over skilled nursing facilities for eligible stroke patients when both settings are available.

The recommendation is supported by evidence showing greater functional improvement and higher rates of discharge back to the community following IRF care. We treat more stroke patients than any other inpatient rehabilitation provider. Through the first 3 quarters of 2026, we treated 37,620 patients recovering from a stroke, comprising approximately 18% of our patient mix. We will continue to put our resources to work to help stroke and other vulnerable patients regain their independence and return to the activities that matter most to them.

Demand for inpatient rehabilitation services remains strong and is growing. We continue to invest in capacity additions to help address this underserved market. In Q3, we opened a new 50-bed hospital in Norristown, Pennsylvania and added 31 beds to existing hospitals. Through the third quarter, we opened 4 hospitals with a total of 189 beds and added 85 beds to existing hospitals.

Earlier this month, we opened 2 additional 50-bed hospitals, one in Bangor, Maine and 1 in San Antonio, Texas and added 60 beds to existing hospitals. Over the balance of the year, we intend to open 2 more hospitals with a total of 100 beds and add up to 45 beds to existing hospitals. We maintain an active pipeline of new hospital development projects while also executing on bed expansion opportunities as warranted by occupancy trends and market dynamics.

Our pipeline of announced new hospital projects with opening dates beyond 2026 currently consists of 15 hospitals with 654 beds. This includes our first 2 small format hospitals, Conroe, Texas and Richmond, Texas, both of which will be additive to our Houston market presence and serve as an exemplar of the hub-and-spoke strategy we have previously discussed.

We anticipate additional projects will be announced over the balance of the year. We also continue to expect to add 150 to 200 beds to existing hospitals in 2027. On October 1, North Carolina's repeal of its Certificate of Need law became effective. As we have previously discussed, North Carolina has highly favorable population growth and demographic characteristics and our assessment indicates a large underserved market for IRF services. We currently operate 1 hospital in North Carolina and have thus far prioritized 15 markets for development. We currently have 6 real estate parcels under contract. Now I'll turn it over to Doug.

Thank you, Mark, and good morning, everyone. The Q3 revenue increase of 8.9% was driven by 5.7% discharge growth and a 4% increase in net revenue per discharge. Net revenue per discharge again benefited from higher patient acuity. Bad debt expense in Q3 was 2.7%. The increase over last year is primarily due to a billing and collection disruption issue following a system conversion in Q2 of 2026.

This was a one-off issue, and we expect bad debt expense as a percent of revenue in Q4 to normalize in the recent historical range of 2% to 2.5%. Q3 Medicaid supplemental payments decreased by $10 million from Q3 '25. Recall that Q3 '25 included $10.8 million of net provider tax revenue owing largely to retroactive Medicaid supplemental payments.

In Q3 '26, we reversed $9.2 million of previously accrued supplemental payments within our other revenue category related to the anticipated approval by CMS of the Florida fiscal year 2026 Medicaid state-directed payment program. The Florida fiscal year '26 program is still pending approval from CMS. And as the fiscal year ended September 30, we deemed it appropriate to make this adjustment.

We also reversed $3.4 million of accrued provider tax expense within our other operating expenses related to the 2026 Florida program. Q3 adjusted EBITDA increased 15.5% to $346.6 million even as we absorbed an $11.5 million year-over-year decrease in net provider tax contribution. Through the first 3 quarters of 2026, the adjusted EBITDA contribution from net provider taxes was $600,000, and that compares to $18.1 million for the comparable 2025 period.

In our Q2 update, we had revised our expectation for the 2026 net provider taxes contribution to our adjusted EBITDA to approximately $10 million. This was based primarily on the Florida fiscal year 2025 Medicaid state directed payment program approved by CMS in May of 2026. Given the pending status of the fiscal year 2026 program and the related adjustments to our accruals, which I just reviewed, we now expect the 2026 net contribution to adjusted EBITDA to be approximately $3 million.

Q3 SWB per FTE increased 3.8%, in part driven by increased participation in our career ladder programs, partially offset by declines in premium labor and medical plan costs. Premium labor costs comprised of contract labor and sign-on and shift bonuses declined $3.9 million from Q3 '25 to $23.1 million. This marks 16 consecutive quarters of year-over-year reductions in premium labor spend even as capacity and patient volumes have grown substantially.

Contract labor FTEs as a percent of total FTEs was 0.9%, an improvement of 30 basis points from Q3 '25 and our lowest level since Q4 of 2020. Q3 net pre-opening and ramp-up costs were $4.9 million, flat from Q3 '25 and were $15.8 million on a year-to-date basis compared to $11 million through Q3 '25.

Based on the incurrence to date and our projection for the balance of the year, we now expect net preopening and ramp-up costs of $20 million to $24 million for 2026. Adjusted free cash flow for the first 9 months of 2026 was $634.2 million, an 8.9% increase from the comparable period in 2025.

During Q3, we repurchased approximately 495,000 shares of our common stock for a total of $57.9 million, bringing our year-to-date total share repurchase to approximately 1.91 million shares and $203.7 million. We also declared a cash dividend of $0.21 per share, which was paid earlier this month.

During Q3, we issued an incremental $100 million of senior notes as an add-on to our 5.875% notes due in 2034, bringing the total amount of that note series to $600 million. Our leverage and liquidity remained very favorable. Net leverage at quarter end was 1.8x, and we ended the quarter with approximately $870 million available on our $1 billion revolving credit facility.

As Mark mentioned, we have again raised our 2026 guidance as follows: we now expect net operating revenue of $6.45 billion to $6.5 billion, adjusted EBITDA of $1.395 billion to $1.415 billion and adjusted earnings per share of $6.23 to $6.37. The considerations underlying our guidance can be found on Page 11 of the supplemental slides. With that, we'll open the lines for Q&A.

[Operator Instructions] And we'll take our first question from Pito Chickering with Deutsche Bank.

Nice quarter. So I know you aren't giving out 2027 guidance yet, but can you help us walk us through the known headwinds and tailwinds for next year as you do your modeling, specifically in areas like start-up losses from the hospitals opening up, managed care pricing because you just raised that this quarter, the VA penetration and then any things around labor and turnover that we should be thinking about?

Pito, this is Doug. I'll start on that and then ask Mark and Pat to jump in as they see appropriate. I'd say, generally speaking, we think that things are setting up for another solid year in 2027. I won't hit these in the specific order that you mentioned, but I think some things to consider. I just went through quite a few adjustments, and we did the same in Q2 regarding net provider tax impact predominantly related to the Florida '25 proposal and then '26 as well. And so we're not going to have to repeat those same accrual adjustments in 2027, and that should present some upside there.

With regard to pre-opening and ramp-up costs, we've got a comparable number of new hospitals opening next year. I would say that we would expect that number to be plus or minus $20 million. Some other things to consider is we'll anniversary the last of the 4 unit closures in late February of next year.

On the labor perspective, we're going to start to anniversary the impact of the increased career ladder participation on SWB. By the same token, and I've said this a couple of times before, at some point, we're going to start to realize diminishing returns on the reductions that we've made in premium labor, but we continue to see some opportunity there. From an overall pricing perspective, as we move into Q4 of this year, we're lapping some of the increases that we've seen based on higher patient acuity on revenue per discharge.

That's not to suggest that there isn't more room to go. But last year, in Q4, our net revenue per discharge was at 4.1%, and it stayed right around 4% for the last 4 quarters. I think those are the primary things that come to mind in terms of considerations.

Yes, Pito, it's Mark. I would just say, as we noted in my comments and as we've made a general theme now for the last couple of quarters, I mean, adding capacity is a big focus for us. So bringing on the additional projects, not only in Q4 of this year, but then as it carries over into 2027 with additional beds coming on to existing hospitals.

We're going to bring on the first small format hospital next year that we've talked about as well as additional de novos. So that will be a common theme that will go into 2027 that we've carried off from 2026.

Pito, this is Pat. Just a couple of points on VA and then hiring and turnover. VA continues to be a big positive for us. We've now hit our sixth consecutive quarter of at least 20% growth in that segment. We hit 21% growth in Q3. That's on top of 26.4% growth in Q3 of 2025. As well as that's going, there remains a lot of upside.

There's a lot of variability between region to region and hospital to hospital in terms of capture of the VA population. So that's something our operators have done a great job with and continue to focus on. You didn't ask about this, but as I think about 2027, one of the things that I think deserves to be called out is the success that we've had in the MA admit-and-appeal strategy and how we're thinking about expanding that.

So, so far, relatively small in size. We've had 294 claims go through. 87% of those have been overturned in our favor, 81% being overturned before they go to the ALJ. So a lot to like there. And if we think about discharge growth in that population, the MA growth in those 9 markets for MA was 36%.

And then we've talked about how that has endeared us to the referral sources. They also saw total growth of about 9.5% with another benefit of 6.6% growth in Medicare. So we have just completed educating all of our hospitals on expanding that pilot for across every hospital, every payer for stroke specifically.

We've increased the number of total pilot hospitals from 9 to 13 as well. So I think we'll start to see that incrementally tick up in Q4 and certainly in 2027. And then we'll evaluate how this goes. The next 2 diagnoses that we would likely scale up through the organization is brain injury and spine, which we're having a lot of success with as well.

And then just on the hiring and turnover front, turnover did tick up slightly in Q3 to 20.7%, but that remains below our historical levels. In the 10 years from 2014 to 2023, we averaged about 24.2%. Even if you back out the COVID years, the 5 years before COVID, 2015 to 2019, we averaged about 23.2%.

So well below historical levels there. And hiring has continued to remain robust. We have more full-time net RN hires through 3 quarters of this year than we've had in the last 5 calendar years on an individual basis. The high watermark there is 2023. So again, a lot of things to be optimistic about from a workforce perspective as well as the other 2 buckets that I mentioned.

We'll take our next question from Ann Hynes with Mizuho .

So just on the capacity thought, I know that your capacity is running very high and I know -- I think you said like 35% of your hospitals may be running at 85% capacity. Can you update that stat for us? And when do you think those capacity constraints could be freed to really accelerate same-store discharge growth?

Yes. So it is a factor. It's not the only factor. And generally speaking, when you're running at high system-wide occupancy rates, that's a really high-class problem. Specifically, we called out a cohort of hospitals that have been running at greater than 90% capacity with an average capacity -- an average occupancy of 95%.

And so in Q1, we identified that there were 65 hospitals in that cohort. In Q2, the number dropped to 60. And in Q3, the number dropped further to 58. Across those 3 quarters, there have been 49 hospitals that have been present in that cohort for each of those 3 quarters. 19 of those will have bed additions between now and the end of fiscal year 2027. So that will help greatly in that regard.

And as Mark mentioned earlier, we're excited about the addition of the small format hospitals that's really going to help us address those in some markets where there are physical limitations on our ability to expand.

Ann, this is Pat. Just in addition to what Doug has shared and what Mark has mentioned as well, we're really excited about our development pipeline. Both our development team, our operators and others at the home office have done a lot of work thinking about capacity expansions and how do we continue to take advantage of the demographic tailwind that is in front of us. And our pipeline from a de novo and small format hospital perspective is larger than it's ever been.

And we're working hard to figure out how do we -- we guide to 6 to 10 hospitals a year with inclusive of North Carolina. We think we can get to the top of that range and potentially in the outer years, be above that range. So we're working towards that and really excited about the pipeline, both from a de novo and small format perspective.

And the demand is there to support it. If you look just at the counties in which Encompass Health has a presence, from September of 2025 to 2026 in those counties, there were almost 0.5 million more Medicare beneficiaries.

And roughly 50% of those, a little bit more than 50% were fee-for-service versus Medicare Advantage. So you've got an underserved population that continues to grow, and I know you've heard the mantra from us frequently, but the demographic tailwinds are still very much there.

We'll take our next question from Andrew Mok with Barclays.

Just wanted to follow up on the managed care pricing. The guidance assumption increased 125 basis points at the midpoint to a new range of 3.5% to 4%. Would love to hear what's driving that increase. Is the admit and appeal strategy part of that? And can you also confirm that, that's unit pricing only and does not include shifts in acuity?

It does include shift in acuity, and it's benefiting from that. The biggest driver there is something that Pat mentioned before, which is that is -- in that category, we include our VA DCM volume, and that's been growing consistently at north of 20%. And as a reminder, that pays at the fee-for-service rate.

So the reason that we adjusted it up for the full year is because of the favorable performance we've had for the first 3 quarters of the year. Medicare Advantage is not included in that bucket. And again, that has skewed upward in acuity in part because of the more stringent pre-authorization that we've been facing and the fact that we've been able to replace some of the lower volume -- some of the lower acuity patients there with the higher acuity, specifically the stroke example that Pat gave earlier.

Got it. Okay. That's helpful. And then maybe just a follow-up on the small format hospitals. You mentioned that you have 2 in the pipeline, but I believe only one is expected to open in 2027. Can you confirm that one is still the expectation? And just given the smaller format and presumably faster speed to open, why isn't that a bigger number in 2027? Why can't you accelerate that?

So I can confirm that our expectation is that one will open in late '27. The best explanation I can give you on why we're not moving faster right now is that small format hospitals are not only new to us, they're new to the communities in which we're introducing those, which have their own licensing and permitting aspects to them.

And so in some of those instances, it doesn't fit -- the small format hospital doesn't fit neatly within the definition of either an acute care hospital or more of a subsidiary type of arrangement. And so we're having to spend a little bit more time on the front end through the permitting and licensing processes so that there's a greater understanding of what requirements really need to be contained within the remote location versus those that are provided by the host location.

I think the good news is really on a state-by-state basis, once you have cracked the code the initial time, the template is set, and we'll be able to go much faster. And it's that aspect of it that gives us a lot of confidence that as we get rolling here, we're going to be able to accelerate that pipeline pretty significantly into 2028 and 2029. The design is there. We're confident in the design. We've got the capacity with our general contractors, and there's no capital constraint either.

I would add to that, that just from a market identification standpoint, our operators and development team have identified about 200 locations where this potentially could happen. As Doug mentioned, we really think that we're going to be in a position to ramp this up in 2028 and 2029. I think we would all be collectively disappointed if we're opening less than 6 of those a year by that point.

We will take our next question from Matthew Gillmor with KeyBanc.

I wanted to ask about the RCD expansion. I think you indicated 75 more hospitals will be subject to RCD in 2027. And at least when we look at the CMS reports, it seemed like the affirmation rate with Palmetto had been improving. Just wanted to see if you had any comments in terms of what to expect as that gets rolled out to additional hospitals next year.

Yes. So I'll start by saying that with regard to the expansion into Jurisdiction JJ, which does include 75 more of our hospitals, we are having ongoing discussions with both Palmetto and CMS to understand specifically how it's going to work.

Our greatest concern is whether or not Palmetto is going to be able to handle this administratively. Palmetto's involvement in RCD thus far has been limited to the state of Alabama and 7 of our hospitals are included there. But the expansion into Jurisdiction JJ is going to increase the volume that they're going to have to process by more than 10x.

It's a requirement that during cycle 1, which will -- is slated to begin on January 1 and extend through June 30, all providers will be on 100% prepayment claim review. There's no option out of that in cycle 1. So that's going to be a real burden on Palmetto, and we just want a greater understanding as to how they're going to be able to process that.

That said, to the extent that we progress through cycle 1, and hospitals exceed the target affirmation rate of 80%, which we would have a high degree of confidence based on our experience to date, they will. And beginning July 1, one of the options we would have is to move from the 100% prepayment claim review to a 5% spot check.

We have just moved into cycle 2 for the 24 hospitals that we have in Texas, where we performed very well and above the target affirmation rate, and we've made the decision to move to the 5% spot check there. And I think it's our anticipation that we'll avail ourselves of the same opportunity as it arises in other RCD markets.

Great. That's helpful. And then maybe just one follow-up. On the bad debt expense, you called out some impact from, I think, a system conversion. I was just hoping you could explain what happened there.

Yes. So really about 2/3 of the increase was due to the system conversion. I'll probably give you more detail than you would want. But in Q2, we converted our patient billing system from a legacy system that was called Patcom to the Oracle module. And we did so because Patcom was essentially being sunsetted and the Oracle module has enhanced functionality as well as greater comparability with our Fusion ERP.

When we initiated the cutover, the pending claims that were left in the legacy system required a more manual processing. And at the same time, we were shifting some of our resources in that area over to processing claims under the new system. As these claims were pending, they became subject to our aging-based reserve methodology.

By the end of Q3, we were essentially caught up on our Medicare billing and collections, but the queue had not been cleared out for our managed care and our Medicare Advantage. And those payers typically run at a higher bad debt expense than Medicare fee-for-service, and they also generally require higher patient co-pays, and we can't bill for the co-pays until the payers process our claims. So it creates this backlog.

Now we expect that queue to be fully cleared by the end of the year. And it is important to note that all claims since conversion are processing through the Oracle module without an issue. So this is really a onetime situation.

We'll take our next question from Whit Mayo with Leerink.

It's Morgan McCarthy on for Whit. So your unit cost per discharge were effectively flat on a year-over-year basis. Is there anything to call out whether it's this year or in prior years related to provider taxes or any other cost items that might skew that metric?

Yes. So the net impact from provider taxes was actually going to be a negative on that. But where we had some gains, again, SWB was very favorable. That was driven by lower group medical expense in the quarter and then also just by the lower overall turnover. EPOB was favorable for the quarter. Length of stay was favorable for the quarter.

I will note that we had a benefit in supplies. You may recall that in Q3 of '25, we called out the fact that we had advanced some purchases of supplies in advance of the Fusion conversion in order to avoid any disruption. And obviously, we didn't have to replicate this year. But generally, when you've got a pricing increase in the 4% range, the flow-through and the efficiency there tends to be high.

And we'll take our next question from Ryan Langston with TD Cowen.

You had some really nice acuity pickup recently that's carried through into the third quarter. I guess, is that acuity lift a durable opportunity into 2027? And might RCD expansion impact the acuity of the patient transfers from the acute care hospitals?

I'll start there, and -- acuity can shift or RC mix can shift on a quarter-over-quarter basis, but we do think that some of the trends that we're seeing are sustainable. We talked last quarter about the shift in acuity, and I'll call out a couple of diagnosis categories where we saw some really nice growth that are driving that again.

We had 9.3% growth in our neuro RIC, 5.1% growth in stroke, 5.7% in brain injury, and then major trauma was up 10.3%. Some of those had a softer comp last year. But even if you look at it on a 2-year stack from a same-store basis, brain injury was up 9.8%, neuro up 8.5%, stroke and major trauma up 5.7%. And that mix is gaining because lower acuity conditions like lower extremity joint replacements are down.

So in Q3, same-store lower extremity joint replacements were down 5.3%. On a total store basis, they were down 0.7%, and we were able to backfill that volume with those higher acuity conditions. Not only are we seeing an increase in -- from a RIC perspective, the percent of patients that come to us with comorbid conditions, it also continues to increase. And then we're getting the benefit on the pricing side as well from the outcomes that we're seeing. So even though we're seeing higher acuity conditions, we continue to do a better job of getting those patients home, and that has a favorable pickup on the pricing line.

We don't anticipate that RCD expansion will have any impact on patient acuity. We believe we are admitting appropriate patients and providing the appropriate documentation for those patients.

Got it. And then sorry if I missed this in the supplemental payment commentary, but is there any update on the potential tax waiver program in Florida? And can you remind us if there's any impact, plus or minus, to guidance for 2026?

Yes. So we went through the fact that we reversed the year-to-date accrual through the first 3 quarters. And that is because the fiscal year '26 ended on October 1 for Florida without a decision, positive or negative from CMS on the proposal set forth by Florida.

The proposal set forth would include waivers for many of our hospitals in that state. If that were to come through in the fourth quarter, it has a potential favorable increase to EBITDA of about $8 million, which would be the sum of the roughly $5.5 million net impact that we reversed in our Q3 earnings plus the pickup we would get for Q4. As we look into 2027, again, if it's approved with the waivers in it as submitted, that would be a positive. And again, on a year-over-year basis, we took that $11.5 million hit related to the fiscal year '25 Florida plan in the second quarter, and we're not anticipating that we would replicate that.

We'll move next to Joanna Gajuk with Bank of America.

So I guess, first on the small format hospitals, it was very exciting, I guess, type of developments there. But can you remind us -- I couldn't remember whether you talk about the returns on these projects versus, say, your typical 40, 50-bed hospital?

Because I guess you're leveraging some of the local costs in there, right? So can you remind us how that progresses, I guess, when you have a small format versus just a regular hospital because of return?

Yes, absolutely. So we've been targeting and realizing returns, IRRs on our de novo program in the mid-teens, and that's based on maintaining a cost per bed, which we feel some degree of confidence in moving forward of roughly $1.25 million per bed. Bed expansions to existing hospitals offer the greatest leverage opportunity and then also the highest returns. We are at 25% or higher with regard to the IRR on bed expansions at existing hospitals, and the average cost per bed there tends to be right around $850,000.

The small format hospitals are going to fall right in between. We're estimating the cost per bed on those will be right at $1 million, and we're targeting an IRR of about 20%. You identified the ability to get some efficiencies by sharing certain components of the administrative staff with the host hospital.

And as a result, whereas we run on a corporate-wide basis an EPOB of just under 3.4x, we think there's an opportunity for the small format hospitals to have an EPOB below 3x, and that's a highly sensitive metric with regard to the P&L and therefore, the flow-through to returns.

Okay. That is great. And I guess the other question that I had in terms of this acuity-driven pricing, it seems like it's very sustainable there, and thanks for breaking out the volume growth by the different categories.

So anything to call out that would suggest that somehow things could slow down into next year? I know it's volatile quarter-to-quarter, but if we think say the next 12 months or so, anything that would say, hey, like things should slow down or change versus your trajectory?

Other than to recall that at least some of the increase in acuity that's flowing through in the pricing growth is attributable to the trends that we've been seeing within Medicare Advantage. And the increase in pre-authorization denials that skewed us towards a higher acuity within our MA book of business first became really prevalent in Q4 of '25.

So if you looked at Q4 of '25, we had a 4.1% net revenue per discharge. Our MA discount for that quarter, it tends to widen out from Q3 to Q4 because MA price increases on a calendar basis and fee-for-service increases on a fiscal year basis was 2%. And it's -- so as we anniversary those higher increases, even if acuity is maintained at the current levels, the year-over-year pricing change is going to be less pronounced.

We'll take our next question from Brian Tanquilut with Jefferies.

So maybe, Doug, my first question, contract FTE this quarter showed some pretty good improvement. And I know in Q2, you said that the gains were getting smaller. So just curious what you're seeing there in terms of on the permanent side, hiring, retention and the career ladder grads that you're putting out there and how that's translating into contract labor.

I'm going to toss that one over to Pat because it's something that he spends a lot of time focused on.

Yes. And Doug continues to challenge us on the operations side by talking about the diminished returns that we're going to see in reducing contract labor and premium pay. And there is a truth to that. But this was another really strong quarter, and I highlighted some of the hiring and turnover dynamics earlier in the call. But we still have -- if you look at contract labor, extra shift sign-on overtime and you normalize that by a per patient day basis, we still have a couple of dozen hospitals that are over $100 per patient day in spend.

So there still is juice for us to squeeze there, and we've had a lot of success working on those higher spend hospitals to bring that number down. Again, just to reinforce what I said earlier, net RN hires and therapy hires has not been better in years. Even if turnover ticked up a bit, the hiring dynamics have certainly overcome that and turnover on a historical basis is still very strong.

From a ladder perspective, we are up to 55% of eligible nurses are on the ladder. That represents about 31% of all of our full-time nurses being on the ladder. They have to be here for a certain period of time to move up into the ladder. So there's some upside there.

Again, we had a big bolus in 2026 of the ladder, and we're going to anniversary some of that. So any of that upside within the ladder, we'll be able to take those dollars and not be as pronounced as they were in 2026. But our largest bucket of opportunity is noncertified non-laddered nurses, which represents about 60% of our full-time nurses.

And again, we have some variation from region to region that we're working to improve upon. And I think if we can continue to do that, we're going to continue to see improvements not only in turnover reduction in the premium pay buckets, but also in the continued sustainability of the higher acuity patients that we've been able to bring in.

Brian, you've heard us say before relative to contract labor, we've given our operators the green light. If they've got the volume and need to have contract labor to accommodate that volume, they need to go ahead, and we'll take the hit on a short term until we can work it back out of the system. But we are not being throttled on our volume because of the focus on eliminating contract labor.

Maybe my follow-up, just as I think about the hospitals that you've opened in the first half of the year, how are they tracking in terms of hitting breakeven in your typical ramp? I mean, just curious how this class of new openings are performing.

So remember, we're heavily skewed towards the back end of the year with 4 hospitals, 4 of the 8 opening up in Q4. That said, we think that these are tracking in accordance with our recent historical performance.

And just as a reminder there, generally, what we have been seeing is that our de novo hospitals are achieving a 4-wall positive EBITDA by about month 6, and they're climbing over a 70% occupancy by about month 10. And then they're achieving what we would suggest is full maturity and typically qualifying for a bed addition sometime between year 3 and year 4. So we have no reason to expect that the performance of the current class is going to be any different from that recent historical.

We'll take our next question from A.J. Rice with UBS.

Yes. First question on the discharge growth on the same-store basis, there's been a lot of focus on that. I wondered if you would just offer us any comments. I know -- I think you mentioned that you had the final 4 closures will anniversary in February of those. And then you've obviously had the pacing on the new facilities.

Anything to call out in the way to think about same-store discharge growth over the next number of quarters here, where there's any challenges or where there's some easy comps? I know you got a long-term target of 4% to 6% growth on that.

Yes. So actually, I think our total discharge growth from '23 to '27, the target that we put out there was 6% to 8%. We didn't break that down between new store and same store. This won't surprise you, A.J., but I'm going to start with my usual disclaimer that we think it is increasingly less relevant to think about the distinction between new store and same-store that what really matters most is total discharge growth and the capital that's required to generate it.

Having now said my piece with regard to the disclaimer, I'm going to take you through 5 factors that we think are relevant to looking at same-store. The first that you mentioned was the impact from the 4 unit consolidations. That impact on a net basis, we estimate for Q3 was about 40 basis points. That's down from 70 basis points in Q2 and from 90 basis points in Q1, and that will be fully lapped in Q1 '27.

And as a reminder, the reduction in the volumes related to those unit closures carried no impact to EBITDA. Second is something that I mentioned earlier, which is that cohort of high occupancy hospitals, 65% above 90% in Q1, 60% above 90% in Q2, 58% above 90% in Q3, 49 hospitals consistent through all 3 of those quarters, 19 of those will have bed additions coming on board prior to the end of the year in '27.

The third factor I would mention was the change that we saw in MA pre-authorization denials beginning in Q3 -- or excuse me, in Q4 of last year. If you look at total MA discharges in Q3, it actually declined 1.1%. Adjusted for the unit closures, which were disproportionately high in Medicare Advantage for the patient mix, especially the sole SNF unit that we closed, we would have been up 1%, still not the height of our aspirations.

As Pat mentioned earlier, in the 9 admit and appeal pilot markets for the quarter, total discharge growth was up 9.3%. So what we've demonstrated is that pilot is working. And as Pat outlined, we're looking forward to extending that across stroke in all of our hospitals and then bringing more hospitals into the fold from a pilot perspective. In terms of bed additions and new hospitals, as we mentioned previously, bed additions in 2026 were also heavily weighted towards the second half of the year.

Q3 benefited from only 54 beds added to existing hospitals in the first half of '26. And also, we only had one de novo, and that was Loganville, Georgia that moved from new store to same-store in Q3. I'll note that we have 90 beds moving into same-store in Q4 and another 150 in Q1 of '27.

And then something we haven't talked about a lot, but it's evident, I think, to some degree in our overall patient mix is there is some impact that is happening across the [indiscernible] team markets. And so in Q3, we saw knee and hip replacement actually declined 3.6%. These are small categories for us and cardiac declined about 0.7%.

Now not all teams markets are reacting the same. And in those markets, we're having a lot of success substituting higher acuity and/or VA CCN patients for these lower acuity patients that may be subject for team [indiscernible]. It may not be a one-for-one change from a volume perspective, what we're seeing in those markets is that the move to the higher acuity patients and the move to the VA CCN patients is generating higher revenue and EBITDA.

Okay. That's great. I would -- maybe as my follow-up, just to ask, I know you're now down to 1.8x net leverage. I think you previously said that it wouldn't necessarily make sense to go below 2x. Should we think of capital deployment from here, leaning into share repurchases, dividends? Anything else, any comment you want to make along those lines?

Yes. I think the capital allocation framework is going to be relatively consistent. You'll probably see modest occasional or periodic increases in the dividend. So that's not going to consume a lot of that capacity. Pat mentioned earlier that as we think about an accelerating pipeline for both small format hospitals and for de novo openings, particularly with the attractiveness of North Carolina is just an example that we're likely to see our discretionary CapEx begin to increase, and that's still going to leave capacity while maintaining a very favorable leverage target for increased share repurchase activity. So we like the combination of those things.

We'll take our next question from Jared Haase with William Blair.

Maybe I'll ask one on the current mix of your beds between single occupancy and double. I know you kind of had this shift towards more single over the last couple of years. Just wanted to get an update on where that stands today? And then based on what you have in the pipeline, where you think that could trend over the next couple of years?

Yes. So at the end of the third quarter, we were at 58%. That compares, if you go all the way back to 2020 at 41%. So 58% were private. All of -- essentially all of the capacity that we're bringing on in all 3 modalities, bed additions, de novos and small format hospitals is going to be 100% single occupancy. So that number will continue to push up.

And we'll get some benefit of that here in the fourth quarter because of the number of bed additions and new hospitals that we have coming on board. So that number will be higher when we report it for Q4.

Okay. Very helpful. And then I appreciate all the details on the Medicare Advantage admit-and-appeal strategy. I realize it's still relatively early with the pilots. But just given the success you've seen so far and then your thinking around how you can expand that to other conditions and other hospitals across the portfolio.

I guess when we think about the impact to the model, are there any guardrails that you would sort of frame for us in terms of what the actual net impact could be on conversion rate or I guess, ultimately, volume growth within that cohort over the next several years?

Well, generally speaking, we think it's positive, a, because we're anniversarying the more challenging pre-authorization from the MA plans that began in Q4 of last year, and this has proven to be an effective tool because even beyond what we were experiencing in these categories with regard to denial rates, pre that dip in Q4 of last year, we're seeing higher success rates. All that said, it's not going to happen in a vacuum. And so we believe it is a tailwind in terms of quantifying it. That's yet to be determined.

Jared, this is Pat. We're in the process now of -- we've added resources since we started the pilot. We're adding a good number of FTEs that are going to help us as we scale this throughout the organization. But we're putting the structure in place to be able to go a little bigger here.

We will take our next question from Raj Kumar with Stephens.

Maybe just wanted to touch back on RCD. As I kind of look at the Alabama cycle-through reports, kind of the claims activity coming down by 25% relative to the pre-RCD baseline, but kind of looking at you guys' results, fee-for-service is still pretty strong.

So would love to kind of reconcile kind of your experience in that kind of Alabama program across these 3 cycles. And more specifically, I guess, kind of where your initial affirmation rates are kind of maybe where your appeal rates are as well? And maybe helping us extrapolate to this more expanded RCD program. Any details there would be helpful.

Well, it's hard to extrapolate any of our experience across the expanded program because Palmetto, in particular, has never been asked to handle this volume of claims. And so we don't know if it's going to be the same reviewers. We don't know if it's going to be under the direction of the same medical director. We don't know whether they're going to be using subcontractors. We don't know if the program is ultimately going to be phased in, et cetera.

What we do have a high degree of confidence in is that there's -- that we are admitting the right kind of patients, and we are providing the appropriate documentation. And again, as this extension begins on -- assuming it begins across all of these 75 hospitals on January 1, we will be prepared administratively to do our part -- and the target affirmation rate in cycle 1 is going to be 80%, and we have a very high degree of confidence that all of our hospitals are going to get over that 80% target affirmation rate.

And if they do beginning July 1, we can move to a 5% spot check. That is not something that we have experienced to date because to this point, either because we were in cycle 1 in the other states that just came out, which was a requirement like California and Texas or because we elected to stay for various reasons on 100% prepayment claim review in Alabama, we haven't had experience with the 5% spot check. But the math will tell you that the impact is going to be less and the administrative burden will be less.

And so again, we think if there's volatility in the bad debt number that arises out of the rollout to the 75 incremental hospitals, it's going to be contained and it's likely going to be contained in the first half of the year. It's important to note, none of the coverage requirements, none of the patient criteria under RCD are any different than they have been under the audit programs that we've been subject to for an extended period of time and that have informed our historical bad debt in this recent range of 2% to 2.5%.

So there's no reason to believe that things settle in, that we're going to settle in at a bad debt number that differs in any material way from that which we've experienced historically.

Got it. Maybe just following up on that. I guess when I think about maybe some of the more independent IRFs and maybe some behavioral changes around maybe not appealing or not admitting IRF-eligible patients that might be on the fringe of eligibility.

I guess, have you maybe experienced any market share gain dynamics from that or any favorability as I kind of think about kind of your administrative working power versus maybe an independent mom-and-pop IRF?

We don't think we're admitting patients who are on the fringe of eligibility. We think that the patients that we admit clearly meet IRF admission requirements.

Yes. This is Pat. I would just add, I sit on the Board of AMRPA, which is the Trade Association for Inpatient Rehab Providers. And I think not only Encompass, but the other providers within AMRPA have all done a really nice job with RCD. And it hasn't shifted our admission practices.

I mean, we are taking the same patients that we did before and to my knowledge, the other providers are as well. So I think if anything, administrative burden aside, we're proud of the fact that this has demonstrated such a strong record of compliance within our company and the industry.

At this time, there are no further questions in queue. I will now turn the meeting back to Mark Miller for any additional or closing remarks.

Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good morning, everyone, and welcome to Encompass Health's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Second Quarter 2026 Earnings Call. Before we begin, if you do not already have a copy, the second quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release.

During the call, we will make forward-looking statements such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our... [Technical Difficulty]

We ask the audience to please stand by. I believe the speakers have reconnected to the live conference.

Yes, we're in the main room.

[ Aaron ], can you hear me?

Gentlemen, you are with the audience now. You have reconnected. I'm hearing a little bit of echo at the moment.

Good morning, everyone. This is Doug Coltharp. We apologize for the technical difficulties we're experiencing this morning. These difficulties are arising through our vendors. It's a vendor we have historically used, and these are not on the Encompass Health side. We appreciate your patience. And with that, we are going to start from the top, assuming that you've heard nothing from us this morning, and I'm going to ask Mark Miller to begin.

Thank you, Doug, and good morning, everyone. Thank you for joining Encompass Health's Second Quarter 2026 Earnings Call. Before we begin, if you do not already have a copy, the second quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page -- last page of the earnings release.

During the call, we will make forward-looking statements such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K, the Form 10-K for the year ended December 31, 2025, the Form 10-Q for the quarter ended March 31, 2026, and the Form 10-Q for the quarter ended June 30, 2026, when filed. We encourage you to read them.

You are cautioned not to place undue reliance on these estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. [Operator Instructions] With that, I'll turn the call over to President and Chief Executive Officer, Mark Tarr.

Thank you, Mark, and good morning, everyone. We're very pleased with our second quarter results as revenue grew 9.6%, adjusted EBITDA increased 9.2% and adjusted EPS increased 10.7%. Based primarily on our Q2 results, we are again raising our guidance for 2026. Doug will review the details in his comments. Patient outcomes were again outstanding. Our Q2 discharge community rate was 84.7%, discharge to acute rate was 8.4% and discharge to skilled nursing facilities was 6.1%. Our performance on each of these quality metrics continues to exceed industry averages.

We again experienced increased participation in our clinical staff professional growth and development programs, such as our career ladders, providing nurses with support to attain advanced licenses and certifications, including certified rehabilitation RN designation. We believe our success in these programs contributes to our favorable clinical staff turnover trends and helps to drive further declines in premium labor spend. Our professional growth and development programs also enhance our abilities to serve high-acuity medically complex patients.

Demand for inpatient rehabilitation services remains strong, and we continue to invest in capacity additions. In Q2, we opened a new 50-bed hospital in Concordville, Pennsylvania; and a 40-bed hospital in Loganville, Georgia. Our Loganville Hospital is our eighth joint venture with Piedmont. We also added 10 beds to existing hospitals. Through the first half of the year, we opened 3 hospitals with a total of 139 beds and added 54 beds to existing hospitals.

Over the balance of the year, we intend to open 5 more hospitals with a total of 250 beds and add 100 to 150 beds to existing hospitals. We maintain an active pipeline of new hospital development projects, both wholly owned and joint ventures while also executing on bed expansion opportunities as warranted by occupancy trends and market dynamics. Our pipeline of announced new hospital projects with opening dates beyond 2026 currently consists of 13 hospitals with 606 beds, and we anticipate additional projects, including small format hospitals will be announced over the balance of the year.

Last month, North Carolina repealed its Certificate of Need law for inpatient rehabilitation care effective October 1 of this year. We believe this is a great result for the citizens of North Carolina who will now benefit from more access to inpatient rehabilitation care. North Carolina exhibits highly favorable population growth and demographic characteristics, and our assessment points to a large underserved market for IRF services.

We currently operate 1 hospital in North Carolina. Replicating our approach to CON repeal in Florida in anticipation of the CON revocation in North Carolina, we conducted a thorough market-by-market analysis across the state. This has led to an initial prioritization of 15 markets, and we currently have 3 real estate parcels under contract. We anticipate our next hospital opening in North Carolina to occur in late 2028 or early 2029.

Finally, on July 30, 2026, CMS released the 2027 IRF final rule, which we estimate will result in approximately 2.3% increase in net revenue per discharge for our Medicare patients beginning October 1, 2026 based on our current patient mix. Now I'll turn it over to Doug.

Thank you, Mark, and good morning, everyone. Q2 revenue was up 9.6% over the second quarter of 2025. The increase was comprised of 5.6% discharge growth and a 3.9% increase in net revenue per discharge. Net revenue per discharge growth was driven by higher patient acuity. We continue to see very solid growth in medically complex categories, including stroke and brain injury. Bad debt expense in Q2 was 2.3%, in line with our expectations and the increase over last year is primarily due to a favorable reserve adjustment that occurred in the second quarter of '25.

Our Q2 adjusted EBITDA increased 9.2% to $348 million, even as we absorbed an $11.5 million year-over-year decrease in net provider tax impact. Essentially, all of the year-over-year change in net provider tax impact relates to out-of-period adjustments to our accruals for the fiscal year 2025 Florida Medicaid program based on revisions promulgated by the state and approved by CMS in Q2 of this year.

Q2 SWB per FTE increased 3.4%, in part driven by increased participation in our career ladder programs, partly offset by a decline in premium labor. Premium labor costs comprised of contract labor and sign-on and shift bonuses declined $2.6 million from Q2 '25 to $25 million. Contract labor FTEs as a percent of total FTEs was 1.1%, an improvement of 20 basis points from Q2 '25. Net preopening and ramp-up costs were $6.9 million, up $2.9 million from Q2 '25 and were $10.9 million on a year-to-date basis compared to $6.1 million in the first half of 2025.

We continue to expect net preopening and ramp-up costs of $18 million to $22 million for the full year. During Q2, we repurchased approximately 704,000 shares of our common stock for a total of $74.2 million, bringing our year-to-date total share repurchases to approximately 1,412,000 shares and $145.8 million. During Q2, we issued $500 million of 5.875% Senior Notes due 2034 and used most of the proceeds from that issuance to redeem $400 million of our 4.5% senior notes due in 2028.

Our net leverage at quarter end was 1.9x. Our leverage and liquidity remain well positioned. We recently announced an increase in our quarterly dividend next payable in October to $0.21 per share. And within our earnings release yesterday, we announced an increase in our common stock repurchase authorization to $1 billion. As Mark mentioned, we have again raised our 2026 guidance as follows: we now expect for the full year net operating revenue of $6.41 billion to $6.49 billion, adjusted EBITDA of $1.365 billion to $1.395 billion and adjusted earnings per share of $6.02 to $6.25.

The considerations underlying our guidance can be found on Page 11 of the supplemental slides, and I want to take just a moment to highlight updated assumptions. Our Medicare pricing assumption for Q4 of approximately 2.3% reflects the IRF final rule released on July 30. Our revised expectation for full year 2026 SWB per FTE growth is 3.5% to 4% as we expect increased participation in both our nursing and therapy career ladder programs. As we have previously stated, we believe these programs contribute to favorable clinical staff retention trends, higher quality patient outcomes and reduced reliance on premium labor.

We previously indicated that we expected the net provider tax impact to adjusted EBITDA for 2026 to be essentially flat with 2025 at approximately $21 million. Based on the retroactive adjustments specific to Florida that I mentioned earlier, we now expect the net benefit to adjusted EBITDA in 2026 to be approximately $10 million. And with that, we will open the lines for questions.

[Operator Instructions] And we'll take our first question from Pito Chickering with Deutsche Bank.

So you raised the guidance in the back half of the year by about $5 million despite assuming 10 basis points of lower Medicare pricing in the fourth quarter and SWB that's 500 basis points higher than you had assumed previously. So can you bridge us the good guys in the back half of the year versus last quarter to help understand how you got so much leverage to raise EBITDA despite those 2 macro pressures?

Yes, Pito, this is Doug. I'll take a shot at it. So we had some favorability in the second quarter and really for the first half in a couple of areas. One is pricing, which was driven predominantly by patient acuity. There's no certainty that, that continues into the second half, but it does represent a source of potential upside. Additionally, we did see some further benefits in EPOB. Some of that is attributable to the fact that we've been running at a higher year-to-date occupancy level, and I can go through some of that, if you'd like. And it's also an ancillary benefit related to the career ladder program participation.

And again, the causality there is we believe that the career ladder program participation is contributing to favorable clinical staff turnover. And when you've got favorable clinical staff turnover, that means that your new hires can consequentially come down, which means that you're spending less hours that would get into the EPOB calculation during orientation.

Okay. Fair enough. And then can you talk about the same-store discharge growth in the quarter and the durability of that strength. Just as you think about the second quarter '26 stacked comps heading into easier comps in the back half of the year, should we be modeling more same-store discharge growth in the 4-plus percent for 3Q and 4Q?

Yes. So again, this is a statement you've heard us made repeatedly for the last several quarters, but we believe increasingly that the distinction between same-store and total discharge growth is going to become less relevant and less consequential. We are up against easier comps in the second half of the year. And so that will be favorable. We also anticipate that the impact of the 4 unit closures that we had beginning in June of last year will dissipate a bit further.

We've got a lot of new capacity coming on in the second half of the year. It is skewed more heavily towards Q4 than Q3, but that will be a contributor to some extent for total discharge growth as well.

And we will take our next question from Matthew Gillmor with KeyBanc.

Maybe following up on the North Carolina comments. I think you had mentioned there's 15 markets you're prioritizing. I was curious what you thought the overall opportunity is in North Carolina. And would that be enough to impact your de novo target of 6 to 10 per year or just maybe bias you towards the high end as you're thinking about beyond 2027?

Yes, this is Doug. I think right now, if we could get 15 open, we feel pretty good about that, but that certainly doesn't mean that the opportunities in the state of North Carolina would be exhausted at that level. And I should note that, that 15 is looking at markets, both large and small as well. There are good pockets of opportunity really dispersed across the state, which is very exciting to us.

I think at a minimum, it would drive us probably beginning in 2029 towards the high end of that 6 to 10 range. And there is some possibility just on how quickly we could pull those together as well as some opportunities that continue to develop in other states that we could wind up going above that. But right now, we're going to stay with the 6 to 10 range and hope that North Carolina pushes us to the upper end.

Matt, this is Pat. One additional point that I'd make there is as we get the small format hospital concept up and rolling, that will provide substantial opportunity and runway for us to continue to grow in North Carolina beyond just the traditional de novo format.

And I think to piggyback on what Pat said, we've talked before about one of the benefits of the introduction of small format hospitals that allows us to approach certain markets with a hub-and-spoke type strategy. And given that we only have one hospital in the state of North Carolina and the extensive opportunities that are there, we're essentially starting with a blank sheet of paper. And so really utilizing the combination of de novos and small format hospitals to pursue that hub-and-spoke strategy in that market could be very compelling.

And that's why you may not see it push the number of de novos up, but I think what will become increasingly important and we'll be able to provide some more visibility on this as we move into 2027 is what do we think is the opportunity for total beds to be added to the state.

Great. And then as a follow-up, I wanted to ask about the payer denial topic. There was an OIG report that highlighted the wide variation in denial rates among MA plans for IRF services. I was curious what your reaction was to that report. And I also wanted to see if there were any early learnings from the admit and appeal strategy that you've discussed on prior calls.

Yes. So I would say just in general that the denials through pre-authorization from Medicare Advantage continues to be a challenge. It's -- the trends that we saw in Q2 were not really dissimilar. We saw some marginal improvement from what we experienced in Q4 of last year and Q1 of this year, but there remains a very substantial disparity between what we see out of the MA plans and Medicare fee-for-service patients. We understand from the comments made by large MA providers that they are struggling to achieve what they deem as an acceptable level of profitability, but denying access to appropriate care for Medicare beneficiaries is not the right solution to that.

We are very pleased with what we have seen thus far in the pilot program. And again, we -- that's the -- our admit and appeal strategy. We initiated that with select patients across 9 of our hospital markets towards the end of February. So it remains fairly early in the program. And remember, there are 5 various levels of appeal that you can go through. I won't take you through each of those 5 right now.

Through the end of July, we had a total of 298 patients who had been admitted into our hospitals on that basis. 144 of those have been fully adjudicated. And of that 144, we have prevailed on 128, which is an 89% success rate. And I'll turn it over to Pat and maybe comment about how we see potential opportunities to extend that program in the future.

Thanks, Doug. I think the first opportunity for us to scale this up, within that 89%, there are certain diagnosis that are almost 100% or darn close to it. And I think as we think about scaling, it will likely be within those diagnosis categories that we move forward across the portfolio and then evaluate fully scaling the rest of the program up. But we're in conversations and evaluations of the education program and rollout that will have to take place for that to happen. And that's something we're preparing for now.

But a broader rollout of the whole program, I think we still want to get some more time under our belt, bigger sample size, but there are certain things right now that we think have the potential to be scaled throughout the portfolio.

Now we've talked in the past about just the stroke program in general and how we had -- some of the payers seem to recognize the value proposition around the stroke patients more so than others. And that would certainly be one of the diagnostic categories that Pat had mentioned that would be a likely candidate to try to push forward.

And when you're prevailing at almost 90% on these patients, what it tells you is that those patients should have been admitted on the front end into our hospitals. And the fact that we have to go through this admit and appeal strategy is doing nothing but adding to the cost of the health care system by increasing the administrative cost.

Yes. I think just to put a bow on this, I think you could see that we'll look to scale certain parts of this in the coming quarters. And then by the end of the year, I think we'll be in a position to evaluate for a full broader rollout across the company.

And we will move next to Ann Hynes with Mizuho Securities.

So I guess my first question is you announced a nice share repurchase program. This morning, how do you view that versus your other capital needs going forward? And I did notice that year-over-year, you have a -- I think it was like a 20% increase maybe in CapEx year-over-year. And what is driving that? Is it just an acceleration of development versus last year? And then thanks for all the detail on South Carolina. I know that's a CON you've been waiting for, but I believe there's 2 other states. I think it's North Carolina and Tennessee that could be expanding CONs for inpatient rehab. Any updates on those?

Yes. So it's North Carolina. South Carolina did not -- South Carolina was previously repealed, and we have a much larger presence where we have 11 hospitals in South Carolina already. We do hear that there is some dialogue around Tennessee, I don't know that anything is imminent there, but we continue to have good success getting CONs approved in Tennessee and have a couple of opportunities that are already in the pipeline there. Nothing else from a CON repeal perspective that is currently viewed as imminent.

In terms of CapEx kind of going in reverse order here, yes, CapEx this year is running right at about 15% of revenue. We think that probably represents close to a high watermark. Most of the increase on a year-over-year basis is in capacity expansions, which is a good thing. And again, some of that is directly related to those high occupancy doors we referenced in Q1 and our ability to add beds there as well as what remains a robust de novo pipeline. And then as Pat alluded to previously, we're really excited about the introduction of the small format hospitals with the intent to get at least one open next year and then increase that to close to a handful at least on an annual basis beginning in 2028.

The story on capital allocation, the increase in the share repurchase authorization notwithstanding remains unchanged. We like to say that we're an and story, not an or story because of the strength of our free cash flow and the resulting strength in our balance sheet, we have the capacity to increase the capital expenditures and increase the number of beds that we're adding to our overall franchise on an annual basis, but augment that with the dividend, which was increased for the October payout and increasingly with share repurchase activity.

And we will move next to Whit Mayo with Leerink Partners.

Mark, you've talked a good bit on this call about various investments in workforce development that you guys are making. Do you have any numbers that you could share around turnover, employee satisfaction, anything to gauge the impact that these investments are making?

Yes, we do. I'm going to let Pat go into greater detail on that. But just a quick comment on the clinical ladders. We've -- that's not a new tool, but we have a team that did a really nice job kind of going in back in to look to see what appeals to the clinical workforce, updated things. We've promoted it internally. And we've had a really good response, which is definitely impacting our turnover rates. It's impacting our ability to not only retain staff, but it's affecting our ability to hire staff in both the existing hospitals and to staff up our de novo hospitals. So Pat, do you want to give some details around that?

Yes, sure, Mark. So on an annualized basis through Q2, our nursing turnover sits around 19%. That represents a low of 12-plus years. On the therapy perspective, we're just above 7%. That's our lowest turnover on an annualized basis in 5 years. So really pleased with the progress there. From a ladder perspective, we are up to 43% of eligible RNs and certified nurses that are participating on the ladder. If we think about the turnover within that group, it's only 5%. If they're a non-laddered nurse, the turnover is closer to 25%.

If we can get a nurse certified, even if they're not on the ladder, turnover is only 12%. And we've increased the number of certified nurses by almost 21% versus prior year and 60% since 2023. So these programs are certainly having the intended outcome in terms of producing lower turnover, lower premium pay costs, the benefit to EPOB and lower unproductive time as well as allowing us to build enhanced clinical capabilities and fueling the value proposition through strong outcomes. So we're pretty excited about this.

If somebody puts in the time and effort to get their CRRN, there's a pretty good chance they're going to stay in rehab as opposed to going out and trying other specialties. And as we've noted, I mean, these are increasing their clinical skills, which ultimately allows us to take medically complex patients, and it's just been proven out. So really seems like a lot of things are clicking on all cylinders around this initiative.

We currently have approximately 22% of our RNs have the CRRN certification. That does carry a premium in terms of their wage rate. It's about 9% over their peers who do not have that certification. But as Pat just enumerated, we think that the benefits are more than offsetting.

Got it. And maybe my follow-up, just wanted to get an update on the VA initiative and whether that's having any meaningful contribution to same-store growth.

Yes, thanks for teeing that up. That remains a source of pride for us and a very fulfilling patient population for us to serve. We -- this is the first quarter where we've really anniversaried a lot of the growth that we had in the VA program that we started talking about last year. And in Q2, we hit VA growth of around 33%. It now represents about 23% -- just under 23% of our managed care volume.

And there still is a lot of runway there. Our local teams and our regional teams have done a really nice job collaborating with the VA populations within their markets. And just you may recall, we have talked about that there's 8 million veterans over the age of 65 in the country, and we're on pace to treat somewhere close to 10,000 by the end of the year. So substantial runway there.

And as a reminder, that pays at the Medicare fee-for-service rate.

And we will move next to Ryan Langston with TD Cowen.

Maybe I missed this. I got dropped from the call, unfortunately. But maybe just an update on the recently opened facilities versus the bed additions over the last year and maybe how each of those cohorts have been ramping versus your historical average?

Yes. I think the bed additions in the de novos continue to ramp very favorably. If we look at the openings on a year-to-date basis, in Q1, we opened 1 hospital with 49 beds. In Q2, we opened 2 hospitals with a total of 90 beds. From a bed expansion perspective, in Q1, we added 44 beds. In Q2, we added 10 beds. Those 10 beds importantly, were added to 3 of the hospitals that in Q1 had an occupancy level of north of 95%. As we've stated previously, the returns on our de novos are in part driven by the fact that we have -- tend to experience a very rapid ramp-up in those.

On average, our de novos achieve 4-wall positive EBITDA by the time they hit month 6, and they're typically north of a 70% occupancy rate by the time they get to month 10. Now those are averages, so some are faster and some are slower. But we think that over the years that we've been pursuing an accelerated de novo strategy, which really came to fruition in 2021, we have further refined our processes. We've set up dedicated teams across functions to do nothing but open the de novos. And as a result, the progress that we're making from the day that we opened the doors has really improved and has increased the time to achieving 4-wall profitability.

One thing I would add to that is just as we think about bed additions in last quarter, we talked a lot about the capacity-constrained hospitals and the cohort that represented that. We have lowered the threshold of when we start the evaluation process for bed additions, just to try to time that capacity coming online to when we actually need it. So we're not missing out on potential volume. So we, again, have lowered that threshold to 70% to 75% versus the historical 80% to 85% threshold.

Ryan, I'd also say it's been really nice to see the ramp-up momentum in hospitals, not only like in the state of Florida, where we have a well-known brand, but as we've gone out into new states, Connecticut, we opened up in Rhode Island a couple of years ago. Those are markets where you really have to do a lot of education about IRF versus SNF and it's been really, really nice to see the ramp-up in these new markets to complement the states where we already have a strong presence.

I think it's important to note that the increase that we've been experiencing over the last several years in system-wide occupancy is an important driver of efficiency, and you're seeing that flow through the P&L. And to put a finer point on that, our Q2 occupancy of 77.4% was up 290 basis points over Q2 '25. And sequentially, occupancy decreased only 130 basis points from Q1 of this year, and that compares to a decrease of 220 basis points from Q1 to Q2 in each of '25 and '24.

And further, our average daily census or ADC decreased only 69 from Q1 as compared to a sequential Q1 to Q2 decrease in ADC of 184 in '25 and 113 in '24. Q1 and Q2 also represented the first 2 quarters in company history with ADC in excess of 9,000.

Great. Appreciate all the detail. Just a quick follow-up, maybe to Ann's question on share repurchase. How should we think about you utilizing this over time? I don't think the EPS guidance change implies a material increase in repurchase through the back half of the year. But any reason we shouldn't think that this could ramp up at least versus the first half?

Yes. The EPS guidance change reflects only the share repurchases that have been accomplished year-to-date. I think you have seen an increase in the last 3 quarters from our historical run rate in share repurchase. We continue to have capacity in the balance sheet based on the leverage ratio that we're running. And also then we have capacity just given the free cash flow and the relationship of that free cash flow to our growth CapEx number as well. So clearly, there's capacity for increased share repurchase activity in the future. And if that had not been the case, I don't think the Board would have taken the action of increasing the authorization.

And we will take our next question from Joanna Gajuk with Bank of America.

So a couple of questions. So first, I guess, on the volume discussion, and you mentioned that you're seeing higher acuity. And I guess in the past, you gave us the stats, I haven't heard them. So I want to ask, can you give us some of these growth rates by category, like the stroke, neuro brain injury versus ortho hip and knee?

Yes, we can do that.

I can touch on that to start. Two of the largest categories of growth for us were in stroke and brain injury. Those were up 7.9% and 8%, respectively, on a same-store basis, 5.5%, 3.9%, respectively. Brain injury has been a -- we talked about this on the last call, probably the call before that as well, we continue to see a lot of growth in brain injury, specifically non-traumatic brain injury, which from a claims perspective, represents the largest source of potential market capture for us. So it's great to see us capitalize on that.

Yes. I think you asked specifically about lower extremity joint replacement. Knee and hip replacement, which is how we categorize that, was up only modestly, about 1% in the quarter.

Okay. Great. Yes, that's what I was getting. So clearly, these other categories higher acuity growing much faster than orthopedics. And if I may follow-up, in terms of, I guess, de novo and the plans adding beds and such as it relates to the pent-up demand, can you give us the stat you gave us last quarter in terms of percent of your hospitals that are above 90% occupied? And to that end, can you talk about the bed expansions or de novos, right? And how much, I guess, you achieved in terms of capturing the pent-up demand in the hospitals you called out prior to that quarter?

Yes, absolutely. So in Q1, we had 65 hospitals with occupancy rates greater than 90% and an average in that cohort of 95%. In Q2, we had 60 hospitals at greater than 90%, so a decrease of 5 with an average occupancy rate of 94%. Three of those hospitals that dropped from that cohort did so because of the bed expansions that occurred in the first half. And approximately 90% of the bed additions that we have in the pipeline and targeted for the second half of this year and the first half of next year are going into hospitals that are in that greater than 90% cohort. It's the definition of a high-class problem.

And we will move next to Andrew Mok with Barclays.

The same-store discharge growth of 2.8% accelerated 120 basis points sequentially despite tougher comps. One, did that finish better than internal expectations? And if those higher acuity categories that you called out are driving the better volumes and are expected to continue, why is there a hesitation to say that those acuity gains are -- may not be sustainable?

Yes. So first, we're not going to comment on performance versus internal expectations. We -- again, we will just compare it to guidance. And obviously, we revised our guidance upwards for the full year based on the second quarter performance. This is, again, one where we continue to believe that the breakdown between same-store and total discharge growth is less relevant because you can be influenced in any particular quarter by bed additions, which go immediately into the same-store count and also by the maturation of de novos, which were outside of the same-store category into the same-store category.

And there are other influences that we've cited previously that can impact same-store discharge growth from quarter-to-quarter. With regard to the increase in acuity, we think that is very positive, one, because there's a bit of a competitive moat around that. It is a real challenge to treat successfully those more medically complex programs, and we're very proud of the clinical programs that we have in place that allow us to do that.

It also creates a competitive advantage because part of the value proposition, a significant portion of the value proposition that we have for our upstream acute care partners is the ability to take those patients out of their facilities with a lower length of stay in the acute care hospital, which frees up the bed for them.

Andrew, this is Pat. I think -- I don't think it's a reluctance for us to commit to that in the foreseeable future. I think what -- from our standpoint, we see fluctuations in acuity from quarter-to-quarter, year-to-year. And while we're very confident in the ability for us to capture that market share, I don't think it'd be prudent for us to back us into a corner that -- and then have one of those fluctuations that occur from time to time. But we're very confident in the outcomes that we provide and the access to care that we're able to provide, and our teams do a great job of capitalizing on that.

Another factor that can impact the acuity is it's important that we not be perceived by our referral sources as cherry-picking certain types of patients. We could create the most value for our referral sources, the hospitals and the attending physicians if we're willing to accept all patients who qualify for admission into an inpatient rehabilitation facility and not just say we're only going to take your stroke or your brain injury patients.

And so doing that based on the flows that come into an acute care hospital in any particular quarter can cause some fluctuations in that acuity. But again, when you look at some of the headwinds that are now baked into our guidance, specifically incorporated into the second half, one of the potential areas of upside that I cited earlier is seeing improved pricing continue for the balance of this year based on some sustainability in that higher acuity.

And we will move next to A.J. Rice with UBS.

First, I just wanted to ask about one more question on the career ladder and the decision to boost your SWB expense growth by 50 basis points. Is that -- should we think of that as this year only? Or are you trading off higher wage growth on an ongoing basis for better turnover and then the back-end benefits of that? How should we think about this?

Yes. I think right now, it is an assumption for this year only and specifically for the back half trend. We believe that as we move just because of the success we've had in the participation in these ladders on a year-to-date basis, as we move into next year, we would expect to start anniversarying some of those increases. And so we should see the SWB per FTE moderate that, but we're not ready to call a level on it yet.

And remember, as we move into the second half of this year, we're also up against easier comps -- or excuse me, tougher comps in terms of more favorable outcomes from last year. If you look at Q3 of '25, SWB per FTE inflation was 2.6%. And in Q4, it was 2.1%. That compares to 3.2% in Q1 of '25 and 4% in Q2 of '25.

Okay. Yes. No, that's helpful. I just wondered also any update on your technology investments and AI initiatives? I know you have called out previously a partnership with Palantir around claims processing and on the administrative side. Are you seeing any meaningful efficiencies yet? Or is that mostly still in front of you?

I think a lot of it is still in front of us, but we've definitely seen many enhancements in our processes, both -- there's a lot of AI that is now embedded as an aid or a tool in our clinical workflows that aid the patient journey, everything from the prescreen narrative to automation of the face-to-face notes. We've used it to enhance our falls risk model, our ReACT model and our readmission model. We've spoken previously about the agentic solution we have, which we call HANA for following up with recently discharged patients.

On the administrative side, it really runs the gamut from agents that are helping us with the monthly closing of the books and scanning journal entries for exceptions. We referenced previously that what is coming soon is going to be an enhanced market analytics tool that's really going to help us to buy the appropriate real estate strategy for markets that we're entering. We think it's going to be very useful as we map out our strategy for North Carolina. So there's a lot in the pipeline.

But I will say, A.J., we've got a team that's been very intentional in terms of prioritizing projects and initiatives that -- in which we wanted to work with Palantir. So we're looking for those that can benefit us the greatest in terms of either efficiencies or working through projects like the development of opportunities and evaluating markets. So I'm with Doug, I think that the benefits still are out in front of us, but I'm very encouraged about where we are and probably more importantly, how we're going about it as an organization.

A.J., this is Pat. Just a couple of other call-outs from a use case perspective that I'm pretty excited about. In addition to the ones that Doug talked about, one of the challenges that we have from an operations perspective is when we are manually auditing records and clinical systems, it takes a lot of time. It takes a lot of effort. It takes a lot of resources. And we're developing a solution with Palantir and our ITG team, our internal IT team that will proactively and concurrently scan our medical records for any potential risk area, if an order is not followed or if an order is delayed, and you can act and intervene in real time.

So I'm pretty excited about that. And then not specific to Palantir, but we did talk in prior calls about our Fusion ERP conversion. And we've gotten our sea legs under us with that. We continue to enhance that system, and we're evaluating opportunities that may come with that to centralize certain tasks that could reduce or create efficiencies for us in the near future. We're just not ready to call those out just yet.

And we will take our next question from Brian Tanquilut with Jefferies.

Congrats on the quarter. Maybe, Doug, as I think about temp staff or contract labor utilization, obviously down a decent bit during the quarter. Just curious how we should be thinking about the back half, especially in light of planned openings coming up in the pipeline.

Yes. So we've historically been very good about not having to tap into contract labor for de novo openings, and we would hope that will continue to be the case in the second half. We're really proud of the progress that we have made and that we continue to make on decreasing the utilization of premium labor. Q2 marked our 11th consecutive quarter where we had a year-over-year decline in premium labor cost even as over that period of time, our volume has increased substantially.

But being at 1.1% of total FTEs in contract FTEs and the fact that the rate has really stabilized for about a 2-year period right now at an annual rate of about $175,000, we've kind of hit the point of diminishing returns. So part of what's embedded in the increased assumption for SWB per FTE the inflation rate there for the second half is just that realization that incrementally, we would hope to continue to improve, but the level of improvement is going to be less than it has been for the last almost 3 years.

Just to add to that, this is Pat. Doug is right. There's some diminishing returns on this, but there is still juice left to squeeze here. Again, it's just going to be smaller than what we have been able to produce over the last several quarters sequentially. A couple of call-outs. The -- in January, we started a pilot with our top 10 markets from a contract labor extra shift and sign-on perspective that had historical recruiting challenges, and we worked with our talent acquisition team and our regional operators and piloted partnership around recruitment and marketing.

And we saw a substantial improvement in the majority of those markets way over the historical hiring trends that had occurred, and we saw nice reductions there. Some of those markets are still going to see continued improvement, which we will benefit from. And then there's opportunities for us to take that pilot to other markets that are challenged as well. And then I'll just call out that this was our best hiring quarter that we've had in some time. And that comes off of a really strong Q1. So just -- I know that, that can change year-over-year. But right now, from a labor availability perspective, it's probably the least stressed that I've been about it in several years.

That's awesome. And then, Doug, I noticed the new slide added there, Slide 19 for the RCD and Team. Just curious, anything you can share with us in terms of what you're seeing with RCD at this point?

Yes. So I would say things continue to be about the same in Alabama. We're above for all 7 of our hospitals. We're above the target affirmation rate, which is north of 90%. The rollout in Texas has gone very well. And there, we're seeing affirmation rates that are consistent with what Novitas had demonstrated in Pennsylvania previously of north of 98%. California, which is a smaller number of our hospitals, I would say that the MAC was less well prepared than we would have hoped for, but they're continuing to make some progress.

We're above the target affirmation rate there, and we would expect continued improvement. We don't really see any reason why that should differ from the experience that we've been having in the state of Texas. And then finally, the inclusion of our hospitals in Pennsylvania has been deferred for a period of time, but we will have a couple of hospitals in Pennsylvania that we believe will be subject to RCD beginning in 2027.

The experience for other providers in the state of Pennsylvania thus far has been positive. And so we're optimistic about that as well. And then we're not currently aware of plans by CMS to extend RCD into any other states at this time.

And we will move next to Jared Haase with William Blair.

Maybe I'll just stick with one as we get towards the end of the call. I wanted to go back on the career ladder programs and appreciate the investment that you're making there. I wanted to sort of try and connect that back to the model a little bit. So when I think about the dialogue that you have with referral partners to drive volumes, are you actually able to articulate some of that data around, let's say, the tenure of your workforce, the mix of credentials, turnover rates, things like that directly?

I sort of get ultimately, at the end of the day, quality measures, readmission rates are probably the main things that they're going to focus on. In some sense, that's basically downstream from the quality of our workforce. So just trying to get a sense of how that actually plays out in the go-to-market as you try to capture volume.

Yes. Jared, I think those conversations directly around turnover and the improvements to the overall business are more direct with our joint venture partners than they are non-partners. I think for non-partners and joint venture partners, the primary focus comes down to outcomes and how fast can we take their patients. And if we have a more stable, trained clinical workforce, we're able to do those -- take a wider variety of conditions and take them sooner before certain conditions can resolve and reduce acute length of stay and associated readmission.

So that's really where the conversations come in. But again, from a partner perspective, they're very interested in those labor dynamics as it has a direct line to their distributions.

I would also say that the more skilled and more tenured your clinical workforce is, there's a correlation of that to your ability to obtain at a hospital level disease-specific certifications. And when we can go to a referral source, citing the disease-specific certifications that we have and then providing them with our clinical outcomes, that presents a very compelling case.

And we'll take our next question from Raj Kumar with Stephens.

Maybe just kind of going back to the North Carolina opportunity. I guess curious on that front, how you see it in terms of JV versus wholly owned? And then kind of thinking as Florida as a use case, maybe kind of illustrating the kind of ramp in that state and kind of what the time line looks like to kind of reach your kind of targeted market share or saying getting your fair share from kind of acute admissions in that market?

I'll take the first part of that. I mean I think that North Carolina will be like what we've seen in other states. It will be a combination of some wholly-owned hospitals and some JV partnerships. Our existing hospital in Winston-Salem is a partnership with the Novant system. So I think that as we initially look at these 15 markets, we see some that may be more likely to be partnered than others, just given the dynamics in the marketplace. But I think you could count on a mixture of some wholly owned and some joint venture facilities within the 15 markets.

There are a number -- any number of benefits that are attendant to a joint venture versus a wholly owned, one of them is the ability to get a CON foothold in a state because the acute care partner is already established by definition, and we may be new to that market or to that state in particular. That doesn't apply when you've got the CON barrier removed. So there are some analogies to Florida, but some distinctions as well. If you think about it, when the CON was revoked in Florida, we already had a presence with 12 existing hospitals. So we were well known to many of the acute care providers, and that facilitated more of a balance of joint ventures and wholly owned.

And that's a little bit distinct from North Carolina, where we have just one, even though it is in a joint venture. Where you get a more parallel path, though, is that we felt that first-mover advantage was extremely important, and we can move faster alone than we can negotiating joint ventures on the front end. So with the expansion in Florida, what you saw us do is go out and initially move with a portfolio approach that was much more balanced towards wholly owned than joint ventures.

But as we got along the way and announced certain projects, a number of those that started as wholly owned converted to joint venture opportunities. And I would expect a similar type of trajectory in North Carolina. We're prepared to move quickly and start projects, and we're going to do that. And once those projects are announced, we'll survey the market and make a determination as to whether or not that particular project would benefit from the presence of a joint venture partner.

This concludes the Q&A portion of today's call. I will now turn the program over to Mark Miller for closing remarks.

Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

[Audio Gap] I cover healthcare facilities and managed care at Bank of America, and thanks so much for joining us. This is going to be an exciting conference. And we're starting now this session with Encompass Health. They are the largest operator of inpatient rehab facilities. And today with us, we have Doug Coltharp, the CFO; and Zabi Hotaki, who is the VP of Finance, but also Mark is here from IR. So just in case you have any follow-up questions, he's right there.

So thank you so much for being here today with us. we appreciate. And I guess maybe we'll go right into Q&A, by the way.

So I want to start with volumes because really, this is like an exciting part of the story for this company growing much faster than a lot of different provider times, you guys targeting 6% to 8% long-term discharge growth. Obviously, this quarter had some puts and takes. So maybe just kind of refresh people where we stand as we think about Q1 and also how you're thinking about the volume growth for this year?

Absolutely. Thank you for hosting us, and thank you again for hosting the tour of our hospital yesterday, which was very well attended. In the way of further introduction, many of you may have not met Zabi before. So Zabi joined us about 2.5 years ago as the Senior Vice President of Finance and Strategy. His last stop before joining us was at Stericycle, but he's had some great experience and relevant experience beforehand, and he is becoming an increasing participant in our Investor Relations functions as well. So glad to have him here today.

As Joanna mentioned, back at our Investor Day in the fall of 2023, we laid out a 5-year discharge growth CAGR. And I say discharge growth because that is our primary measure of patient volumes in this industry. And that objective was to have a 5-year CAGR of 6% to 8%. We attempted to be clear in our communications at that time, but apparently have fallen short that, that 6% to 8% was indeed meant to be a 5-year CAGR and not a series of quarterly targets that would be 6% to 8% or a series of annual targets.

And so if you wind the clock forward to the end of 2025, we would be 3 years into that 5-year CAGR, and we were fortunate that we had operated at the high end of that range with a 7.6% CAGR. We've said all along that there would be fluctuations, particularly from quarter-to-quarter, depending on things like the constitution of the calendar and what day of the quarter ends on.

Yes, that makes a difference because our discharge patterns based on the day of the week are a little different as well as things like the comp that you're up against from the prior period and when you have new capacity rolling in, because we've been adding a lot of new capacity to our business, both in the form of opening up new hospitals and then adding beds to existing hospitals.

The last few quarters, our discharge growth has slowed from those levels a little bit, but it was readily explainable. And in particular, when we look at the first quarter, our discharge growth was 4.3% and that was impacted by a number of factors. First, something that's a little bit anomalous in the business is between the second half of last year and February of this year, we closed 4 units that we were operating that were actually housed within joint venture acute care hospital partners.

And all of those were situations where we were operating -- excuse me, 3 of them were that, and one of them was the lone SNF unit, skilled nursing facility unit that we operated. With regard to the 3 unit closures, those were leased space within the hospital. They operated as remote locations. So they were tied to the same Medicare provider number as a freestanding hospital that we operated in that market.

And we operated those units, all of which ran at essentially a breakeven EBITDA as an accommodation to that acute care hospital partner. They were not strategic to us. They were not financially contributing. And so in each one of those cases, it was just coincidental that it happened within a 1-year period of time. The host hospital wanted to take that space back for other purposes. We were glad to turn that back over to them.

The aggregate impact of that plus the -- we closed our one skilled nursing facility. We had skilled nursing facility housed within one of our freestanding IRFs in Lexington, Kentucky. That was a facility that we acquired in 2014. Based on our relationship with the University of Kentucky, we agreed to continue to operate that skilled nursing facility, even though that, too, was not strategic for us for a period of time. They agreed that it was no longer necessary for us to do that, so we closed that as well.

All of those together constituted about 85 basis points of a discharge growth headwind, but no impact to EBITDA.

The second thing that we commented on, and I'm going to ask Zabi to elaborate is we've got a high-class problem, which is because of that rapid discharge growth that we experienced over the 3 years ending in 2025, our hospitals, even as we were adding capacity, filled up more quickly than we had anticipated. And so we had about 35% of our hospitals in the first quarter that ran at an average occupancy rate of 95%.

So we've got some plans to address that in the future. Zabi, maybe you just want to take a moment and comment a little bit more on the occupancy situation.

Yes. So more than half of our high occupancy stores have bed addition plans over the next 3 years. And when we look at 2026, 70% of the bed additions coming online are earmarked for these hospitals. And then as we move into 2027, and most of those bed additions are coming on in the back half in 2026.

As we move into 2027, we're seeing about 90% of the bed additions in 2027 slated for these high occupancy stores with more of those stores having bed additions in the first half than the second half. So when we look at the next 15 months or so, we'll see a nice ramp of bed additions coming on, specifically addressing this high occupancy and alleviating some of these constraints and enabling discharge growth.

The last thing I would point to, and I don't want to make this sound like a litany of excuses because actually 4.3% discharge growth, we weren't disappointed, particularly given the EBITDA flow-through we had in Q1. But you may have heard from some of the upstream acute care hospitals that it was a particularly mild season for flu and respiratory illnesses. And we do get volume in the first quarter attributed to those. There's some seasonality.

One of the proxies that we have, and it's not a direct correlation for what kind of volume we're seeing related to flu and respiratory is debility, which is one of the RICs that qualifies for admission into an IRF. And for the first quarter, our total mobility growth was only 0.7% was actually negative 1.5% for the first quarter. That's again, just a seasonal thing that varies, and so it's not necessarily a carryover.

Last point on this, Joanna, because we've taken a lot of time to answer your first question, you said, what about the rest of the year? And so if you just go through our guidance assumptions and pair those back, and those were updated with our Q1 earnings report, it would imply volume growth for the full year between 5% and 6%.

So obviously, as we progress through the year and we start to anniversary some of those unit closures I had mentioned before and also consolidate some of the volume from those closures into the remaining capacity that we have in those markets, that impact will diminish, and we're going to anniversary some of these other impacts. So we should see volume growth accelerating from the first quarter level through the balance of the year.

And on disclosures, just to wrap it up, originally, you talked about 30 to 35 basis points, I think, for the year headwind. So remind us, are you on track of that? Because you also talk about the fact that you plan to sort of capture these patients somewhere else, right, in different locations. So kind of walk us through the gross versus the net headwind?

Yes. In a couple of those markets, we need to add beds to the existing facilities to accommodate that demand. I think a reasonable estimate is that 85 basis point impact in Q1 drops by about 20 basis points in each of the remaining quarters in this year.

And the 30 basis points, by the way, is more back half heavy, not full year because the first half is 85 basis points in Q1 and then it starts to step down.

As you kind of capture these patients. All right. And just talking about the bed additions, so I appreciate it. So it sounds like you're addressing these high occupancy markets first, right, the next -- like you said, the next 15 months. But you're also talking about now adding the small format hospitals, the large hospitals.

So I guess there's a lot of different options you have at your disposal. So maybe walk us through in terms of economics, like does it kind of change your ROIC metrics, whether you do the large format, the regular or the small format?

Yes. So just going back, we mentioned half of these hospitals have bed addition plans, the other half do not. So the portion that do not have bed additions planned are typically landlocked hospitals or hospitals in competitive markets where they're best suited for a small format hospital. So we're evaluating a dozen or so markets within this high occupancy cohort for the smaller format concept.

And then just another subset of this high occupancy cohort, we had some of these hospitals grow at a faster pace than we had anticipated. A portion of that had to do with some of the recent de novos that are just outperforming our original model, and we're addressing those in the next couple of years with bed additions.

As far as just the economics, and maybe I'll kind of run through the different modalities. And at the top of that list, I would say, I put small bed additions at the top of that list as far as the returns because it's the highest and best use of capital for us. Typically, returns on those bed additions are north of 30% and the average investment or cost per bed is about $850,000. On the small format hospitals, we're expected to generate a return somewhere between 20% and 25%. And the average cost per bed there is about $1 million.

And then as we look at de novos, historically, that has generated a return somewhere between the low- to mid-teens and the cost is about $1.2 million. You mentioned the larger format hospitals. In theory, a larger hospitals, so 60 beds or greater, would generate a slightly better return than, say, a 50-bed de novo, if all things are equal.

But there are so many different variables that go into that depending on the ramp-up of the demand, the patient payer mix, the cost per bed, whether we have a partner or not. So I wouldn't necessarily classify the 60-bed hospitals that we're doing into a new category. I'd probably put them in that de novo return category of low- to mid-teens.

And Joanna, I don't want to assume that everybody in our audience today knows what a small format hospital is because it's a relatively new concept for us. We've had a chance to explore that with you previously. And so historically, our methods for increasing capacity in our business have been twofold.

Since 2021, we have been opening on a greenfield basis, 8 new hospitals per annum. And not surprisingly, because there are great economies of scale for standardization, those hospitals have followed a pretty standard format. So essentially, what we have looked to do to create the best labor efficiencies because labor consumes about 54% of every one of our revenue dollars is we would go out and we would acquire depending on the specific topography, anywhere between 5 and 7 acres of land.

And we would start with typically a 50 all private room single-story building supported by administrative areas and a large therapy gym and dining facility and so forth. And on that acreage, there would be capacity, again, depending on the specific topography to increase with future period bed additions of anywhere between 10 and 30 beds, so up to about 80 hospitals.

And the effect of those subsequent period bed additions, as Zabi mentioned, was to turbo boost the overall return because you're bringing on new capacity at a 30% plus return.

What we have found as we've moved into more dense markets is that finding a 5- to 7-acre piece of land can be challenging and can be expensive. And if we fill those up as we've been able to do, then the opportunity to serve that market typically means that we need to move to another location.

And sometimes the market dynamics, if you think about a Dallas or Houston are such that between traffic patterns and the movements and the migration of population, you don't want to be in the same location. You want to put the beds more proximate to where the patients and the attending physicians are. And so we spent about 3 years developing this concept for a small format hospital. So what does that mean?

The prototype is going to be 24 all private rooms. It's going to be a single story. It will sit on 2 to 2.5 acres of land. It's going to have a smaller amount of the square footage devoted to administrative space because you have fewer patients, the dining facility will be smaller and the therapy gym will be smaller. But importantly, this only works to the extent that these small format hospitals are set up as a remote location.

And remote is a defined term under the Medicare regulations that says it's going to operate under the same Medicare provider number as an existing hospital in the market. And that allows us to get economies of scale by sharing leadership functions, by sharing a marketing team and other administrative services. For example, in the small format hospitals, we're not going to be doing on-site food preparation. So the food will be prepared and then brought over to that facility either by the host hospital or by a third party in the market.

So we are really excited about this. The first of these is going to open up in 2027. It really gives us another important arrow in our quiver to address a high-class problem of higher occupancy. And it gives us a hub-and-spoke strategy in a lot of the denser markets that we're serving that are seeing a pretty significant growth in the age population over 65.

Right. And since you mentioned that kind of underlying demand, right, the population growing pretty robustly here. But also another dynamic in the market is around Medicare Advantage, like that growth clearly slowed down this year. So the penetration seems like maybe that's going to slow. I mean we don't know what's going to happen afterwards. But can you talk about your experience in your markets? And I guess, what implication does that have to your company?

So we had a great run up into -- through the third quarter of last year with regard to Medicare Advantage growth. And I think from 2021 through the first 3 quarters of 2025, we had seen something like a 9% CAGR in Medicare Advantage. And as a percentage of our payer mix, Medicare Advantage grew from just under 9% to a peak of about 17%.

And over the last 2 quarters, we have seen some more challenging pre-authorization requirements from the Medicare Advantage plans, even on higher acuity patients. And so our growth has slowed in that category. In fact, in the first quarter, it was 0.6% in total and it was negative on a same-store basis.

Now within that, the units that we closed that I mentioned before, particularly the SNF were actually much more heavily weighted towards Medicare Advantage. So if we factor out those units, we had a positive same-store growth of, I think, 0.6% and a total discharge growth in Medicare Advantage of 1.9%. We've got a specific strategy that we began rolling out on a pilot basis at the end of February to try to address this.

I'm going to ask Zabi to talk about that in just a moment. But I do want to comment that the fact that the MA plans are pushing more self-pay back on the patients that they're reducing benefits in part in response to the medical cost increases that they're seeing and the level of increases that they've been getting from Medicare and that they're so stringent on pre-authorization is starting to show up in enrollment.

So Medicare Advantage enrollment and penetration look like that for a long period of time. And it appears that it has now peaked at about 52% of Medicare beneficiaries and that it's actually started to recede a little bit more. And in fact, if you look at the 12-month period from March '26 through March '25, 20 states had a decline in MA penetration.

We have hospitals in 12 of those and 54 of our 148 counties saw a year-over-year decline in Medicare Advantage penetration. That doesn't mean it's necessarily going away, but I think it is showing up in how beneficiaries choose a particular plan. Zabi, you want to talk about the net appeals?

Yes. So we're taking several steps to counteract some of the MA denials, the aggressive MA denials, and that includes maintaining active communication with the subject plan, highlighting our value proposition. We're also informing CMS of noncompliance with Medicare coverage criteria.

We're making sure on our end, our clinical liaisons are responding timely to referrals, but we also have this admit-and-appeal strategy that we implemented this past quarter, where we will admit MA patients that were denied through the pre-authorization process that we believe meet CMS criteria, and we have strong clinical support for admission. And then we're following up with a formal appeals process on those.

And so 9 hospitals are part of a pilot that we kicked off a couple of months ago. Early outcomes from that are very promising. But it's not to say we are done. I think we'll let this play out over the next 6 to 9 months and understand kind of the end-to-end process of appeals and what the full effect of this program is and our success rates as far as what gets overturned. But early outcomes look good.

There are 5 different levels of appeal and the first 2 happen very quickly. So the first is called an expedited appeal. And essentially, as soon as you get a denial in the pre-authorization process, you fill out a form, which we've been using AI to help us do and flip that back to the plan to see if the plan will overturn it based on that. We've actually seen this almost a 30% success rate. I'm just flipping it back and saying, take another look.

The second level of appeal is with a fiscal intermediary that is employed by CMS. That happens automatically if you get a denial and the turnaround is very quickly. And then it moves to the ALJ and things slow down. So it's going to take us a little while to develop an experience curve on this.

Our historical practice, by the way, you have to compare this to what we were doing before is, because there was sufficient patient flow within basically all payer classes, if we got a pre-authorization denial for an MA patient, unless we're really extenuating circumstances, we let it go and we move on to the next patient, but as we've seen their conversion rates drop so dramatically over the last 2 quarters, we felt the need to take a more aggressive approach, really advocating for the patients.

And we're hopeful that this will change behaviors in 2 ways. One is that we're going to be successful on those that were admitting and appealing. But the second is that the plans are going to wake up to the fact now that we're just not accepting their initial decision. And so they'll start approving more of those appropriate patients on the front end. More to come on that in the future.

But do you see -- because it sounds like there was an issue with one particular payer, which is nationwide, but has that spread to other payers?

It has not. It's been disproportionately concentrated with one large player.

Okay. And are you seeing any, maybe different actions from other players? Because obviously, we hear across the board kind of providers talking about kind of your experience in terms of pre-authorization increasing and sort of more pushback from the payers. So just curious if there's anything else?

We really haven't.

Okay. That's good. But overall, I guess...

We also want to remind everybody, we'd like to be able to serve the Medicare Advantage beneficiaries at the same rate that we do Medicare beneficiaries fee-for-service. There are plenty of patients out there. Again, nationwide, just as a proxy for the unmet demand in this business, 60% of patients admitted into any IRF, ours included in a particular year, have to have as a primary diagnosis, 1 of 13 categories established by CMS called CMS-13.

We have the ability through the Medicare database to look upstream at all of the discharges coming out of acute care hospitals in the U.S. on an annual basis. And we look at those that are coded CMS-13. We look up to the acute care hospitals because 93% of the patients who come into an IRF come from an acute care hospital.

And only 14.5% of patients coming out of acute care hospitals with a CMS-13 diagnosis wind up in an IRF bed. And so that just tells you how much room there is to expand that. In many of the markets in which we operate in an existing hospital and we track that same conversion rate, we're able to move that up north of 20%.

And I guess also maybe finishing up on the Medicare Advantage dynamics because it is an important payer, right, especially as you think about the penetration. And you guys, like you mentioned, you did a good job growing that penetration inside your business, right? But also can you talk us and remind us where you stand in terms of the rates from these payers, right?

Because historically, there was a bigger discount. It sounds like on average, you're kind of closing the gap. So kind of is there more room to close that gap? Or are we kind of where we should be on that rate?

So there are positive aspects and there are concerning aspects around closing the gap between the 2. So if you roll the clock back 10 or more years ago, the payment gap between fee-for-service and Medicare Advantage for our IRF services would have been as large as 25%. For the first quarter of this year, it was 1%.

And that is a result of 2 things. One is, over time, as we've been able to demonstrate our value proposition, we have converted over 90% of our MA contracts from being paid on a per diem basis to being paid on a per episodic basis tied to the fee-for-service rate. And so that has helped close the gap significantly. But the gap that we're talking about also is not acuity neutral.

So within both payer classes, reimbursement is tied to acuity. And we skew higher in acuity, not surprisingly for Medicare Advantage. And for instance, just a comparison, one of the most medically complex conditions that we treat in our facility, and we're better than anybody else in the world at doing that are patients that are recovering from stroke. And so within our fee-for-service book of business, about 14% of our patients are stroke patients. Within Medicare Advantage, it's 35%.

So as we're seeing these more stringent pre-authorization requirements for Medicare Advantage, what we're also witnessing is that we're retaining the higher acuity patients, and we're losing some of the more -- some of the still IRF appropriate but lower acuity patients. And so that's closing the payment gap between them, but it's impacting volume. So ultimately, I would rather see that payment gap open up a little bit because the MA acuity spectrum is broadening.

And maybe we have a couple of minutes left, but I want to touch on the fee-for-service reimbursement. So we got the proposal, I guess, that was very benign, I think, in there. I mean there's some language around some CMS looking at some things and they're quoting netback analysis. So maybe how we should think about the reimbursement outlook? I mean we kind of had a view of '27, right? But I'm thinking about could there be something else that could happen in the future?

Because obviously, there's a lot of discussion in D.C. around fraud and abuse and going after certain providers. I mean there's nothing out there that would suggest that their inpatient rehab is being targeted. But I'm just kind of putting out there in terms of how you're thinking about that bigger picture kind of reimbursement changes in the future?

Yes. I think the greatest comfort that everyone in this room should take around fraud and abuse in the IRF sector is the extension of RCD, Review Choice Demonstration. So when the providers in this space are having 100% of their claims reviewed by a Medicare fiscal intermediary on the front end, and still prevailing at rates of 98% and higher in states like Pennsylvania and our early experience in Texas has been the same. That should be very comforting.

I mean that's not our reviewer, that's their reviewer, and it's 100% on a preclaim basis. The proposed rule was relatively benign. The market basket update and the pricing increase were a little bit lower than we anticipated. We had been anticipating 3% for the fiscal year that will begin October 1 of this year. It came in at 2.4%. That impacts our fourth quarter revenue and EBITDA by about $7 million. We absorbed that within our guidance and still increase those guidance ranges.

There are a couple of provisions that are operational components about just including functional status within the pre-screen about when you have to initiate the initial team conference and so forth. Some of those don't make a good deal of sense. And so as we normally do during this comment period, we will provide -- be providing comments to CMS, both as an individual company and part of the trade association.

There was one RFI in there that has confused a lot of people because it talked about within certain patient categories wanting to basically converge coding of those patients between the SNF system and the IRF system. We do not believe that, that is any kind of step disguised or otherwise towards site neutrality. And we really think that, that is just an attempt to reconcile some coding differences on similarly situated patients.

And the intent is to be budget neutral with those changes. So as we see some of these categories maybe moving down, other categories moving up, it will potentially have a net offset.

And we saw that when Section GG was initiated in the IRF payment system in 2019. You just moved the pieces around the chessboard and wound up in the same place. And by law, again, as Zabi mentioned, CMS cannot promulgate any changes that are not budget neutral for the industry.

And maybe last question on capital deployment and I guess, leverage and kind of your targets there because I guess, clearly, your leverage is now below 3x. So now kind of as we're thinking about kind of...

2x.

2x, actually, right.

It's a good place to be. One of the real attributes of our business is that we generate really high and sustainable levels of free cash flow. And so we've been in a position in the last several years where even as we ramped up CapEx to address these occupancy issues and add more capacity, we're funding that almost exclusively with internally generated funds because EBITDA has been growing in the low double digits for the last several years, the leverage has been coming down.

And so that's been giving us capacity to augment the capital that we're deploying for growth in the business with an increasing share repurchase program. There was a time when we said our target leverage was about 3x, and we go up and above and below that. The last several years in speaking with our investors, and it's just we've observed the overall environment, it feels like 2 to 2.5x is the new 3 to 3.5x.

We're at 1.9x. It doesn't mean that we're capped there. But I think you're going to see us because we can do this without sacrificing the opportunities we have to grow the business and buy back shares, I think you're going to see us probably hover in that 2 to 2.5x range for the foreseeable future.

All right. That's all we have today. Thank you so much, everyone. Thanks so much, and enjoy the conference.

Thank you.

Good morning, everyone, and welcome to the Encompass Health First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mark Miller, Encompass Health's Chief Investment Relations Officer. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's First Quarter 2026 Earnings Call. Before we begin, if you do not already have a copy, the first quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com.

On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control.

Certain risks and uncertainties and like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K, the Form 10-K for the year ended December 31, 2025, and the Form 10-Q for the quarter ended March 31, 2026, when filed. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements.

Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we would adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue.

With that, I'll turn the call over to President and Chief Executive Officer, Mark Tarr.

Thank you, Mark, and good morning, everyone. We are pleased with our start to 2026. Our first quarter revenue increased 9% and adjusted EBITDA increased 11.2%. The based primarily on our Q1 results, we are raising our guidance for 2026. Doug will review the details in his comments. We achieved these strong results while once again delivering outstanding patient outcomes. Compared to Q1 of '25, our discharge community rate improved 50 basis points to 84.5%. Our discharge acute rate improved 30 basis points to 8.6%, and our discharge to SNF rate improved 20 basis points to 6.2%.

Our performance on each of these quality metrics exceeds the industry average. We continue to invest in our clinical staff by providing professional growth and development programs such as our career ladder programs, providing nurses with support to attain certified rehabilitation RN certifications and offering in-house continuing education opportunities. We've seen increased participation in and benefits from these development programs. We believe our success in these programs contribute to the continuing improvement in our clinical staff turnover trends Q1 2016 annualized RN turnover was 17.8%, down from fiscal year '25 to 20.2% and annualized therapist turnover was 6.4%, down from last year's 7.8%.

This represents our lowest RN turnover rate since at least 2012 and help drive a 9.4% decline in premium labor spend compared to Q1 of 2025. We also believe that our clinical advancement programs and reduced clinical staff turnover further enhance our abilities to serve high-acuity medically complex patients and increased patient satisfaction scores. Demand for IRF services remained strong, and we are continuing to invest in capacity additions to meet the needs of patients requiring inpatient rehabilitation services.

In Q1, we opened a new 49 bed hospital in Irmo, South Carolina, our 11th hospital in that state. We also added 44 beds to existing hospitals. Over the balance of the year, we plan to open 7 more hospitals with a total of 340 beds and add an incremental 100 to 150 beds to existing hospitals. We continue to build and maintain an active pipeline of new hospital development projects, both wholly owned and joint ventures, while also executing on bed expansion opportunities as dictated by occupancy trends and market dynamics.

Our pipeline of announced new hospital projects with opening dates beyond 2026 and currently consists of 11 hospitals with 520 beds, and we anticipate additional projects, including small format hospitals will be announced over the balance of the year. We have previously discussed the innovation of our small format hospital, which will serve to facilitate a hub and spoke strategy in large and growing markets. We are confident we will open at least one small format hospital in 2027 with the potential to add more depending on the timing of pending real estate transactions. The small format hospitals will operate as remote locations under the same Medicare provider number as an existing end-market hospital and will share certain administrative services with that hospital.

Small-format hospital will complement our existing de novo and bed expansion strategies. This is a particularly active year on the regulatory front with inflammation of team beginning on January 1 and the expansion of RCD into Texas effective March 1 and California beginning today. We will work to address these developments as we have the numerous other regulatory challenges, we have successfully navigated in the past through extensive preparation and proactive refinements of our operations. This is not to say that we will be immune from short-term transitory impacts to our business.

Nonetheless, the fact remains that demand for inpatient rehabilitation services remains considerably underserved and is growing as the U.S. population continues to age, we are uniquely positioned to address this important societal need. On April 2 of this year, CMS released the 2027 IRF proposed rule. The proposed rule included a net market basket update of 2.4% and which we estimate would result in a 2.4% pricing increase for our Medicare patients beginning October 1, 2026. We expect the IRF final rule to be released in late July or early August. With that, I'll turn it over to Doug.

Thank you, Mark, and good morning, everyone. Q1 revenue increased 9% to $1.59 billion adjusted EBITDA increased 11.2% to $348.8 million. The revenue increase was comprised of 4.3% discharge growth, inclusive of 1.6% same-store discharge growth and a 3.7% increase in net revenue per discharge. Net revenue per discharge growth benefited both from patient mix and a favorable year-over-year comparison in the annual Medicare SSI adjustment.

Bad debt expense increased 20 basis points to 2.2%, primarily as a result of writing off claims from 2013 associated with the legacy audit appeal. As a reminder, since the end of Q2 2025, we have closed 3 IRF units hosted within acute care hospitals as well as our loan SNF unit hosted within one of our freestanding hospitals. Together, these 4 units were essentially breakeven in terms of adjusted EBITDA. The unit closures impacted total and same-store discharge growth in the quarter by approximately 85 basis points.

The impact on future period discharge growth will diminish as we consolidate this volume into other proximate hospitals and as we anniversary the unit closure dates. We expect to add 66 beds to our existing hospitals in these markets. We previously announced the closure of our 18-bed unit hosted within our acute care hospital JV partner in Evansville, Indiana. This closure will occur in early 2027 and represents another market consolidation opportunity. We are in the process of adding 40 beds to our existing freestanding hospital in this market to support the consolidation and future growth.

These incremental beds are expected to be operational in late 2026. Following the Evansville unit closure, we will have 9 remaining hospital and hospital locations with no further closures currently planned. The hospital and hospital format remains a viable strategy to capitalize on market opportunities. Over the next 2 years, we expect to open three additional hospital and hospital locations in existing markets. These three projects are already in our bed addition assumptions and will address needed capacity in these markets.

Q1 SWB per FTE increased 3.7% and driven in part by the increased participation in our career ladder programs Mark discussed earlier. Greater participation in career ladder programs leads to more of our clinical staff obtaining higher licensing and compensation levels. Over time, we believe this drives financial and operational benefits, primarily in the form of reducing turnover in premium labor costs. Premium labor costs comprised of contract labor and Syntonic ship bonuses declined $2.7 million from Q1 $25 million to $25.9 million. Contract labor FTEs as a percent of total FTEs was 1.2% in Q1, down 10 basis points from Q1 '25.

Net preopening and ramp-up costs were $4 million. We continue to expect net preopening and ramp-up cost of $18 million to $22 million for the full year 2026. The -- we continue to generate significant free cash flow. Q1 adjusted free cash flow was $194 million. Our primary use of free cash flow continues to be capacity expansions. During Q1, we repurchased approximately 708,000 shares of our common stock for a total of $71.6 million. We paid a $0.19 per share cash dividend and declared another $19 per share cash dividend that was paid in April.

Our leverage and liquidity remain well positioned Net leverage at quarter end was 1.9x. Based primarily on our Q1 results, we have raised our 2026 guidance as follows: We now expect net operating revenue of $6.375 billion to 6.470 billion, adjusted EBITDA of $1.35 billion to $1.38 billion, and adjusted earnings per share of $5.89 to $6.11. The considerations underlying our guidance can be found on Page 11 of the supplemental slides. And with that, operator, we'll open the line to Q&A.

[Operator Instructions]. We'll take our first question from Ann Hynes with Mizuho Securities.

Thanks for the question. So I know your organic volume of discharge growth was impacted by closures. Do you have a number of what that would have been if you exclude the closures?

Yes. As I mentioned in my comments, the impact of the closures was approximately 85 basis points, and that would be the same for both total and same store. And again, we would anticipate that, that impact will diminish through the course of the year. because we're going to be consolidating some of that volume and in certain instances, adding beds to those markets, the existing hospital in those markets, and then we'll also be anniversarying the closure date.

And Dan, just a reminder, as [indiscernible], there's no impact on EBITDA. That was [indiscernible].

And then just your comments around nursing. You have the lowest nursing turnover in 2012, which is very impressive. What do you think is driving that? I'm sure there's internal factors and external factors like inflation, but any observations you can provide on why you think that's so low.

Ann, I'm going to ask Pat Tuer to weigh in on that.

So Ann, the -- a couple of things on that. We talked about our centralized talent acquisition team before, and they have done a great job bringing talent into our organization. Net hiring for the quarter was higher, in fact, than the first 2 quarters combined last year on a same-store basis. And on the turnover front, our ladders are really starting to take hold. So we have about 35% of our nursing staff is now on clinical ladders. That's up about 300 basis points from last quarter turnover.

If we can get a nurse on the latter in Q1, the turnover for that group was a little over 2%. It was 2.6% compared to 20.7% for non-laddered nurses. So really, our hospital teams are doing a great job engaging our staff to become more organizationally rooted and get into these latter programs, and as a result, earn more compensation. I would say more broadly, the dynamics around the labor environment can be unpredictable, but we have seen a lot of positive momentum from a hiring and retention standpoint.

And as Pat noted, having that centralized talent acquisition here in Birmingham frees up the local hospital staff then to do nothing but really focus more on retention. So there's a lot of other programs involved, but certainly clinical ladders are an important part of the tools they've added in the last couple of years.

We'll take our next question from Matthew Gillmor with KeyBanc.

Maybe following up on Ann's line of questioning on the same-store volumes. The 2.6 number, if you adjust out to 85 bps is still a pretty healthy number, but slightly moderated from the trends you saw in 2025. Just curious if there were any other sort of puts and takes to think about and how you're sort of thinking about same-store volume performance for the balance of 2026.

Yes. And Matt, we don't want to make it sound like a litany of excuses, but since you've asked for further insight on volume, I think we would cite 4 factors in the first quarter. The first was the unit closures, which we've already covered. The second is occupancy levels, and I'll go through that in more detail in just a moment. The third is something that you've heard from the acute care hospitals reporting, which was -- it was a relatively light, meaning low-severity flu and respiratory season, and the fourth is some continuation of the MA trends that we experienced in Q4.

To dive a little bit deeper on the occupancy story. Our Q1 average occupancy of 78.7% was essentially flat with our record high levels in Q1 of '25 and that was up 200 basis points from Q1 of '24 and up over 500 basis points from Q1 of '23. And that's reflective of our strong growth. And as Mark pointed out, the underlying demand for inpatient rehabilitation services. But to meet that demand, we've obviously been adding beds via de novos and bed additions, and we've been seeking opportunities to convert semi-private rooms to private rooms.

That's something we've talked about quite a bit before. At the end of the first quarter, 58% of our beds were private and that compares to 41% being private at year-end 2020. But in spite of those efforts, occupancy has become a bit of a constraint in certain markets. In Q1, approximately 35% of our hospitals had occupancy in excess of 90% with that cohort having an average occupancy of 95%. A subset of that group is comprised of relatively recent de novos that have been growing quickly, and they crossed the 90% threshold in Q1.

More than half of our hospitals within Q1 that had occupancy in excess of 90% are slated for bed additions between 2026 and 2028 and we anticipate adding more of those hospitals to the list as well as introducing small format hospitals per Mark's discussion in certain of those markets. So we probably fell a little bit behind because the growth was faster than we anticipated, but we've got a plan to address that. Just a little bit more commentary on the flu and respiratory season. The ability for us is a proxy for the severity of the flu season and also for respiratory illness.

And as -- as you've heard from the acutes, Q1 26 was relatively light in that regard. ABILITY is approximately 11% of our patient mix and it only grew by 70 basis points in total for the quarter and actually declined 1.5% on a same-store basis. That's purely a seasonal item, and it's going to fluctuate from year to year. And then, again, MA continues to be a bit of a struggle as we moved into the quarter. I'd probably there point to some things on a longer trend. We can talk about obviously the success that we're having with regards to the admit and appeal strategy that we began implementing at the end of February -- that's very early on.

It's only in 9 hospitals, but we're seeing some good traction there. But some of the things that you've probably been hearing nationwide on an MA basis that are worth underscoring is the nationwide MA penetration appears to have peaked at approximately 52%. And it's now actually receding slightly. And as a matter of fact, if you look at the year that ended in March of states experienced a decline in MA penetration from the prior year. And we have hospitals in 12 of those states. And if you drill down even further to our home counties, of our 154 home counties or 31% had a year-over-year decline in MA penetration.

So we're not necessarily suing that there's going to be a wholesale abandonment of MA, but what we would point to is there continues to be a very large population of Medicare fee-for-service patients that continues to grow that remains considerably underserved.

Add a little bit to that, Matt. This is Pat. Doug talked about how half of the hospitals are being -- have capacity expansion plans underway. That could beg the question, what about the other half. And those are all under evaluation as well. Some of those are landlocked. Some of those are in competitive markets where it makes more sense for us to consider a small-format hospital. But we're looking at a lot of options in those markets as well.

In addition, one of the things that we found is we have ramped up in many of these markets faster than anticipated. And as a result of that, we've historically talked about how we have looked at the hospitals to have an occupancy between 80% and 85% for us to start that expansion process. Well, that worked for a long time. But what we're seeing now is that the process can take a little longer. The permitting process takes longer than it used to.

The regulatory process can take longer than it used to. So we have lowered the threshold internally where we're now looking at 70% to 75%. And from an occupancy standpoint. And that -- what we're hoping is going to allow us to time these capacity additions a little better so that when the capacity is available when the occupancy is reaching to the point where we actually need it. The other thing that I'll mention is we typically build a 50-bed hospital and we've been talking internally about in some markets, should we be looking at larger footprint. And that's something that we're also evaluating currently. So we have several plans to address these occupancy challenges and constraints moving forward.

I will say with regard to occupancy, it meets the definition of a high-quality problem.

Yes, I agree with you. Thanks for all those details. That's great. Let me try one follow-up on the Medicare proposal. Within that proposal, there was an RFI to potentially make some adjustments to the payment model. From our perspective, it seemed pretty neutral. But I was curious if you all had any initial reaction or maybe it's even too soon to kind of give an educated guess, but any perspective there would be great.

Yes. This is Pat again. And I think we're aligned with your -- some of the points you made in your question. So this is a concept at this point. It's not a proposal, and it lacks many of the details necessary for us to model out what the particular impact could really look like. But it's not any sort of site neutral concept. And in fact, it would look more to change the SNF PDPM buckets to account for the unique and more complex patient populations that are treated in IRFS. And the new process would ultimately be based on ICD-10 coding for both levels of care. So it's more just trying to make things uniform from how things are coded and classified rather than any type of neutral push. But too soon to tell, not really a concern for us right now.

Matt, we -- as we always do, we'll be responding to the proposed rule with our comments as a company. as well as working closely with the trade associations to contribute to the feedback to CMS.

We'll take our next question from Andrew Mok with Barclays.

Just wanted to follow up on those comments around MA trends. So you previously called out aggressive utilization management from a large national Medicare Advantage payer. Is this issue broadening out to other payers? Or is more of the MA drag coming from the higher fee-for-service volumes? And if the latter, why is that the case?

I'm not sure I fully understood the second part of your question. The first part of your question, has it extended other payers. Now the trends from Q4 to Q1 remain pretty consistent. And again, I want to highlight that as we mentioned last quarter, we did begin implementing a strategy for MA patients in certain markets of admit and appeal.

And as a reminder, whereas previously, for a very high percentage of the patients on which we received an initial denial, we would simply not admit the patients and move on and not attempt to take that any further. Towards the end of February in 9 of our hospitals thus far on certain MA patients, where we believe we have a very strong case that referral is appropriate. We are now admitting those patients even with an initial denial and taking them through the 5 various levels of appeal. We've started to see some positive results there, and we anticipate rolling that out further. It's important to note that, that is not targeted at any one particular MA plan that is based more on the specific patients and not the plans. Andrew, could you help clarify me on the second part of your question regarding fee?

Yes. I think you made a comment that the slower MA membership growth, industry membership growth is creating maybe a little bit of a volume drag I guess, why is that the case if fee-for-service penetration a little bit higher?

I was going to the opposite. I think for many years, what we were observing is that an increasing percentage newly minted Medicare beneficiaries. We're signing up for MA. And so the total MA penetration of the beneficiary population have been increasing but it appears that it peaked at about 52%, and it's actually backing up now. And I was giving some specificity about how MA penetration in some of our home markets has receded, which means that a higher percentage of those patients are fee-for-service, which generally speaking, is a good thing for us.

Just to add to that. Andrew, this is Pat. Sequentially, our conversion rate with MA actually went up, but it was down versus Q1 of prior year. And just a little more color on Doug's comment around the admit and appeal strategy. It is ways to really to form an educated opinion about this. But in the 9 markets that we are piloting this, we have seen some nice improvement in the approval rate of claims that we submit for authorization. So we're encouraged by what we're seeing. We have a number of cases that are pending and an ALJ hearing. And we'll wait until we have several of the decisions around those before we make a decision on when and if to scale this up further.

Got it. Okay. And then as a percentage of revenue, it looks like SWB is the lowest levels we've ever seen, which is even more impressive given 1Q SWB tends to be the highest in the year. Beyond low turnover. Is there -- are there any other factors driving the strength in SWB this quarter? And how should we think about sort of the seasonal progression from here given that starting point?

Yes. I mean, you had a couple of things depending on how you're looking at it as a percentage. First of all, we had a pretty significant increase in state-directed payment revenue because that included some out-of-period stuff. Now we believe that the net provider tax impact on EBITDA for the quarter had some seasonality to it, and we continue to believe that for the full year, it's going to be relatively flat with last year.

And then also part of our pricing increase, as I mentioned in my comments, was a favorable year-over-year impact from the Medicare SSI adjustment. And so you're pulling in incremental pricing revenue without any labor required to offset that. There's always some seasonality. And our labor first quarter just because of the higher occupancy rate tends to be one of the more efficient quarters. It's also going to be impacted by the timing of de novos and when that capacity comes on. And as was the case last year, we're pretty back-end loaded this year.

One other comment on that. On a same-store basis, and we don't give out same-store EPOB, but to Doug's point, the ramping de novos and the timing of de novos can really impact EPOB and we look really good for Q1. But on a same-store basis, we are showing incremental improvement year-over-year and that's just a product of us continually working to make sure that our hospitals are as efficient as possible without sacrificing any type of clinical or quality outcome. And with an organization of our size, you'll have some variation from hospital to hospital or region to region. And those are the markets that we work to get in line with our expectations.

The last thing I'd point out that had an impact there, Andrew, is that the closures had a favorable impact on that because as we mentioned, we were taking out the revenue and the volume, but they were breakeven from an EBITDA perspective which lead you to conclude that the SWB associated with that volume was a substantially higher percentage than we run on average.

We'll take our next question from Pito Chickering with Deutsche Bank.

Shockingly, to you guys, I won't go back to the occupancy question. If you can give some good details around the facilities that are capped in occupancy with half of those you can expand in the next few years half of them, you can't because they're landlocked. What do you think is a ceiling for same-store discharge growth over the next year or until those beds are getting added just because you're captain occupancy.

Yes, I want to be clear, and I think Pat elaborated on this, we've identified bed expansion opportunities for half of that cohort. It's not that we can't do the other half. Some of those just moved into that category faster than we anticipated, so we're evaluating those -- and even in those where we are land block, there's a good chance that we'll be able to solve for that equation with a small format hospitals. So I would actually anticipate that for those high occupancy markets, there's only going to be a relatively small percentage that over time we can address with incremental capacity in some way.

In terms of a theoretical cap on discharge growth, Again, this is another reason and the introduction of the small format hospital goes into this category where we believe it is increasingly irrelevant to think about the breakdown between total discharge growth and same-store discharge growth because you're going to have buckets that move in and out. So with regard to total discharge growth, it's just a matter of how quickly can we add new capacity and continue to fill in and boost the occupancy rates as we do so. And we certainly believe that, that number is greater and perhaps substantially greater than that, which we've posted in the last 2 quarters.

If you look at the track record of our real estate and our design and construction team I'm very proud of the way they've been able to bring these projects on plan, on schedule and within budget. So got a lot of confidence. The team that we have in place here will help us to address the occupancy and capacity issues.

Yes. These are all pretty high-quality problems to your point. I guess if I'll hear from a CapEx question then, what's the right level of CapEx in order to keep on filling this demand? Does CapEx as a percentage of revenue go up as demand is going faster than you guys think? Or is this sort of the right level of CapEx as a percent of revenue?

I think it's going to increase as a percent of revenue relatively modestly over the next 2 to 3 years and peak at probably about 15% and then start to recede back towards the, call it, 10% to 12%, which was probably going to represent a longer-term run rate.

We'll move next to Whit Marshall with Leerink Partners.

Doug was the Medicaid DPP, the supplemental known when you gave guidance, I believe that it was. And then just how much more incremental directed payments do you have within your plan for the rest of the year? And then are there any states that you're looking out for that may not be in the plan?

Yes. So we're not aware of any new states coming online, Q1 was larger than we anticipated, largely due to a significant portion being out of period, and we called that out, the EBITDA impact from the out-of-period was about $4.2 million.

In our Q4 call, we suggested that we anticipated for this year that the EBITDA impact from net provider taxes would be roughly flat with last year, which was $21 million -- and we continue to believe that the increase in Q1 was really a timing issue and that the full year will be in that range. As a reminder, the peak that we had in last year was in Q3, where we had a $10 million favorable impact from provider taxes at the EBITDA level and $6 million of that was out of period. So again, we just think that's a flow between quarters and that the EBITDA impact should be flat on a year-over-year basis.

Okay. And then my follow-up is, I just wanted to kind of take your temperature on buybacks, again, with leverage now drifting to probably 1.5x soon, just seems like you could add a half turn, maybe a full turn of leverage in the next year or 2 deplete a lot of the market cap, maybe move the investor focus away from EBITDA to EPS. So I just wanted to hear the latest thinking about the longer-term buyback strategy.

Yes. I'll leave it to you guys to decide whether you want to move the focus from EBITDA to EPS. We do feel like using some of the capacity in our balance sheet and buying back shares, particularly at the levels we've been trading at here more recently, represents a really attractive complement to our overall strategy. And so if we just do some math around that, and you look at the guidance assumptions that we've included in our supplemental slides, the midpoint of our free cash flow estimate for the year is roughly $818 million.

And what's not included in that number -- and by the way, the reason that the taxes went up was predominantly, as you can see from that end note, was predominantly because of the proceeds we received on the sale of the Gamma Knife and then also on the receipt of legal proceeds of legal fees in the Delaware litigation, that adds another $40 million of cash. And so that would take you to cash available for investment of roughly $858 million. The midpoint of our growth CapEx estimate is $725 million. You hold the dividend constant. That's $77 million.

So at those levels, even without utilizing any capacity on the balance sheet, you've got roughly $56 million that would otherwise be available. If you look at the end of the first quarter, our funded debt was roughly $2.575 billion, and the midpoint of our EBITDA range based on the updated guidance is $1.35 billion. If you simply took the leverage up to 2 from 1.9, that would suggest total incremental capacity of $212 million for share buyback. We did $71 million in the first quarter. So you've got at least $140 million available. And then you can do the math in a similar fashion, if you decided that you want to be the leverage to flow between 2 to 2.5x. So I mean that's a simple way that the math works and we believe that share repurchases will continue to be part of our allocation of free cash flow.

This is Pat. Just going back to state-directed payment question for a second. We do think this represents an opportunity for us in certain states to work with our acute care partners to get additional Medicaid volume. There's about our markets are in states that have a pretty attractive Medicaid reimbursement structure that -- on the surface, it doesn't look like it covers our cost, but when you factor in the other dynamics, it does, and that represents an opportunity for us on the volume growth side as well.

We'll take our next question from Joanna Gajuk with Bank of America.

I just want to follow up on the discussion around the proposal, thanks for sharing your initial views about this RF at CM61 in the proposal. I know it's earlier in details, but also in the document, CMS actually closed Madpak analysis, and they talk about like the mix varies by the ownership and they talk about aligning payments with costs. So what are your thought process there?

Like what exactly CMS is trying to can a little here, too? And would you expect something specific they have in mind? Or is the thinking about '28 because obviously '27, like they cannot add anything. But like I guess, in a year from now, sort of would you expect something in that proposal?

Joanna, this is Pat. It's hard for us to tell. And to discern the -- for a long time, what has been issued by MedPAC has not historically been followed or given much attention -- so the fact that something was quoted now, it's hard for us to be able to speak on that intelligently. What I can tell you is this proposal is relatively benign. There's some pieces of the proposed rule that could create some minor burdens from a logistics perspective. I'm not really sure what it does to help patient care. But in any case, we will provide comments by June 1, as Mark said, and we will adapt and be prepared to meet any changes that are SP-5 Included in the final rule.

Joanna, just in general, as you know, we're always quite active in D.C. and have our own resources up there and remain part of the discussion with and members of Congress and others about just making sure that people understand the value proposition that comes with inpatient revelation and we are the leader within that sector. So we'll always be part of those discussions. There will be thoughts that are shared from CMS and other types of proposals. As you know, a lot of times, these things are discussed, but actually implementing them is a major challenge. So we'll be part of any of those discussions and give our feedback and I want to make sure that we're ahead of the curve.

And we do believe that the CMS is aware and is sympathetic to the amount of change that they're inflicting on any 1 particular sector at a time. And it's not lost on them that team implementation began on January 1, and then RCD is being extended this year in a significant way as well as some of the specific provisions in the proposed rule regarding the therapy evaluations and treatment, the preadmission screening and then also the timing of the disciplinary team meeting. So there's already a lot underway.

[Operator Instructions]. We'll take our next question from A.J. Rice with UBS.

So obviously, you've had a nice pacing of your JV opportunities. I wondered if you could update us on how that pipeline looks? Is it still pretty plentiful. And obviously, your leading peer and competing for those JVs is in the misting private. Does that maybe even create more opportunities, maybe the potential partner is a little hesitant because of that or maybe they're just pulling back because they're going to focus their cash flow elsewhere. Any thoughts?

Well, I -- look, we've had this business model in place now for well over 30 years in terms of joint venturing with acute care hospital systems. As I noted in my prepared statements, we have a nice mixture of both wholly owned and joint venture projects that are in the pipeline. I like our chances when we go out with other providers as we show what we can do and the fact that we have about 1/3 of our overall hospitals are partnerships. We have a lot of partners that can validate what a great partner we are and what a great manager we are. So A.J., I'm not concerned about what others are doing, but I am very confident in our ability to move forward.

If you look on Slide 18 of the materials we distributed this morning, we note that we have 18 IRF development projects underway. Now only 1 of those is currently identified as a joint venture opportunities, and that's our Loganville, Georgia Hospital, which will open as part of our partnership agreement with Piedmont. But as you've seen with us over the last several years, as we've ascended the learning curve with regard to Nova development, we've gotten increasingly comfortable going ahead and forging ahead on an individual basis in a market even as discussions with potential joint venture partners are underway.

So I think there's a better than even prospect that some of the development projects that are listed on that page will ultimately turn out to be joint ventures. With regard to Select Medical, we don't expect any change in their appetite for incremental growth. Their strategy is somewhat different from ours and that they are 100% JV focused, and they tend to focus a lot on HIH as well. So we would expect them to continue to be a viable competitor, but the pool is big enough for both of us.

And A.J., I think one of the trends that you do see within our joint venture, partners is building multiple hospitals within that partnership. Piemont is a prime example of that. We've done a [indiscernible] the BJC and a number of other providers where we are building multiple hospitals within that same partnership.

The last thing I would say there, and this also relates back to some of the high occupancy doors. Some of those are joint ventures. And as we have gone back to some of our joint venture partners and introduced them to the potential for a small format hospital, we're getting a very favorable reception.

Okay. Then my follow-up, I wanted to ask about the small format hospitals. Does the ROI on those materially different than the regular size facilities? Is there any ability to get around certificate of need or more flexibility on specifically with the small format hospitals and just how you're going to think about those versus the traditional size.

Yes. So the ROI falls squarely between bed expansion, which is our highest ROI and a de novo better than the de novo, not quite a bed expansion because of the infrastructure leverage. In CON states, the addition of beds is almost always subject to CON requirements. Because you're operating under the same Medicare provider number and because you're dealing with less than number of beds associated with the de novo, that tends to be not always, but it tends to be a lower hurdle to get over. It is not a substitute for a de novo hospital. It is a complement to de novo hospitals and it's a bit of a substitute for [indiscernible] at an existing hospital.

A.J., just in terms of how we're thinking about the scale of this opportunity, you could have markets that have 3 or 4 of these at maturity, you could have markets that have 1 or 2 and some markets won't have any. It gives us a lot of flexibility in how we approach markets. But we are currently evaluating dozens of markets and building out a robust pipeline, similar to what we've done with our bed expansion process and our de novo process. We're doing the same thing for small format hospitals.

And we are actually developing an enhanced market analysis tool that includes all aspects of the market, including projected growth and real estate aspects in conjunction with Palantir that's going to help us be a lot more prescriptive when we're entering in the new market about what should be the initial size and location of the de novo that's going to anchor that market and then what would be potential sites prioritized in terms of timing for augmenting that with small format hospitals.

So that's going to allow us to be much more proactive with regard to our real estate strategy. And hopefully, even as occupancy ramps up quickly with new capacity coming on board, it's going to alleviate some of these concerns we have when we've fallen behind with regard to bed expansions.

We'll take our next question from Brian Tanquilut with Jefferies.

Maybe, Doug, since you mentioned Palantir. So when I look at what your hospital, the acute care hospitals are doing, rolling out a lot of AI here. Just curious, I mean, what are the initiatives that you're doing right now? And then when I think of where something like a pant can come into play. I look at your [indiscernible] days right now, is there room for AI or analytics to improve when the clinical and operational side beyond just kind of back office tough.

Yes, I think there's a lot going on. Pat, do you want to speak to maybe some of the clinical and operational aspects of it.

Yes. The first thing I'll say in regards to Palantir on the length of stay front, we're not actively trying to get our length of stay down further. What we're trying to do is make sure that each patient has and appropriate care plan for their needs. That just happens to average around 12 days. And again, we're not trying to pressure our hospitals to get that down. So we're really focused on an appropriate patient care for each patient. But we are on the same note, looking for opportunities to make sure that our care plans are as efficient as possible.

We've talked about our partnership with Palantir on prescreen narratives, appeal letters. But we are looking at and have -- are in various stages of implementation of documentation efficiency for our physicians and providers around histories and physicals, face-to-face notes, discharge summaries, and we're evaluating other opportunities as well. And this is all in an effort to give our physicians and our clinical staff time back so that they can do direct patient care instead of documenting. And I think there's going to be operational benefits that come along with that, and we're excited to see where that goes.

We're really encouraged by some of the things we're seeing and how efficient it is allowing our providers to be. I would further say just kind of in summary, in the queue with Palantir, we have the real estate analysis and the market analysis project I mentioned before. We've got a substantial CRM opportunity. We've got a revenue cycle management opportunity, and we've got a clinical staffing opportunity as well. Those are all in the queue.

Brian, just as a follow-up on the length of stay discussion, -- we've seen our lease stay over the years come down from 14% to 12%. As Pat noted, and you get to a point where you want to be careful on pushing it down much lower because some of these quality metrics that I mentioned in my opening comments relative to the ability to have 84 plus percent of our patients go back on to the community, have very few of them go back to the hospital on the acute care transfers or skilled nursing discharges. Those are all kind of tied to that length of stay. So we're very careful in terms of trying to really push that down.

Yes. I think it's important to note that much of the reduction from 14 days to 12 days had less that was much more to do with removing the friction on the discharge process than any change to the care that the patient has been treating the volume and the intensity of it while in our facility.

That makes a lot of sense. And then maybe, Doug, last 1 for me. So when I think of $4 million of preopening costs in the quarter, is that kind of in line with expectations? And how should we think about the back half, given the timing of bed adds? But maybe just in the same vein, the free cash flow guidance was revised down. Just curious what we need to be thinking about as it relates to that adjustment.

Yes, absolutely. So with regard to the preopening, $4 million for the quarter. We anticipate for the full year, it's going to be $18 million to $22 million. Midpoint of that is $20 million, going to be a little bit more heavily weighted towards Q3 and Q4. probably following a little bit of the same pattern that we had last year. Q3 will probably be the most significant on that. The free cash flow came down because of upward revisions in 2 items. One was interest expense, which moved up by about $5 million. That's simply reflective of the fact that as we're -- as our CapEx is rolling out and as we're spending a little bit more money on share repurchases, we're carrying a larger balance on the revolver, but not overly significant.

Second piece is that cash taxes went up. That estimate went up solely because of the tax payments that are due against the gain on the sale of the Gamma Knife and also the taxable portion of the recovery of legal fees on the Delaware litigation. As I mentioned previously, what you don't see from an accounting perspective in that table is the $40 million benefit from the receipt of proceeds. So net-net, the actual cash available for us in spite of the increases in those two categories actually increased for the year.

We'll take our next question from Jared Haase with William Blair.

I appreciate all the details thus far. Maybe I'll take a step back for a little bit of a bigger picture question on the market landscape. But obviously, A lot of what you've messaged today is demand clearly remains very strong, and you're seeing that show up in all of the occupancy dynamics. But I am curious, just as we think about this long-term kind of structural thesis that you had around capturing some share away from skilled nursing facilities over time, moving that volume to IRFs, are you seeing some of these competing SNFs in your markets, increasing their investments around clinical capacity programs, other services that would help them move further into higher acuity patients?

This is Pat. I think much like every level of care is probably trying to improve what they do and how they operate I'm sure the SNFs are doing the same thing. But it's an entirely different level of care. They don't have the staffing intensity or the clinical oversight that we do, the investment that we have in our programs, technology, it's just apples and oranges, and there's a time and a place for skilled nursing facilities.

But I've talked before on these calls that across the country, in markets that we're in, patients are still twice as likely to end up with a CMS-13 diagnosis, send up in a nursing home. And we have an opportunity to continue to add capacity to address that. Our average age patient is around 78 years old, the oldest baby boomer turned to 80 in January. There's a few years of baby boomers that haven't even hit Medicare eligibility. So there's a lot of volume dynamics for a long period of time that we can serve. And again, I still see a lot of opportunity for us to continue to capture market share away from SNFs.

Okay. That's really helpful. And then this is very a small nuance here, but I thought I'd just clarify. It looks like there was a slight change in your guidance assumption for the bed expansions that went from approximately 175 to now 150 to 200 million. And so I guess, obviously, just in light of everything you've shared, with what's going on from an occupancy perspective, just is there anything we should be thinking about as to why maybe a slightly lower end is imply here from that expansion this year? Is that mostly just a timing dynamic?

It's exactly that. So the midpoint of $150 million to $200 million is obviously the 175-point estimate that we used previously. We've got 24th quarter projects with both which have the potential just based on timing and weather conditions to flip over into the first quarter of next year, and so we just hedged a little bit with the range.

Our next question comes from Raj Kumar with Stephens.

Maybe just kind of thinking about sticking to the kind of MA versus fee-for-service dynamic. You typically called out that your MA patients tend to exhibit just a higher average acuity versus your fee-for-service propulsion. I guess given more payer intervention or just kind of more stringency around that. Have you seen that kind of acuity gap grow maybe over the past couple of years? And then I guess maybe also on the kind of the admit and appeal strategy. Would be curious on kind of what the win rate target is or what that's kind of demonstrated early into the program?

Yes. So I'll start, and I'm sure Pat will want to chime in as well. We have seen more of a concentration within the MA in our highest acuity categories. In the first quarter, stroke was almost 36% of our MA volume. That's not surprising. Those tend to be non jump ball cases as well. And so the favorable aspect of that is because reimbursement across all payers is tied to acuity the average reimbursement gap between Medicare Advantage and Medicare fee-for-service trump to 1% for the quarter.

But we continue to think that there are opportunities and necessities for us to service a broader spectrum acuity of MA patients. With regard to the appeal and admit strategy, Again, we are seeing favorable results even at the first level of appeal, which is an expedited appeal right back to the plant itself. We don't have enough of the universe yet to understand how we're going to succeed at the various levels of appeal beyond the Maximus decision, which tends to be a bit of a rubber stamp, but there's reason for optimism.

Raj, this is Pat. Just a couple of points. So on MA, this remains grossly underpenetrated. And if the dynamics around that ever changed, we'll have a lot of opportunity to continue to add even more capacity. The higher acuity dynamic of the MA patient, I don't necessarily view it as a positive it's great from a revenue perspective. But what that signals to me is there's a lot of other patients that should be coming to us that just aren't giving the opportunity to do so. And that's something we'll continue to focus on. On the admit and appeal strategy, we really got that up and going kind of mid-February. March, we started to see some significant improvement in those markets.

We did have -- Doug talked about MAXIMUS, we did have our first overturn at the MAXIMUS level. So that's encouraging. And it's probably going to take us about 6 to 8 months to really get our arms around and have a better sample size of what our success rate is at the ALJ level. What -- if we want to take cases beyond that, that could extend the time a little further. So I would say 6 to 8 months, we'll be in a better position to make a decision on scaling up or increasing the size of the pilot. And probably within 12 to 18 months, we'll have a lot of clarity around this.

Yes. And just to maybe dimensionalize this as well with regard to MA by 2030, it's projected that 20% of the U.S. population is going to be aged 65 and older. So that means 70 million Americans by 2030 will be Medicare beneficiaries. If you assume for a moment that the MA penetration rate based on recent trends stabilizes at around 50%. That means that you've still got 35 million Medicare beneficiaries who are not MA patients, which means that they're likely to be fee-for-service.

That's a total addressable market -- some portion of those are going to be CMS-13 eligible of 35 million individuals. Our total discharges on the last 12-month basis were $266,000. So there's a really big pond out there for us to fish out of.

Great. And maybe as a follow-up, just kind of going back to Pat's comment on the kind of Medicaid side of the business and with the funding environment being supported there? And then I think outpatient visits for the first time in a while grew positively year-over-year. And so the kind of thing about that business, even though it's a smaller part, just kind of thinking about if the 1Q is a good baseline for that business kind of going from a volume perspective, just given how the funding environment has been kind of supportive to -- from an economics perspective as well?

Raj, this is Pat again. I wouldn't read too much into the outpatient volume in Q1. It's really not a core business of ours, and we've continued to ramp down the number of outpatient clinics that we have I would anticipate that we'll continue to assess the clinics that we're in. And if they're not profitable or not, there's not a good business case for them to be in operation, we'll continue to look at opportunities to further bring that count down. And then the -- what was the second part of a Medicaid?

Yes.

Medicaid is this is a newer opportunity for us. I know it's been a big tailwind for the acute providers. And it just has not been a big focus for us, and we are starting to see some of the benefits in those states. So we are, like we do anything else, developing strategies around how we can serve those patients more effectively, and I'm excited about some of the early progress that we're seeing.

And on that point, Raj, what's really changed there is if you rolled back the clock as recently as maybe 3 or 4 years ago, on an annual basis, our net provider tax impact to EBITDA was essentially 0. It would be plus or minus $1 million. And with the implementation of new programs by states over the last several years, that's increased to the point again, we were estimating $21 million this year. That's obviously not evenly distributed across all states. So when we look at some states where historically the on its space rate that we were paid for services didn't cover our variable costs. If you include the directed payment portion of that with the actual reimbursement that we get, it puts in a position where in some of those states, it is a profitable patient for us to treat -- and so we'll look at handling those referrals perhaps in a slightly different manner.

This does conclude our question-and-answer session. I'd like to now turn the call back over to Mark Miller for any additional or closing remarks.

Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Hi. Good morning, and welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Facilities analyst here at Barclays, and I'm pleased to welcome Encompass Health here to the conference. We have on stage with me Mark Tarr, CEO; and Doug Coltharp, CFO. Welcome.

Mark, you just reported 4Q results, 2026 guidance a few weeks ago. Why don't you start with just giving us the current state of affairs of the business and how you're thinking about the year ahead?

Yes. So we're coming off 3 years of very high level of execution, and we're extremely positive about our outlook going forward. You look at the continued need for our services with the aging demographics. There's an imbalance of the supply and demand. There are very few beds being added outside of our organization in terms of net gains in beds in the IRF industry. So this continued demand is out there. We're one of the few that are of the scale to continue to capture this growth that's out there in front of us.

We're also excited about a number of the states that are in the midst or in the throes of discussions around repealing the certificate of need. We've talked before about the state of North Carolina has very attractive demographics for us. We have one hospital there, but we think there are many other markets that we could grow in. There are plans in place for the state of South Carolina next year. This last week, we've been made aware that the state of Tennessee has some discussion going on.

So not only are we looking at same-store growth in existing markets, but we're looking at the opportunities to grow in new states. And you combine that with our free cash flow and the opportunities to use that to fund our growth. We have been focused on expanding our capacity. Historically, we've done that through de novos as well as bed additions to our existing hospitals. This last earnings call, we started to introduce the concept of a small format hospital, which we think will have an opportunity for us to add a different concept in terms of capacity growth. So we're extremely positive about this -- the outlook for this year and our future.

Right. And last month, you made a remark that Encompass has never before been presented with a greater opportunity. I think some might find that a bit surprising just given the strong growth you've delivered over the last 3 years. So what underpins the conviction today? And what feels most different about the next few years relative to recent history?

Well, I think there are a number of things, which I've stated in terms of this continued need for our services. But the fact that we have executed at such a high level in the last 3 years, bringing on new de novo hospitals, adding capacity, we've been able to address labor in a very constructive fashion in terms of reducing our premium pay. Our clinical outcomes are the best they've ever been. So there are just a number of things that are out there, Andrew, that I think we have a lot to look forward to going forward and have a lot of momentum going into this year.

Great. And you've emphasized that supply-demand gap. You called out North Carolina, South Carolina, Tennessee as potentially new or expanding markets. Where else do you see the greatest gaps today? And how do you expect that to evolve over the next few years?

Well, I think there -- certainly, there are other states that we're looking at. We're looking at existing marketplaces where we can add density. We've expanded significantly in the state of Florida. Texas is a big state for us, but we've entered new states. This last year, we entered state of Connecticut. We have projects in the pipeline for states out west. So we're looking for any markets that have the demographics and the growth trends that would present us for the chance to go in and develop marketplace.

Moving on to volumes. Discharge growth was stronger in the first half of 2025 and moderated in the back half as you face some tougher comps and the timing of some of your maturing de novos. As we think about 2026, what should we keep in mind when considering the cadence of volumes this year?

Yes. I think one of the things that impacted discharge growth in the second half of last year was that we had several unit closures. And that's a bit of an anomalous situation for us. You haven't heard us talk about that previously. We have a relatively finite number of units that we've been operating inside the walls of an acute care hospital. We do that predominantly as an accommodation, and we do that in markets where there is a freestanding host hospital, if you will.

It's difficult to make money on those. In almost all instances, those units are leased from the host hospital. We had 2 such units that closed during the second half of 2025, one in Sewickley, Pennsylvania, which is a suburb of Pittsburgh, and the other in Cincinnati. And that was because they were coming to the end of the lease. And in both cases, the acute care hospital host had plans to either repurpose the space or close that space. Although those impact volume, they were at best breakeven from an EBITDA perspective. As we roll into the first half of 2026, there are 2 more of those types of situations. One is we just recently, at the end of February, closed another unit in Bridgeport, West Virginia. And so that will have an impact as well.

And then a bit of a larger scale, we had one skilled nursing facility unit that we ran as part of our Cardinal Hill Hospital in Lexington, Kentucky. That was a gift with purchase when we bought that facility back in 2014. We had kept it open as an accommodation to some of our referral sources in that market. It was a 74-bed SNF facility that only ran at about a 25 ADC. All of those discharges counted as part of our total discharge that we reported. It became evident that, that unit was no longer important to the marketplace. And so we closed that at the end of the year.

All of this to say that those are going to weigh on first half discharge growth. We anticipate, and I made this comment in our fourth quarter earnings call that for the full year, unmitigated, it's about a 70 basis point drag on discharge growth. And we expect to mitigate about half of that because in 3 of the 4 markets, we're adding additional capacity to the host hospital. The way that, that shakes out through the course of the year is its impact is going to be more pronounced in the first 2 quarters of the year. We would anticipate that the impact in Q1 is probably on the order of 90 to 100 basis points and that it will begin to decrease through the course of the year.

But I do want to reiterate, these are anomalies, Andrew. If you look at our history, we're in the business of opening and growing hospitals. It just so happened that we had a number of these, and they were all predominantly tied back to leases. It reiterates what we like to control our own real estate and why we don't do more units within acute care hospitals. So this is not a trend of things to come.

Evidence of the fact that although it's having an impact on volume, it's neutral from an EBITDA perspective. So these units in aggregate, we're not -- we're not contributing any EBITDA. And to Mark's point with regarding the capacity expansion, we'll be adding between 500 and 600 beds to our total base in each of the next couple of years. And we would probably expect that trend to continue beyond that.

On those new bed additions, how quickly are you seeing demand absorb that new capacity? And how much runway do you think you see for sustaining that pace of investment?

So as we have ascended the learning curve on opening up de novos, we've seen that the ramp-up on those facilities is accelerating. In a typical de novo, particularly if it's in a brand-new market, we would expect to achieve a 70% stabilized occupancy level after about 12 months. Bed additions because you're building into an existing infrastructure and established referral patterns and existing payer contracts ramp up even faster than that.

Our anticipation is that when we begin with the small format hospitals in 2027, they're going to be probably closer to a bed addition than the de novo. So the return on those capital investments is generated relatively quickly. Even on a de novo, when we're going into a new market, we expect for the ROIC on those facilities to be in excess of our weighted average cost of capital by the time we get to the end of the third year.

Great. And what's driving -- obviously, the returns are higher, but what's driving the interest of this newer hospital format? Why are we seeing that now where you're exploring this avenue?

I think there's a number of reasons behind it. We do have some hospitals. We've already expanded with bed additions, and therefore, the footprint of the land itself doesn't make it -- there's just no space to add additional beds there. We have certain markets that there is demand, but we think that having a second or third location in a marketplace geographically helps us be better suited for where the patients are within those marketplaces.

So we think the small format hospital has a lot of different points of rationale behind it that lend itself well to fitting the need and adding capacity. We think it will also appeal to our joint venture partners in certain markets. I was in a meeting last week with one of our partners in Texas, and they're very excited about having an opportunity to open up a small format hospitals.

I think the other things that are contributing to that, the evolution in construction techniques and specifically the utilization of prefabricated components, which allows us to employ more standardization in the hospitals that we're building and also to speed up the time of construction, which means that we start the cash flows on those projects generating faster.

We combine that with some pretty intensive industrial engineering to figure out how to best use labor in a facility of that size. And then all of the small format hospitals will need to operate as remote locations of an existing hospital so that we can leverage the management team and the existing insurance contracts and the Medicare certification process as well.

Great. Let's move on to payers and regulations. You've called out MA utilization management as a challenge in some instances where conversion rates don't necessarily align with Medicare coverage requirements. Can you describe your decision to use an and appeal strategy and how sustainable that is?

Yes. So first of all, if you look back over the last 4 years, we've had great success increasing our MA penetration between 2019 and the end of 2025, MA as a percentage of our total payer mix almost doubled from just under 9% to almost 17%. And the 4-year CAGR from 2021 through 2025 was just under 9% in terms of MA discharge growth. But we did see a slowdown in 2025, and it became more pronounced in the fourth quarter.

And specifically in the fourth quarter with one of the national plans with whom we do pretty extensive business, we saw a marked decrease in their conversion rate. When we speak to conversion rate, it's simply of the referrals that we have received of patients who are covered by that particular plan, what percentage are admitted.

Now not all of the reasons for a nonadmittance are due to pre-authorization, but the overwhelming majority is. And that plan, which had historically run at one of our more challenging conversion rates at just under 20%, that dropped on a national basis by almost 500 basis points in the fourth quarter. And there was no reason for that to have happened in terms of a change in the types of patients that were being referred to us. So with some kind of policy change.

Historically, with the MA plans, even though there are multiple levels of appeal, starting with the MA plan and then progressing through additional levels like an intermediary for CMS, the ALJ and so forth. Historically, the approach that we have taken is if we were denied admittance in the pre-authorization, we simply moved on. We dropped it and moved on.

And beginning this year, we are piloting in about 10 of our hospitals, a different approach where we are highly confident that the patient meets all of the Medicare coverage criteria, even if we get that initial denial, we are going to admit the patient and start the appeal process.

With regard to the appeal process, without dragging into too much detail, the first level of appeal is you kick it back to the MA plan for what's called an expedited review, which is you turn this down on preauthorization. We believe this patient qualifies, take another look. We've actually had some early success on the expedited review.

If it gets turned down there, it moves to what's called an independent review entity, which is an entity that is employed allegedly by CMS. That has tended to be more of a rubber stamp in favor of the managed care plan, but it has to procedurally go through that step. It can then go from there to the ALJ. Beyond the ALJ, it goes back to a Medicare administrative body and then ultimately up to the District Court. So we're at the very early stages of this, but we believe we've already seen some shifts in behavior.

Great. Can you talk a little bit about or share your historical appeals win rates?

So we don't have a lot of experience with regard to appealing these claims up to the ALJ level from an MA perspective. But there's no reason to believe, again, because these patients are very similar to what we've seen on the fee-for-service side that it wouldn't in large -- to a large extent, mirror the success that we've had at the ALJ level and through the appeals process on fee-for-service, which has been relatively high.

Great. Let's move on to the team model. It's been a source of anxiety for some investors, particularly RCD expansion team model. At a high level, like what's the core message you want investors to take away why these are manageable changes?

So in all the marketplaces, so we have 89 hospitals that are in team marketplaces that accounts for about 2% of our total discharges 41 of those 89 hospitals are joint ventured hospitals. So we have seen these types of programs come out from CMS in the past, and we've managed through them in very strong fashion.

With those others in the past with teams, we were out discussing and meeting with our referring acute care hospitals. They recognize the fact that our quality outcomes stand out and the fact that they would be penalized if they change the referral patterns to patterns that would increase their rate for readmission. So we don't see this as being something we can't work through. And our track record in the past shows that we have had the ability to mitigate pretty high form.

Yes. And I think that's one of the real keys. One of the inherent flaws in analyzing the potential impact of these models is an assumption that all else stays the same. And yet when you think about it, if you start to direct patients in accordance with the specifics laid out in the team model, the potential repercussions that it has on the avoidable days and length of stay in the acute care hospital, which is the most expensive setting and then also on readmission rates could easily overwhelm any benefit that you might get from the risk participation model.

It's also the case that we are likely to lose some patients within those specific diagnostic categories that are covered by team in those markets. But it may also mean then because those patients are staying for slightly longer length of stay in the acute care hospital that other patients coming out of the acute care hospital who are eligible for IRF services need to be shifted into the IRF setting. And the benefit that we can bring to the acute care hospital is our ability to treat a more medically complex patient allows us to take the patients safely out of the acute care hospital earlier.

You also mentioned RCD. And I think the key takeaway on RCD, which was expanded into the state of Texas at the beginning of March and is scheduled to get expanded into California at the beginning of May is there's nothing new here. We have been subject to Medicare audit -- claims audit programs of all kinds of different acronyms for the entire time that we've been in existence. And those audits have been extensive. This has a different acronym, and it has somewhat of a different procedure.

But the documentation that is required and Medicare coverage requirements for the types of patients that should be admitted to an IRF have not changed at all. We've been pleased with the progress that we've made in RCD in the state of Alabama. That's by far our most difficult MAC.

As we look at the MACs that are going to be responsible for our hospitals in Texas and California, Noridian and Novitas, not only are we able to look at our historical experience with those MACs around other audit programs, most notably TPE, but we can look at the experience that they've had to date with RCD in Pennsylvania with other providers and the affirmation rate there has been above 98%.

Great. Let's move on to labor and technology. I think you've been partnering with Palantir for close to 2 years now. Can you talk about that relationship and the impact that it's had in areas like admissions, documentation and denials response?

I think our approach with Palantir, first of all, it's been a great partnership with them in the past couple of years. We started out by looking at ways we could help our clinicians, particularly around documentation. And what you just cited was specifically each of our patients are evaluated by a clinical liaison that goes out with pretty extensive evaluation form where they are collecting clinical data from the medical record.

We work with Palantir to help to look at ways to make this more efficient process. We have reduced the time by almost 20 minutes for that type of an evaluation and the documentation. So it helps our clinical liaisons be more efficient. They can move on to the next patient. It helps their own -- it also helps their own job satisfaction in terms of just not having to do such mundane documentation. So that's just one aspect, but there are a number of others that were utilizing Palantir in the future. Doug, I know you've been involved with this.

Yes. So one of the elements that's contributed to our improved performance under RCD in the state of Alabama is as we were seeing a higher than we had anticipated non-affirmation rate from our MAC, we needed to -- in response to beginning the appeals process, you need to generate a letter based on the response that you've gotten from the MAC that attempts to present information for the patient record to overcome that.

And so we found that we could use a Palantir tool to generate that response letter very quickly and with a higher degree of accuracy than we were able to do manually. It still has to be reviewed by a clinician before it can be sent, but that certainly has helped boost our affirmation rate there.

We'll be using a version of that in this MA admit and appeal process as well. And then big initiatives that we have underway with Palantir for 2026 include revenue cycle management, staffing, clinical staffing model with the hopes to continue to improve getting the right license and the right -- really honing our EPOB strategy.

And then finally, real estate market analysis increasingly important with additional modality of a small format hospital to be able to look at a market and to analyze what is the right mode to enter that market and ultimately to count on the expansion of that market over time. Is it a traditional de novo that's expandable in its current location? Is it a traditional de novo of 50 beds or so that's not going to be expandable with the idea that you'll add 1 or 2 more small format hospitals in the future. So it's going to be a much more sophisticated analytical tool for that.

So we use our data now working with Oracle and Cerner for various purposes. Predictive modeling stands out in terms of identifying patients that may be likely for potential readmission. We've looked at it from a fall rate and how to reduce our fall rate. So I see this Palantir initiative as just yet an extension of some of the initiatives we've already utilized in the past. We're committed to utilizing this technology to improve our efficiencies where we can.

Great. Let's move on to labor. Labor tends to draw a lot of attention during periods of stress, but it remains a critical focus even when conditions are stable. How are you investing behind the scenes to build durable staffing pipelines and leadership benches? And how do those investments ultimately show up in retention, productivity and quality outcomes?

So it's been probably about 5 years ago now, we centralized talent acquisition into our offices in Birmingham. So we took that off the hospitals and combined it in one centralized function. That's been one of the best things we've done around labor. We have 70-some recruiters that's all they do all day long or help us find nurses and therapists and other critical positions that are out there. So we've seen that really help support our hospitals.

One of the areas that we've seen it really shine is with our de novo hospitals for 3 years running now, we've been able to open up all of our hospitals without any contract labor. So that's just one opportunity there. We've utilized some clinical ladders that we put in for nurses and therapists for helping to increase our retention. Our turnover numbers are lower than they've been now in 4 or 5 years.

So we've seen a lot of opportunities to utilize, whether it's on the recruitment side or the retention side to reduce our premium pay, eliminate contract labor per diem and shift differentials where we can. So it all plays part in that. We've made some really nice progress on that the last 2 or 3 years. We think there's some more opportunities to go, but we remain very focused on that.

Our premium labor spend in 2025 was half of what it was at the peak in 2022. We entered 2025, assuming that we would do well to hold the premium labor spend constant nominal dollars from 2024 even as we added capacity and grew volumes. And yet we took $21 million out of that spend. And so I think our focus on labor productivity and efficiency is really evident in those numbers.

Great. Maybe just to finish up here, Encompass ended 2025 at less than 2x net leverage. What's the right leverage range for your business? And how should we think about the uses of excess cash across growth CapEx, share repurchase and dividend?

Yes. So if you look at 2025, we were able to fund $527 million in growth CapEx, just shy of $160 million in share repurchase and a little over $70 million in cash dividends in our common stock, all with internally generated cash flow and the leverage ratio dropped to 1.9x.

If you use the midpoint of our guidance for -- across the metrics for 2026, it would suggest free cash flow of roughly $825 million, $725 million of growth-related CapEx. The dividend will increase slightly, call it, $70 million or $80 million. That means you're still going to be able to generate those 2 spends out of internally generated cash flow.

And if you did nothing else, the leverage ratio at the end of the year, given the midpoint of our EBITDA guidance would fall to about 1.8x, which would suggest that you could repurchase up to $250 million of stock and still hold the leverage ratio at 2x. So I think there's a lot of flexibility. I think those same categories are going to be the likely places that we devote free cash flow and capital allocation.

Great. With that, we're out of time. So thank you so much for joining us...

Thank you.

And please enjoy the rest of the conference.

Good morning, ladies and gentlemen. Welcome to today's Encompass Health Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Just a reminder, today's call is being recorded. And if you have any objections, you may disconnect at this time. I will now turn the call over to Mr. Mark Miller, Encompass Health's Chief Investor Relations Officer. Mark, please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Fourth Quarter 2025 Earnings Call. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com.

On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release.

During the call, we will make forward-looking statements, such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K and the Form 10-K for the year ended December 31, 2025, when filed. We encourage you to read them.

You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements.

Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website.

[Operator Instructions]

With that, I'll turn the call over to our President and Chief Executive Officer, Mark Tarr.

Thank you, Mark, and good morning, everyone. Our Q4 performance was again very strong, capping a stellar 2025. Our 2025 revenue increased 10.5%, driven by 6% discharge growth and pricing growth benefiting from patient mix and patient outcome quality.

2025 EBITDA grew 14.9% as we gained operating leverage and exercised disciplined expense management. Most notably, premium labor spend in 2025 declined by more than $21 million from 2024, even as we added capacity and significantly increase the number of patients we treated.

Our quality and patient outcome scores for 2025 were outstanding. Our full year discharge to community rate was 84.6%, discharge to acute care was 8.6% and discharge to SNF rate was 6.1%. Each of these quality metrics is favorable compared to the industry average.

I'd like to recognize our clinicians and support staff who bring their expertise and compassion to our hospitals every day and deliver outstanding patient care.

We continue to generate attractive returns from the investments we are making and capacity additions. In 2025, we added 517 beds, 390 via 8 new hospitals and 127 through the addition of beds to existing hospitals. We will continue investing in capacity additions as the underlying growth in the target demographic remains at approximately 4% and the demand/supply gap of licensed IRF beds continues to widen.

We'll be augmenting our historical two-pronged approach to capacity expansion, de novo and bed additions with a third modality, small-format hospitals beginning in 2027. This will facilitate a hub and spoke strategy to larger and growing markets.

In October, we converted our enterprise resource planning, or ERP system, to Oracle Fusion without significant disruptions to our business. Fusion provides us a flexible and sustainable cloud-based IT infrastructure to support our growing business.

We are keenly aware of market anxiety regarding IRF industry regulatory changes, specifically the extension of RCD and the initiation of the team model. Beginning with RCD, during 2025, we undertook significant engagement with Palmetto and CMS to ensure correct and consistent application of reimbursement criteria. Our 7 hospitals in Alabama currently have an aggregate average affirmation rate of approximately 93% for Cycle 4, which we believe validates our admissions and documentation practices.

Leveraging our experience in Alabama, we believe we are prepared for the expansion of RCD into Texas and California this year. The MACs is responsible for our hospitals in these states are Novitas and Noridian. Novitas, the MAC responsible for most of our hospitals in Texas, has gained substantial expertise with RCD in Pennsylvania, where providers have achieved very favorable affirmation rates. As RCD extends to other states, and we elect 100% prepayment review, affirmation of our claims should reduce our exposure to other Medicare claims audits.

The T model implementation began on January 1. Encompass has 89 hospitals in the initial team markets, 41 of which are joint ventures with acute care partners. As a reminder, there is no downside risk to the subject acute care hospitals in 2026 under the default track. As we have consistently done with all regulatory changes, we have prepared extensively for team. It is another episodic payment pilot similar to previous models such as CJR and BPCI, or BPCI, versions of which have been continuously in place since 2014. In those prior cases, concerns regarding the impact to our patient flows were greatly overstated. The presence of these models notwithstanding with the exception of 2020 for obvious reasons, we have recorded positive total and same-store discharge growth every year.

Regulatory change is a constant in our business, and we have a long track record of successfully adapting and continuing to grow as the underlying demand for IRF services continues to grow.

Our strategic relationship with Palantir continues to bear fruit. In 2025, we focused on initiatives that streamlined admission documentation and enhanced our responses to claims denials. We have recently extended and expanded our agreement with Palantir and look forward to additional successes in 2026 and beyond.

In 2025, in addition to substantial investments we made in our operations, we allocated $158 million to share repurchases and returned in excess of $70 million in cash dividends. We maintain a strong balance sheet with year-end net financial leverage of 1.9x.

The need for the services we provide has never been greater and is growing. We are uniquely positioned to fill the void. We are incredibly proud of our recent historical performance, but we do not rest on our laurels. Our focus is on the future, which for Encompass Health is very bright. Our company has never before been presented with greater opportunity and we have never been better positioned to capitalize.

Our expectation for continued growth is reflected in our initial 2026 guidance.

I'll now turn it over to Doug to provide some additional details on Q4 and the specifics of our 2026 guidance.

Thank you, Mark, and good morning, everyone. Q4 revenue increased 9.9% to $1.5 billion, and adjusted EBITDA increased 15.9% to $335.6 million. The revenue increase was comprised of 5.3% discharge growth and a 4.1% increase in net revenue per discharge. Net revenue per discharge benefited from a $2.7 million settlement with a managed care payer related to prior year claims.

Bad debt expense for the quarter was 2.1%, flat on a year-over-year basis.

Q4 SWB per FTE increased 2.1%. Premium labor costs comprised of contract labor and sign-on and shift bonuses declined $5.8 million from Q4 '24 to $23.8 million. This was the lowest since the first quarter of 2021.

Contract labor FTEs as a percent of total FTEs was 1.1%, also the lowest since the first quarter of 2021. Benefit expense per FTE increased 2.9% as we anniversaried the large increase in group medical expense experienced in Q4 of last year.

Net reopening and ramp-up costs were $2.9 million in Q4 '25, bringing our full year total to $13.9 million. Q4 net costs were lower than expected as 4 of our 8 hospitals opened during 2025, contributed positive adjusted EBITDA during the quarter, and the losses for our hospitals opened during Q4 were less than budgeted in part due to faster Medicare certifications.

We continue to generate significant free cash flow. Q4 adjusted free cash flow increased 23.6% to $235.4 million, bringing our 2025 full year total to $818 million, an increase of 18.5% from 2024. The strength of our cash flow allowed us to fund $736 million of capital expenditures, $158 million in share repurchases and $71 million in cash dividends, while holding long-term debt essentially flat on a year-over-year basis.

Our year-end net leverage ratio of 1.9x connotes substantial flexibility for continuing investments in our business augmented with shareholder distributions.

Moving on to guidance. Our 2026 guidance includes net operating revenue of $6.365 billion to $6.465 billion, adjusted EBITDA of $1.34 billion to $1.38 billion and adjusted earnings per share of $5.81 to $6.10. The key considerations underlying our guidance can be found on Page 11 of the supplemental slides.

And with that, we'll now open the lines for Q&A.

[Operator Instructions] We'll go first this morning to Matthew Gillmor of KeyBanc.

I thought I might ask a couple of questions on the volume front. The way volumes evolve this year was stronger in the first half and then moderate a little bit in the back half. I think there were some comp issues you talked about last call. I was curious if you could sort of flesh those out and then help us think through any comp issues we should be thinking about during 2026, especially the dynamic of the de novos rolling into the same-store base and that timing issue?

Yes. So certainly, in the back half of the year, we were up against some pretty challenging comps. Q3 '24 total discharges were up 8.8% and 6.8% of that was in same-store. And then in a similar fashion, when you moved into Q4 of last year, we were up 8.3% in terms of total discharges and 5.8% of that was in same-store. It was also the case that with regard to contributions from new stores, we were more skewed towards the back end of this year with new hospitals coming on board. You may recall that we had 1 hospital that opened in the last week of the third quarter and then 3 hospitals that opened in the fourth quarter, 1 in each month. And then there was the issue of the unit consolidations and closures that we talked about last quarter.

And so as a reminder, we had 2 units, 1 in Sewickley, Pennsylvania, and 1 in Cincinnati, Ohio. Those were spaces that were leased from a host acute care hospital. For various reasons, we terminated the lease, and we anticipate that we'll consolidate that volume into another hospital in the market, but there's a period of time in which that's not happening. We estimated that, that was a headwind of about 30 basis points to total and same-store discharge in Q3. Cincinnati actually closed relatively late in Q3, so we had a full quarter impact in Q4. And so the impact in Q4 was probably closer to 45 basis points.

I think it's worth noting in terms of our track record of bringing on our de novos. Last year was a good example of how if we can get the Medicare survey quicker than having a long drug out awaiting period for them to come into the survey. It certainly benefits benefits us. Our teams have done a great job getting these hospital staffed, getting the word out in the marketplaces, our design and construction has done the same thing. There are a lot of factors outside of our control as you go through the start-up processes. But our team has just done a really nice job in delivering these hospitals pretty much when the due dates are there. So that has benefited from us in our continued planning and execution.

Got it. Understood. And then as a follow-up, I thought I might get a comment or 2 on the mix. It seemed like the Medicare fee-for-service mix was a little bit higher in the fourth quarter. Is there something you'd attribute that to? And if you had any comments on just sort of the growth across different payer classes that would be great?

Yes. Fee-for-service growth was strong in the fourth quarter. That's good because that's our best payer. We did experience some challenges with regard to Medicare Advantage in the fourth quarter, and it was specifically with 1 national payer where we saw the conversion rate drop, not insignificantly in the fourth quarter. I'm not going to name names right now. I will tell you that if this persists into next year, we may be inclined to name names. The referrals within that specific Medicare Advantage plan were actually up nicely, high single digits for the converter -- for the quarter, but conversion rate, which is the ratio of admits to referrals was down significantly. And there's no reason for that. Again, as we look at the underlying nature of those referrals, they were consistent with the referrals we were getting across the system and across payers.

And so what that translates into is, for whatever reason, that planned elected to start the care to a segment of the Medicare beneficiary population, which we believe is in direct contravention of Medicare coverage requirements. We're going to be undertaking some specific actions to address that as we move into Q1. That includes maintaining active communication with the subject plan and also with CMS regarding what we've view as noncompliance with the Medicare coverage requirements.

As we did in the fourth quarter, we think that there's going to be an opportunity to backfill with IRF-appropriate patients covered by fee-for-service, other MA plans and the continued growth in our veterans community care network. We will ensure in terms of doing our own part that our clinical liaisons are responding timely to all referrals and doing so with high-quality medical necessity documentation. It's probably an opportunity to enhance that process with some AI tools. And we're going to be implementing an admit and appeal strategy on those MA denials that we believe are clearly in contravention of the Medicare coverage requirements. And then finally, we'll make sure that we continue to reinforce the value proposition for IRFs with the Medicare beneficiaries, making sure they understand the right of choice that they have, with referral sources, with respective patients and also with families and caregivers.

Matt, this is Pat. Just to add a couple of points to what Doug said. So one of the callouts he made was on the VA program. We've talked about that before. We continue to drive that initiative and have scaled up some best practices and education across our company and really pleased with the results. So that has now grown to represent 19% of our managed care volume. Our third consecutive quarter of discharge growth in that segment over 20% on the quarter, finishing around 25% to bring the year to 22% growth. We continue to see a lot of upside in that segment, and it's a great opportunity for us to provide IRF access to veterans.

The other point that I'll make is on the MA admit and appeal strategy, we've never really taken -- undertaken such an effort before. And 2 of the major payers have Medicare -- excuse me, have conversion rates below 20%. And what we're going to do in a couple of these markets is, if the patient meets Medicare coverage criteria, we're going to admit those patients. And we're going to go through the different levels of appeal process. There's 5 levels of administrative appeal all the way to the ALJ and Federal District Court, where we're going to advocate for access to care.

And these issues with this particular MA plan notwithstanding, and they're really not new, we've seen this pop up from time to time. There is a significant population of IRF-appropriate patients who are still not being treated in IRF. And so there's -- the pond for us to fish out of is plenty big.

We'll go next now to Ann Hynes with Mizuho Securities.

Thank you for all the detail on some of the regulatory unknowns. That was very helpful. Can you tell us just like how these pilots usually play out? Like I know the team pilots 5 years, 2032, what typically happens after that pilot program? Like do most of these pilots just kind of die out or are they implemented nationally? If you can give us some examples, that would be great.

No. Ann, if you go back and even back to 2016, 2015, with the plans I mentioned, the CJR, there was a little bit of both in terms of people required to do it or voluntarily got into it. You saw some people really go into it strong, kind of what I would refer to on the bleeding edge. Then you saw a lot of systems kind of wait and see what happens and didn't want to get after it too far. I think it's the nice thing about our ability to work with our joint venture partners in these markets where team will come out. We have a very collaborative approach. Pat and his team have been out talking to all the major systems in our markets impacted to see what their plans are and also to bring forth our value proposition because there's a big quality factor in teams that where the acute care hospitals will be penalized for readmissions. So that's a big part of the value that we bring in to that.

So I think that, in large part, as I noted, there is typically an overreaction in terms of what people think will be the impact on our facilities. And with time, as noted, we just continue to grow through them because there are enough patients that would fall outside these plans that can benefit from the care that we provide. So I'll ask Pat just talk a little bit about what he and his team have done, I think specifically in the Boston marketplace, where we have some team introduction.

This is Pat. Thanks, Mark. So just to reinforce what Mark said around team and to get a part of your question, so if you look back to BIPC and BIPC Advanced, both of them were 5-year programs that were not expanded after the 5 years. And if you look between those 2 models and then CJR, we added or acquired approximately 4,500 beds during that time. So significant growth in spite of those models. So there's really 3 things that I'll point out to you, aside from the VA strategy, which is a nice opportunity for us to continue to backfill any potential impact. But -- and aside from patient choice remaining. First is, we've had a lot of conversations in our marketplace. As Mark mentioned, Boston, 2 of our largest potential impacted hospitals are in the Boston marketplace. And frankly, we're not hearing a whole lot of chatter from them or our JV partners on that they're going to handle patients differently. In fact, they remain very focused on quality, length of stay, capacity constraints and readmissions. And those are all elements of our value proposition that we have executed on for decades to their benefit.

Second, and Doug touched on this, there's substantial opportunity for us to backfill potential volume with other diagnostic categories. So if you think about stroke, brain injury, neuro, cardiac and pulmonary, those are patient categories where people are still twice as likely to end up in a nursing home than in an inpatient rehab hospital. So we put a lot of effort into working to increase our market capture there. And then third, from a team perspective, patients on dialysis with end-stage renal disease are exempt from team. About 4% of our volume currently falls into this bucket. But through our investments in Tableau, where we have almost 70% of our hospitals covered with Tableau and then the remainder with external dialysis, we have the capacity to slightly more than double that volume across our portfolio based on current utilization.

So there's a lot of opportunity for us to backfill volume with IRF-appropriate patients across other diagnosis categories or within the team impacted groups as well.

And at the risk of piling on, I'll just add a couple of things. First, our anecdotal evidence, and this has been consistent for multiple months right now as we canvass the acute care hospitals in the impacted markets is that there is very little focus on team from those hospitals. And it's perhaps not surprising as they face a substantially larger issues with regard to what's going to happen on Medicaid supplemental payments and what's going to happen with regard to the extension or the lack thereof of any ACA subsidies.

Further, as we drill down and looked at the target prices that have been set for these conditions in the impacted markets, in almost all cases, regardless of the patient's condition, those target prices cannot be achieved unless the patient bypasses a post-acute inpatient stay, IRF or SNF altogether and go directly to the home. The only way that, that could be safely accomplished is if you increase the length of stay in the acute care hospital. And doing so by even a couple of days would completely erase any of the participation in the risk corridor.

And one last comment on this. We've done an analysis early. It's 1 month, but there's been no impact of team associated diagnoses categories within our team impacted markets. So it's really been no impact to volume.

We'll go next now to Andrew Mok of Barclays.

There was a pretty meaningful beat on labor costs in the quarter with improvements in both wage growth and EPOB. Can you help us understand the drivers of that in the context of moderating volume growth?

Andrew, just real quick. I think it's kind of twofold. I'll ask Pat to talk specific about premium pay. But I think we're seeing some softening in the labor markets as a whole, which has been a positive thing for us for the last year or so. And then I think, secondly, while we've always been very disciplined around the use of premium pay and managing our staffing ratios, Pat has really dug in with his team to look at some of the outliers we had with our portfolio, and it's been meaningful. So Pat, do you want to give some detail?

Yes. And I'll give credit to a few different groups here. So first, our operators have done a tremendous job both bringing in -- excuse me, bringing down turnover. Our in turnover continues to drop. It's at pre-pandemic levels. And at the same time, our centralized talent acquisition team continues to do a tremendous job on the hiring front. So we added, from a same-store perspective, 300 net RNs in 2025, and that brings our 4-year total up to around 1,700. So just a tremendous job to both of those groups there.

We feel like there is -- while the rate of improvement will slow that we have an opportunity to potentially narrow the gap in variation in some of our higher utilizing markets on premium pay, in particular. Our 10 most challenged markets, which represent a significant portion of our spend, we are substantially increasing our efforts from our recruiting team as well as recruitment marketing to try to get at those markets where hiring has been a little slower.

In particular, I'll point out that we've -- all the growth that we've had in the de novo markets, we have opened those without contract labor. So we are taking some of the resources that we would use to open a hospital and staff a hospital, and we're going to apply that approach to these more challenged markets as well.

And then on the EPOB front, while there is some small timing impact of de novos ramping, we are relentless in our pursuit of operational discipline across our regions and in our local markets. And we do that in a way that does not sacrifice quality outcomes or clinical excellence. Mark talked about our discharge outcomes. We had records in 2025 of our discharge outcomes as well as patient satisfaction. We were able to get at these additional efficiencies, and we'll continue to work towards those without sacrificing anything on the clinical front.

And then just to go through the specifics on the Q4 labors, as we mentioned, total SWB per FTE in Q4 was up 2.1%. The composition of that core SW, which does not include contract labor per FTE was up 2.8%, benefits, again, anniversarying the substantial increase in Q4 of last year was up 2.9%, and premium labor was down year-over-year $5.8 million. The EPOB came in at [ 3.38 ]. That was better than our expectation, and that was largely attributable to the past ramp-up of the de novos that opened in 2025. And as we cited during our comments previously, that was boosted in Q4 by the fact that we got our Medicare certifications on those openings faster than we had anticipated.

We don't control that, so we can't guarantee it's going to happen on future openings, but it was a lift in Q4. Importantly, we were able to achieve all of these things with regard to our labor cost while holding nursing turnover at 20.2% for the year and therapy turnover at 7.8%.

One last comment here that I failed to mention is, we have talked about this before, but we have made a substantial investment in the development of clinical ladders and tweaking those to increase participation. Because if we can get a clinician on the ladder, their turnover is about 1/3 of what a non-laddered clinician is. And I'm really, again, proud of our operators. We have our nursing participation up to 32%. 36% of our therapists and 47% of our nurse techs are participating on our clinical ladders. Again, we still see upside here, but we're really pleased with our progress.

Great. And just to clarify, the better labor and preopening -- the Medicare certifications coming in earlier, that's what's driving the better-than-expected preopening cost, correct? Is there anything else?

No. Again, you had not only that impact from Q4, which was predominantly where it was, but the performance of the de novos that opened in 2025 prior to Q4, in Q4 was favorable, and we cited a number of those, 4 of those actually had positive 4-wall EBITDA in Q4.

We'll go next now to Pito Chickering of Deutsche Bank.

So I apologize in advance for this one, but I want to go in the weeds and talk about the Alabama RCB experience. From a process perspective, can you explain with the 93% affirmation rate, what happens with a 77% of claims that weren't affirmed? When you appeal at 7%, so what percent of those are you winning? And when you appeal to the administrative law judge level, what percentage of those are you winning? So at the end of the day, after you peel and go to the ALJ, what percent of these claims do you guys need to reserve for?

Well, you were in line. You were down in the weeds. Let me first kind of pull us up a little bit, and then I'll see if I can get down to that level. So first of all, there's a perception out there that both team and RCD represent new risk to IRFs. And Mark referred to some of this. In our opinion, they do not. They are ordinary course of business. We have lived continuously with episodic payment models since 2014. And CMS has always had the right audit 100% of IRF Medicare claims on both a prepayment and post-payment basis. And they have done so under a series of programs such as TPE, ADR, RACK, SMRK, et cetera. RCD is just a new acronym for the same old thing. The Medicare coverage requirements under RCD have not changed. The documentation requirements under RCD have not changed. And the third parties performing the RCD audits have not changed. The potential upside to RCD is that if we choose to remain on a 100% review, and Mark alluded to this in his comments, it potentially obviates the other audit programs.

Moving specifically to Alabama. 93% is the current affirmation rate for the 7 hospitals in Alabama, where we're dealing with a difficult MAC who continues to non-affirm claims for reasons that are in contravention of Medicare coverage requirements and guidelines. As a result, we appeal the overwhelming majority of non-affirm claims through the multiple levels available to us. And although it's still early to call the ultimate resolution rate because those claims are still pending and because the sample size is relatively small, we're having a good success reversing the denials. We continue to educate Palmetto, and we continue to involve CMS, and we believe that it is more likely than not that, that 93% affirmation rate moves up.

When we look at the Pennsylvania experience, it covers more hospitals, and we believe that, that rate, 98% to 99% is more representative of where a broadly adjudicated RCD program will land. And so all of that suggests to us that the go-forward bad debt expense rate that we experience is going to be consistent with our recent historical experience, thus the 2% to 2.5% number that is included in our 2026 guidance.

Just 1 quick addition on RCD in Alabama, not necessarily on the bad debt front, but just on the volume and occupancy front. So virtually, again, no impact here. We have expansions that [indiscernible] on the volume side, unimpacted.

Look, Palmetto is the pain in the [indiscernible] in Alabama, they were pain in the [indiscernible] for RCD.

Okay. Fair enough. That's a pretty honest response. A follow-up question. [indiscernible] I think you talked about earlier, you said that the referrals were up from a legal perspective. How much layweighted MA have to deny post-acute care?

Yes. So I'll start and then maybe pass it over to Pat. So historically, our total MA conversion rates have run between 25% and 30%, and that's going to compare to Medicare fee-for-service, which is the same patient population, subject to the same Medicare coverage requirements, which is run in the mid-60%. And so that's been a problem all along. Particular payer who shall name named us for at least this quarter, has always been our lowest conversion rate, but they dropped by about 500 basis points in the quarter. This is, again, in contravention of Medicare requirements. So we do have the ability to take this directly to CMS. Because the change was so material in Q4, our first order of business is going to be to try to work directly with the plant itself and say, is there something different, is there something that we can do better to try to do that in partnership?

But we're not going to wait and to see the effect of that before we get more aggressive with this admit and appeal strategy that Pat outlined just a bit earlier.

What I would add to that is, MA is required to operate with the same coverage criteria as traditional fee-for-service Medicare. They're allowed to have a prior auth requirement, which they do, but they are supposed to adhere to that same coverage criteria. And what we see on a daily basis, and this is not new, is the failure to adhere to that Medicare coverage criteria. So we have typically taken that in stride, and it's been a frustration for our referral sources. It's been a frustration for us. And most importantly, it's been a frustration for the seniors in this country that deserve our level of care.

So we have decided that we're -- there's no teeth to the Medicare requirement right now that they have to do that. So we're in a position we're going to pilot this, and we're going to take these claims that are in alignment with the Medicare coverage criteria through the administrative appeal process, through the ALJ and potentially beyond. And we're optimistic. We feel like the facture is on our side here, and more importantly, we're really interested in making sure that seniors have access to our level of care in this country.

I think it's important to note as well, perhaps another silver lining out of RCD is that the affirmation rates that we're seeing in Alabama and that the others are seeing in Pennsylvania suggest that under fee-for-service, which has that much higher conversion rate, the overwhelming majority of patients are appropriate for IRF care, which means that those that are being denied that access by Medicare Advantage are being done so again in contravention of Medicare coverage requirements.

We'll go next now to Whit Mayo of Leerink Partners.

Doug, just wanted to take your temperature on leverage and how you're thinking about the appropriate target. You're going to probably drift below 1.5x soon. Just any thoughts on upping the dividend more, stepping up buybacks on a permanent basis, maybe buying up leases? Just any updated views would be helpful.

Yes. So maybe what we can do is kind of use our guidance to 2026 as a proxy for what things might look like. And so if you look at our free cash flow assumptions, the midpoint of those assumptions is right at about $828 million. Again, using the midpoint of other ranges within our growth CapEx, that's up $725 million. The dividend at its current level is $77 million. So that would suggest, again, if we are achieving our midpoint of EBITDA guidance and our midpoint of the free cash flow that we would fund those uses internally and still have about $25 million of cash. And that would leave us, all other things equal, at the end of 2026 with a leverage ratio of 1.83x. And that implies even if you wanted to be conservative and leave leverage at, say, 2x that there would be capacity for another $230 million to $250 million of buybacks or other distributions.

There really aren't other opportunities to buyback leases. So I think to the extent that we generate excess cash and have capacity within the leverage ratio, the most likely utilization of that is going to be additional share repurchases and increases in the dividend.

Okay. And then we haven't heard much about malpractice from you guys. Some of the other providers have been talking about it more. Just how did that develop in 2025, thoughts on 2026? You've got this new reasonable care standard change, I think, with malpractice. Does this change your views at all how you're thinking about it?

Yes. We've seen no significant change in our GPL activity from 2024 to 2025.

We'll go next now to A.J. Rice of UBS.

This is James on for A.J. I just wondering if you can give us some color on the rationale behind the changing development as you look to add these small format hospitals and what advantage is this type of hospital provides versus the traditional de novos?

Yes. So it's the confluence of design and opportunity maybe with the dose of necessity cost in. And so from a design perspective, historically, we had had trouble coming up with an economically feasible model that would be in the size range that we're talking about. But as we have ascended the learning curve with regard to our de novos, really, over the past 5 or so years, and been able to incorporate more in the way of prefabricated construction, whether in a hybrid model or fully, it's helped us kind of crack the code on this 24-bed prototype. It solves an issue for us where we've got 1 or 2 situations. One is, we've got an existing hospital in a market that doesn't have any more physical ability to expand and yet the demand of the market suggests that more beds are needed. And so this is an economically feasible way of adding more capacity into that market even on a chassis that can't be expanded.

It's also the case that as we find in a lot of larger metropolitan markets in Dallas and Houston and Tampa or 3 that come immediately to mind that the overall market is growing, but based on traffic patterns and based on the growth in specific neighborhoods or geographies, the additional beds might best be positioned elsewhere. [indiscernible] is what we acquire 2 to 2.5 acres based on specific topography. It is a single-story 24-bed chassis. It has got a smaller kitchen because there's no food preparation on site. Obviously, the gym is smaller because we've got a fewer number of patients. And we're able to leverage the management team and the marketing resources associated with the host hospital. So the returns are very favorable.

It's a market density is a big part of the strategy. Not only you get scale from staff, but you get a brand recognition in the marketplace, which helps us with staffing as you have the employees and the workforce there starts to become more and more familiar with Encompass Health. We've seen that in markets. It gives us an opportunity to provide growth opportunities for our existing staff and management teams. So that helps with retention and also decreases the risk as we add another location in the marketplace. So we think there are a lot of benefits from the small format hospital. And as I noted, it's just yet another modality that we have [indiscernible] plans going out in the future on this, and we think it's going to be really helpful as we expand that capacity.

And it's important to note that because all of these small-format hospitals will be remote locations, meaning that they are tied to a host hospital, they operate under the same Medicare provider number, which in almost all cases means that managed care contracts and so forth can be extended and don't have to be renegotiated. It also [indiscernible].

This is Pat. I would also add that we do have 3 locations right now. They're not technically what we would consider a small format hospital, but they operate like it, and they are satellites of a main location. And they drive impressive results and returns. So we do have some experience with this operating model. This is a great way for us to scale this across the country. We have dozens of potential locations that we're going to be looking at for consideration. And we talked about growing or under -- excuse me, larger growing markets, but underserved or fringe markets have where we have a hospital are also candidates for this because you may have someone within 30 miles -- location within 30 miles that it does not have the density of a new requirement for a new hospital, but they could benefit from a smaller location. And we'd still be able to get the leverage that both Mark and Doug have talked about.

So we're really excited about this. I think it's going to be a big part of our strategy moving forward and a nice way for us to not only help patients but increase our returns as well.

We'll go next now to Joanna Gajuk of Bank of America.

[indiscernible] volumes. So first on the team. So thanks for sizing up exposure here. So 2% of volumes seems very manageable. You expect to be able to replace any lost volumes, so that's good. But just a couple of questions as we try to like sum up maybe in the future, too. So are these procedures that is included, right, in the team model, in the 5 [indiscernible] are those coming at the [indiscernible]. I want to clarify, you don't assume much of an impact, I guess, to bottom line this year. But I just want to make sure, like, is there some sort of a number in terms of EBITDA headwind that you included in your '26 guidance? And with that comment around the acute hospitals are not taking risk in year 1. But would you expect things to change from [indiscernible] over time as these hospitals to take more risk in the future years?

So Joanna, this is Doug. I'm going to start with the margin and then I'm going to turn it over to Pat for the balance. So there is no real stratification of margin or real diversion of margin across our patient categories. And so it is true that reimbursement is tied to [indiscernible] into patient acuity. But when you drill down the specific patient level, you also have to factor in things like comorbidity. And where is you may be getting a higher reimbursement for [indiscernible] between the margin profile of the patients that will be subject potentially to this demonstration into our other patients.

Thanks, Doug. So Joanna, this is Pat. I would say from a margin perspective, Doug is absolutely correct. No, we're not foreseeing any impact on margin. From a net revenue per discharge perspective, it's almost each of these are in line with our average net revenue per discharge. The only 2 that have slightly higher and I mean slightly higher are the ones associated with fractures, so lower extremity with fracture and then hip fracture. But again, we're not anticipating for this to be material. It's all reflected in our 2026 guidance, and we feel really good about our opportunities to backfill.

The only other point that I'll make on team is the majority of our team impacted markets have less than -- well, 39 of the 89 have less than 10 discharges tied to team's diagnoses. Almost all of our team impact is tied to 50 markets, and half of those are joint ventures. So again, we've reflected this in our guidance. We're really -- we think we're prepared to mitigate this if issues come up, but we're really just not hearing of any changes in referrals or admissions in our markets.

I will note also just further on the margin issue. Part of the reason that you get to that parity with our average revenue per discharge on those particular categories that are subject to team is because those specific patients have more comorbidities that would make them less likely to actually be a participant within the team model in terms of diverting their care away from the IRF because they really need to be in that intent setting.

Okay. That makes sense. And if I may, a question on volumes. I don't think you talk about some breakdown in terms of just the categories, in the past, you would talk about your sort of the cardiology, neurology, orthopedic cases in the quarter. So if you can give us a color, that would be helpful.

Well, we provide patient mix every quarter. And we provided the 2%. It's not a direct equation. It's convenient to try to look at this in isolation and just say I'm going to pick those RICs and assume that, that's an estimate for the volume that's in those categories. But that's missing 2 other things. One is the presence of comorbidities that is going to be an element that clinicians make in deciding the appropriate course of care. And the second is, let's say that you even had an acute care hospital that was extremely committed to all elements of team. Again, the only way that they would be able to achieve the target price in many instances is by increasing the length of stay so that they would have a patient who could safely bypass any inpatient -- post-acute inpatient setting.

If they do that, the likelihood is that they would be looking for [indiscernible] patients where they could reduce the length of stay, and that has been 1 of the key elements of our value proposition all along, which is the ability to take a more acute patient with a shorter length of stay in the acute care hospital so that would be offsetting volume there. So the team is not something that will happen in isolation.

Joanna, if you're talking about overall volume and just on a RIC basis, we did see nice growth in brain injury up 8.7%, cardiac up 5.1%, neuro 4.5%. Major trauma was up 5% and stroke was up 3.8%. So again, broad-based growth across diagnosis categories. From a mix perspective, with brain injury being our third largest discharge RIC category, that was up 40 basis points to be our largest mover. So again, that's something we're pretty excited about, especially given that it's not a team impacted diagnosis.

We'll go next now to Brian Tanquilut of Jefferies.

Maybe, Mark, as I think about concerns that are emerging on Medicare Advantage rates and how that could potentially translate to payer pressure on providers. I mean how are you thinking about that dynamic? And what are those discussions like with payers as you think about your scale and local market power?

We always lead with our outcomes, Brian, and it's part of our value proposition. And I don't see that changing going forward. I think the concerns, particularly if you think about just team and some of the -- and certainly with the payers, the quality aspects and concerns around readmission rates back to acute care hospitals, it really puts the premium on a post-acute provider that can take care of these higher acuity patients like we do and have a low readmission percentage. So we're very diligent about leading with our data and our outcomes. When we go and meet with the payer or the medical director for that payer, it's very helpful that we can show them the differences that we can have with an Encompass Health Hospital versus nursing homes or even other IRF providers.

So I don't think our strategy on that changes. If anything, we have more data and data sources now than what we did 5 or 10 years ago just to help create that competitive advantage for us.

What is happening out there is the rate of growth in terms of new MA beneficiaries has declined very substantially. And if you listen to some of the dialogue in response to some of the rate [indiscernible].

We'll go next to now to Jared Haase of William Blair.

Maybe I'll just stick to 1 as well. You mentioned the expanded relationship with Palantir. So I'll ask on the technology front. It sounds like you've had some wins around administrative work and revenue cycle management. I guess 2 questions. Number one, just be curious if there's any kind of quick ways to quantify sort of cost savings or other metrics that you track in terms of that deployment?

And then as you think about expanding that initiative, is that still broadly around areas that I would bucket under, let's say, revenue cycle management? Or are you seeing other areas of the business to optimize maybe around clinical care patient experience?

Yes. So on the first, it is difficult to assign a specific ROI to the work that they're doing. But hopefully, what it's going to mean is that our success on claims denials is going to continue to improve. The manpower that we need to process those denials is going to decrease and can be shifted elsewhere. So there are going to be some real tangible benefits. In terms of new projects that we're working on, we are going to be focusing on CRM market analysis specifically to help us identify the optimal strategy for positioning in a market in terms of de novos, de novos with expansion capabilities and the use of small format hospitals.

Revenue cycle management is something that we'll be looking at later this year and clinical staffing is another one that's on the table.

Just to add to that, we're looking for opportunities on the upside to enhance and elevate our clinicians. You talked about clinical care and patient experience in your question. I think that is certainly a goal to ours. People don't go to medical school or nursing school or therapy school to become great at documenting and document for half of their shift. So we'll continue to evaluate opportunities to allow our clinicians to do what they do best and have to take care of patients.

We'll go next now to Raj Kumar of Stephens.

just 1 quick one. As we kind of think about in the first quarter and maybe any potential impacts from the winter storm. I see that in your disclosures that 1 of the facilities that may have been slated for the first quarter was pushed back to the second quarter. So just curious maybe if there's anything embedded in guidance related to any potential winter storm impacts, and how we should be thinking about that?

No significant impact from the storm. I do want to call out, we've got 2 other closures that are going to impact Q1 as well. So the first is that we have operated since we acquired this facility in Lexington, Kentucky, Cardinal Hill, we've operated a 75-bed SNF unit. It's the only one -- only SNF unit that we have had, it ran at a low ADC, 25 ADC. Both the beds and the ADC were included in our IRF bed count and discharge number. And that unit basically had 0 profitability. We closed that at the end of December. So you're going to have some carryover impact from that.

You'll have the continued impact, although lessening a bit from Cincinnati and Sewickley. And then we've got 1 more unit consolidation that is taking place, and that is we have a unit in Bridgeport West Virginia, which is in the Morgantown market that is housed within an acute care hospital. It's at the end of its lease. So we are closing that effective February 28.

Unmitigated, meaning not picking up volume elsewhere in the market as we go into 2026, that creates about a 70-basis-point headwind for 2026 discharge growth, all of which is in same-store. We think that we will mitigate somewhere between 35 and 40 basis points of that.

We will go next now to Parker Snure at Raymond James.

I was just wondering if you could give some detail just on your outlook on provider taxes or supplemental payments? Maybe just remind us your total exposure there and then just your outlook for '26? And then maybe some potential upside from the fed funding program for particularly in Florida that you may get some benefit from? Maybe just talk broadly about supplemental payments and how are your thoughts there?

Yes. So the EBITDA impact from net provider taxes for this year was about $21 million and a little over $3 million of that was out of period. I think a core assumption is that, that would stay relatively flat as we move into 2026.

Okay. Great.

And by the way, that $21 million compared to an EBITDA contribution of $15.5 million last year, with a comparable amount being out of period.

And gentlemen, it appears we've answered all the questions today. Mr. Miller, I'd like to turn things back to you, sir, for any closing comments.

Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.

Thank you, everyone. Again, that does conclude Encompass' fourth quarter earnings conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.

Good morning, everyone, and welcome to Encompass Health's Third Quarter 2021 Earnings Conference Call.

[Operator Instructions]

Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Third Quarter 2025 Earnings Call. Before we begin, if you do not already have a copy, the third quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release.

During the call, we will make forward-looking statements such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K, the Form 10-K for the year ended December 31, 2024, the Form 10-Q for the quarters ended March 31, 2025, June 30, 2025, and September 30, 2025 when filed. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements.

Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, Reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to President and Chief Executive Officer, Mark Tarr.

Thank you, Mark, and good morning, everyone. Revenue in Q3 increased 9.4% and adjusted EBITDA grew 11.4%, contributing to year-to-date revenue growth of 10.6% and adjusted EBITDA growth of 14.5%. [indiscernible] largely to our Q3 results, we have again increased our 2025 guidance Doug will cover the details of the quarter and guidance in his comments. Our dedicated and highly competent clinical teams continue to deliver outstanding patient outcomes. Our Q3 discharge community rate was 84.6%. Our discharge to cut rate was 8.6%, and our discharge to SNF rate was 6%. Our performance on each of these quality metrics exceeds the industry average. Our high-quality patient care was again recognized by Newsweek in Statista to name Encompass Health, America's most awarded leader in inpatient habilitation for the sixth consecutive years.

We continue to invest in our clinical staff by providing professional growth and development opportunities, such as our career lighter programs. These programs contribute to our continued favorable turnover rates. Q3 '25 annualized RN turnover, of 20.2% and annualized service turnover of 7.8% are consistent with last year's very favorable trends. In Q3, we opened 3 new hospitals a 40-bed hospital in Danbury, Connecticut, our first in that state, a 50-bed hospital in Daytona Beach, Florida and a 50-bed hospital in Wildwood Florida or The Villages. We also added 39 beds to existing hospitals. Earlier this month, we opened a 50-bed hospital in St. Petersburg, Florida. We expect to open 2 additional 50 bed hospitals in Q4, 1 in Amarillo, Texas; and the other in Layforce, Florida and add approximately 37 beds to existing hospitals. The demand for inpatient rehabilitation services remains considerably underserved and continues to grow as the U.S. population ages.

The Medicare beneficiary population is the fastest-growing segment of the U.S. population. It is estimated that by 2030, 1 in 5 Americans, more than 70 million people will be aged 65 or older. The 65-or-older population has been growing consistently at a CAGR of approximately 3%. The average age of our Medicare beneficiary patient is 77 years old, and the aged 75-plus population is growing at approximately 4%. Yet the supply of licensed IRF beds in the U.S. has increased only nominally. As a result, the demand for treatment of the complex medical conditions such as stroke necessitating earth care intensity remain significantly underserved. We are responding to this unmet noodles and add beds to existing hospitals. We have again increased our expected bed addition growth. We now expect to add approximately 127 beds to existing hospitals in 2025 approximately 150 to 200 in both 2026 and 2027. Our pipeline of announced new hospitals with opening dates beyond 2025 and currently consists of 14 hospitals with 690 beds. With an active pipeline, more than 40 projects, additional hospital locations will soon join this list. To this point, last week, we received CON approval to build a 40-bed hospital in Clarksville, Tennessee.

On October 3, we converted our ERP system to Oracle Fusion. Our team worked tirelessly and diligently for more than 18 months to accomplish this challenging feat. We experienced no significant disruptions to our operations from the conversion -- although like any other project of this magnitude, there remain bugs to be resolved and refinements to be made. Now I'll turn it over to Doug.

Thank you, Mark, and good morning, everyone. Revenue growth of 9.4% in Q3 was driven primarily by a 5% increase in total discharges and a 3.3% increase in net revenue per ton [indiscernible] -- discharge. As we have previously stated, quarterly fluctuations in discharge volume growth and the composition of that growth between same and new store is a normal expectation of our business model. Volume growth in any particular quarter is influenced by factors such as the prior year period comp, the timing of capacity additions in the current and prior year and the calendar. For example, the day of the week in which the quarter ends and the timing of any holidays.

Specific to Q3, Discharge growth comp from Q3 '24 is a very strong 8.8%. Q3 '24 same-store discharge growth of 6.8% and is our highest since Q2 '21 when we were normalizing from COVID. As for the timing of capacity additions in comparison to Q3 '25 Q4 same-store growth benefited from a significantly higher number of de novo beds transitioning from new store to same-store as well as a higher number of bed additions to existing hospitals in the immediately preceding quarters. Additionally, this year, we consolidated 2 satellite locations, comprising 72 beds in Cincinnati, Ohio in Sewickley, Pennsylvania into their host hospitals. This was primarily attributable to lease expirations and allows for market rationalization. Ultimately, we expect to transition much of the volume in these closed units to the remaining hospitals. And in the case of Cincinnati, we are adding beds to accommodate this expectation. Nonetheless, these consolidations had a negative impact of approximately 35 basis points on Q3 and total and same-store discharge growth.

As Mark stated, the market for IRF services is growing and underserved. Reflective of this market opportunity, we are again increasing our estimated annual bed additions to existing hospitals through 2027. We have increased the estimated bed additions to existing hospitals for 2025 from approximately 110 to approximately 127. And for each of 2026 and 2027 from approximately 120 to now 150 to 200. Taken together with our new hospitals, capacity expansions now total approximately 517 beds in 2025, 540 to 590 beds in 2026 450 to 500 beds in 2027. Q3 '25 adjusted EBITDA increased 11.4% and to $300.1 million. The quarter included $10.8 million of net provider tax revenue an increase of $7.7 million from Q3 '24, owing largely to retroactive payments related to newly initiated programs in Tennessee and West Virginia. This increase in net provider tax revenue was partially offset by a $1.6 million increase in noncontrolling interest expense associated with higher net provider tax revenues at joint venture hospitals. Q3 25 adjusted EBITDA also included a $1.3 million retroactive property tax assessment associated with 1 of our California hospitals and approximately $3 million in accelerated supply purchases in anticipation of the October Fusion ERP conversion.

Q3 per FTE increased 2.6%. Premium labor costs comprised of contract labor and sign-on and ship bonuses declined $5.6 million from Q3 $24 to $27 million. Benefits expense per FTE increased 1.9% as we anniversaried the large increase in group medical claims experienced in Q3 last year. EPOB of 3.42% for the quarter was driven in part by the timing of capacity additions. Q3 adjusted free cash flow decreased 8.2% and to $174.2 million, primarily due to a $55.8 million increase in working capital, which included accelerated payments of accounts payable in preparation for the October Fusion conversion. We expect accounts payable balances to normalize during Q4. On a year-to-date basis, Free cash flow increased 16.5% to $582.5 million. We have increased our full year adjusted free cash flow estimate to $730 million to $810 million. During Q3, we repurchased approximately 221,000 shares of our common stock for approximately $25 million, bringing the year-to-date total to approximately $82 million. We also declared a cash dividend of $0.19 per share, which was paid earlier this month.

Our leverage and liquidity remain well positioned. Net leverage at quarter end was 2 times. And in September, we retired the remaining $100 million balance of our 2025 5.75% senior notes. As Mark stated, we have again raised our 2025 guidance. We now assume net operating revenue of $5.905 billion to $5.955 billion, adjusted EBITDA of $1.235 billion to $1.255 billion and adjusted earnings per share of $5.22 to $5.37. The key considerations underlying our guidance can be found on Page 11 of the supplemental slides. And with that, we'll open the lines for Q&A.

[Operator Instructions]

And we will take our first question from Joanna Gajuk with Bank of America.

So I guess maybe first on the discussion around, I guess, accelerated bed additions and de novos too, which is clearly the volume seem to be the issue, I guess, or where questions are in terms of just slowdown this quarter, but obviously, you kind of explained a couple of things. But let's talk about the future, right? So how should we think about this accelerated bed addition plans impacting your volume growth going forward? And I guess to that point, your 6% to 8% sort of long-term growth algo, can you talk about -- I know you don't give any specifics for '26, but kind of how should we think about it into next year?

Yes. So I think the fact that for the second time this year, we're increasing bed expansions and now doing it for a multiyear period is really a validation of our business model and strategy. It reflects the fact that our de novos have been performing well and are justifying bed expansions as they mature. It also reflects what we've been saying about the unmet need for IRF services really across the country and our unique position to be able to step in and add capacity.

We've also talked in the past that bed additions to existing hospitals offer the highest return on invested capital we have. So that's a favorable component as well. And I think all of you have observed as we have, that our occupancy has been steadily rising over the last couple of years. So this is in response to that demand that we're seeing at existing facilities.

We continue to be very optimistic about the market that is in front of us, the total addressable market. This suggests that on a go-forward basis, we're going to be more heavily weighted in the past than we have been towards bed additions in terms of total capacity expansions. But it's going to be continued utilization of both of those arrows in our quiver, maintaining the de novo program and then the increased bed expansions that we outlined for at least the next 3 years.

Joanne, you may recall from past calls where we've mentioned that one of the areas we're prioritizing where we add beds is to help give a higher complement of private beds to those hospitals that have a high percentage of semiprivate rooms. So that too has helped with our overall occupancy.

I think it's important to note, too, that these aren't just numbers that we have specifically identified projects and the number of beds at each one of those hospitals supporting those increased ranges for bed additions over the next 3 years.

And we can move next to Pito Chickering with Deutsche Bank.

Not surprising, I'm asking a similar question there. But I guess sitting back here and looking at sort of the next couple of years here, what percent of -- I guess, what level of CapEx as a percent of revenue should we be modeling in order to keep your discharge growth in that 6% to 8% range? Just as are you scaling up bed additions to sort of get to the proper levels of occupancy for more durable growth?

Yes. So growth CapEx this year at the midpoint of the estimate is about $580 million. we're increasing the number of bed expansions and holding the number of anticipated de novos relatively constant from year-to-year. So you figure at the midpoint of the range at 175, you're up about 50 beds in each of the next 2 years and the average cost per bed on a bed addition is roughly $800,000. That would be the increment to the 580,000 that you might pencil in.

Okay. Great. And then a question on occupancy. In order to maximize margins but still maintain growth, what is the target occupancy before you expand beds at the facility? And how quickly can you expand capacity at those facilities? And any color on what percent of your facilities today are at max occupancy and a headwind for growth?

Yes. So there's a lot of it depends on there, as we've talked about before, in terms of when you're hitting what might be considered a peak occupancy, the composition between private and semi-private beds that Mark mentioned earlier goes a long way towards that determination. We've been steadily moving the percentage of our overall portfolio that is comprised of private beds. At the end of Q3, it was up again to 57%. And again, that compares favorably to 41% at the end of 2020. Generally speaking, whether it's semi-private or private, a hospital starts to hit our radar screen for potential bed expansion after it crosses 80% of sustained occupancy.

Within an all private room hospital because you're not facing issues of gender or germ compatibility, you can run into the mid-90% and do that very efficiently. With semi private, you're probably going to peak out just south of 90%. In terms of ability to add beds, it depends on the physical configuration of the plant and then really whether or not you're in a CON state or not. I will note that even for our hospitals in CON states, in almost every instance that we can think of, the process for adding beds to an existing hospital is much shorter and less complicated than it is for getting a CON for a new hospital.

When I mentioned the physical plant for the building, we have some older legacy hospitals that just cannot be expanded anymore. We have the ability to address capacity needs in those markets by adding a freestanding satellite. You've seen us do that effectively a number of places in our portfolio. We are also in the design process and something that we're going to be talking a lot more in the future, which is what we call a small format hospital, which will be a smaller version of a freestanding unit that can be used for bed expansion opportunities and market diversification. And that would be roughly a 24-bed unit built on, say, 2 to 2.5 acres of land. It's a very efficient plant.

Again, we expect to be talking more about that in the future. In most cases, where we do have the ability to add beds to an existing hospital, it can happen pretty quickly, meaning from the point of ideation to it working its way through the design and construction time line, it's certainly less than 24 months, and it may be closer to 18 months.

And we will take our next question from Ann Hynes with Mizuho Securities.

I know your stock is down a little bit on today's earnings. Did expectations come in line with your estimates? Did anything surprise you in the quarter versus what you initially thought? And then secondly, maybe if you can give an update just on the Washington outlook and there's anything that the company is watching closely.

I would say no surprises in the quarter other than the retro payment from Tennessee and West Virginia on the net provider taxes and maybe the California property assessment. Those were kind of in the queue, but we weren't sure when they would come through. Otherwise, I would say just kind of scanning down the P&L that everything was pretty much in line with our expectation. Had another quarter of really good labor management, both in terms of controlling the spend, seeing a year-to-year decrease in the premium labor spend, felt really good.

We had been anticipating, but until it gets there, you don't know that we would see a nice decrease in the inflation rate on the benefits because of what we experienced in the second half of last year. And it was nice to see yet another quarter where bad debt was at the low end of our expectations. TPE activity did resume at a modest level in Q3.

But again, nothing that caused any alarm and our performance under RCD remains very strong in the latest cycle. So again, aside from maybe the timing and the magnitude of the out-of-period provider tax revenue, nothing that was a surprise. Mark, do you want to give?

Yes. And relative to your question around Washington, in spite of Washington being closed down in a lot of areas, we remain active there. We are not seeing anything near term that is of concern. It was -- it's our understanding that CMS was called back to the office this week. So hopefully, things go back to a normal flow there, but we're just not overly concerned about anything that we see right now on the horizon.

And this is Pat. Just a quick expansion on the labor comment. There's a lot to be proud of here. Both our centralized TA team and our operators have done a great job -- we posted our best same-store net hiring quarter since Q3 of 2023. Turnover is back down to pre-pandemic levels and contract labor shift and sign-on bonus are at their lowest level since Q1 of 2021.

And we can move next to Matthew Gilmore with KeyBanc.

I thought I might ask about payer mix. I think there was some favorability in the first half with traditional Medicare and VA. It seems like that may be normalized in the third quarter with moderation in pricing. Just curious if you could give some comments on how payer mix evolved in the third quarter compared to the first half.

Yes. So in terms of payer mix, if we just look at the growth rates by payer in Q3, relatively comparable between Medicare and Medicare Advantage, both were up -- or Medicare was up 4.4%. This is total discharge growth. Medicare Advantage was up 4.8%. Managed care saw another nice increase, 9.2%.

I'll remind you that, that includes the volume that we're getting under the VA Community Care network, and that continued to see another nice increase in the quarter. That was up -- and again, it's off of a relatively small base, but that was up almost 26% on a year-over-year basis, and that pays at the Medicare CMG rate. That contract now comprises about 18% of our total managed care volume. In terms of elsewhere in the payer mix, Medicaid was up about 3.5%. So overall, we feel like the growth across the payers was pretty well balanced.

That's great. And then, Doug, I thought I might see if you could provide some comments on headwinds and tailwinds for 2026. I know you're not providing specific guidance, but anything to call out just from a modeling perspective as we're thinking about next year?

I don't know that a lot comes immediately to mind other than I think net provider taxes will continue to be a bit of a wildcard. But again, if you look at the progress that we've made through the course of the year on premium labor, I think that sets us up well going into 2026. Again, the level of capacity expansion overall is going to be up somewhat next year. My guess is because we're going to be at roughly the same level on de novo activity that ramp-up costs and start-up costs will be comparable next year to what they are this year. It could be a little bit of fluctuation in bad debt, but things seem to have settled in there. So Matt, we're currently in the budgeting process for 2026, but I'm not aware of anything at this point that I would call out as a significant headwind or tailwind. And look, a continuation in this environment would not be a bad thing.

And we will go next to Whit Mayo with Leerink Partners.

Maybe just back to volumes for a second. You quantified the satellite consolidation. I think that was 35 basis points. Doug, any way to put numbers around the timing of beds, the calendar? I think 4th of July might have been on a Friday. There are some other factors there. I mean the comp is the comp, it is what it is. Just wondering if just -- there's any way to put a framework around maybe just quantifying what some of those other factors might mean optically for the same-store discharges.

You can kind of walk yourself in circles a little bit in trying to do that. It was a little bit of an odd cadence to the quarter. If we compare it to last year, the toughest comp that we were actually up against was the month of July, and yet we did pretty well in July. The quarter -- volume in the quarter was kind of a U-shape. July was solid. We reached the nadir in August and then recovered nicely in September.

And so I don't know that we can point to any specifics. We've got kind of the same dynamic with more holidays as we look at Q4. And so I think overall, the dynamics with regard to the impact of the capacity expansions in the satellites for Q4 set up a lot like Q3 with an extra dynamic around the timing of holidays. And it's a bit of a wildcard. So we can look, for instance, at the month of October, and it ends tomorrow on a Friday that happens to be Halloween. Is that a positive or a negative? I don't know. It's a factor, though. Likewise, Thanksgiving this year is 2 days short of the latest it can fall. It falls on Thursday to 27. Again, that's going to have an impact, but it could be a positive or a negative. So it's, again, difficult to be too specific about those things.

We look again and I think we're not measuring this -- we're not managing this business quarter-to-quarter. And we said all along that there were going to be fluctuations based on the factors that I identified in my script. We set out a target to have a discharge CAGR between 2023 and 2027, total discharges of somewhere in the 6% to 8%. We're almost 3 years through that 5-year target, and we're 75%. And we've increased the number of capacity additions that we're going to have in future periods. So obviously, we feel very good about the prospects of the business.

Whit, there weren't really -- if you look at our actual program mix, when we mentioned payer mix earlier, program mix, we weren't anything that really stood out. We continue to see progress made and continued absolute case growth for strokes, other neuro continues to be strong. So there wasn't anything that really kind of stood out from a volume standpoint that would tie back to our program mix.

And I think that's important to note. Obviously, we analyze the volume and the trends there in a lot of different ways. We didn't see anything looking at the third quarter results that said we need to make a course correction. Other than in the normal course of business where we do recognize that some markets outperformed others and we'd like to see a rise in tide lift all boats.

Yes, I can kind of tell your brain into a pretzel, trying to figure this out. My second question is really just an update on the review choice demo and how your experience has evolved this year versus your expectations?

So every month, since the end of the first quarter, we run with all 7 of our hospitals in the state of Alabama having affirmation rates north of 90%. Cycle 3 ended in June. And because of our performance early in that cycle, we did not clear the 90% affirmation rate for all of began on July 1. And since cycle 4 began, all 7 of our hospitals have been north of the target 90% affirmation rate. It remains a situation where we have to stay very hands on with regard to Palmetto.

And as much as we can through a government shutdown, we're also staying very much in touch with CMS to ensure that we are being treated fairly and appropriately throughout this process. So we continue to have to apply more administrative resources to this and should be necessary. But generally speaking, the program is running much better than it was during the course of cycle 2 and cycle 3.

We will take our next question from Andrew Mok with Barclays.

Given all the de novos and supply-demand factors, we don't usually hear much about closures or consolidations in the space. So I was hoping you can speak a little bit to that dynamic. Was this truly a unique event -- or does this happen with more regularity and is only getting called out given the extra attention to volumes in the quarter?

Andrew, this is Pat. Both of those are unique situations where the -- where we were renting space from hospital or location closed. So one-off events, a very small percentage of our portfolio and not anticipating any additional activity in the future.

Great. And maybe a question on the Medicare landscape more broadly. It's undergoing some pretty big changes, whether there's a slowdown in Medicare Advantage growth next year or greater than normal churn across the national payers. Just curious how you're thinking about that and any implications for your business?

I think -- and again, it's reflected in some of the discharge growth rates by payer that I reviewed earlier. But what we like is that we do well across the payer spectrum. Obviously, our primary areas of focus are with Medicare fee-for-service and Medicare Advantage. If Medicare Advantage growth is slowing that means that the greater opportunity is within fee-for-service, and that actually pays at a slightly higher rate, and we do better with regard to conversion rates, the percentage of admits to referrals.

So that's not a bad dynamic for us. Conversely, if Medicare managed growth resumes, what we've demonstrated, particularly over the last 4 years that we can effectively play in that sandbox as well. So in terms of how we're planning for 2026, a more global shift between Medicare Advantage and Medicare fee-for-service is not going to impact how we plan the business.

Andrew, this is Pat. Just some additional context. So when we look at strokes, about half of them in the country are going to skilled nursing facilities. And that's including in markets that we currently operate in. So we see continued upside there. The same story plays out with brain injury, which is just a huge patient population that we have the opportunity to serve.

And then while it's not fee-for-service Medicare, that VA dynamic that Doug talked about before, it's a small in size, but it grew 25.6%. And that -- this was the first quarter where we have really put some scaled attention to it. And we had originally, when this opportunity came out, we weren't sure how to size it. We thought it was proximity to a VA. And when we look across our portfolio of what we were currently pooling, we had hospitals that were 250 miles away from a VA that we're growing double-digit percentage point. So we looked at hospitals like that and what they were doing from a process perspective, created a tool kit, scaled that up, and Q3 is really the first time that we have implemented that. So I see upside in these areas in 2026.

And we will go next to A.J. Rice with UBS.

Just to maybe think about -- we obviously talked a lot about the development and program and so forth. I wonder if you could comment on your pipeline, and you sort of hit on this trajectory of 6 to 10 a year, averaging about 8% and you sort of got that pipeline baked for the next 3 years, it looks like. Is there any pressure that people want to move faster than you're able to accommodate them in terms of potential partners out there? What's the competitive landscape to other people? Are they on basically the same time frame that are competing against you for those joint ventures? Any thoughts on that?

Yes. So I'll go back to a couple of things that Mark mentioned in his comments. One is we've got 14 projects that were announced and underway as at the end of Q3. Since then, we've already added another project with the awarding of another COM in the state of Tennessee. That's within a total active pipeline, meaning more than just exploratory conversations of 40 projects. And we feel good about being able to operate least the midpoint of that 6% to 10% target range. What could change that and move us up in the near term? We've talked before about the potential for CON restrictions to be a key states, namely North Carolina.

In terms of pressure from any other parties, I think you specifically cited potential joint venture partners to move more quickly. It tends to be the opposite, which is we can move much more quickly than our partners just because of the experience we have both in operating as a joint venture and the way that we have streamlined our design and construction process. So that is not an issue. With regard to competition, we've got a number of parties out there, namely Select Medical and HCA, who have publicly stated plans to increase the number of beds they're adding. They have different models than we do, and the market remains incredibly underserved. So we don't see that in any way crowding this out.

And as we've mentioned previously, Part of the reason that in spite of the very attractive market opportunity that's out there, you don't see more competition coming in is the barriers to entry in this business are really high. It is capital intensive. It is clinically complex. It is heavily regulated. All of those things make it very difficult for somebody who's not really well-capitalized and experienced to step into the breach.

A.J., the fact that we've done a lot of new development over the last x number of years, and we have the resources internally. Well, that's the real estate or our design and construction team and we can move with a high priority on first mover advantages, speed to market. I think we've shown that over and over again. Relative to your question around joint venture partners, as Doug noted, does vary from partner to partner. But if you look at a partner like what we have with Dimont in the State of Georgia, I mean, we collectively have both systems have really prioritized post-acute and rehabilitation in particular.

We now have 7 hospitals with that partnership because we moved at a brisk pace to make sure we were taking advantage of the opportunities in the various marketplaces they serve. So we think we're very well aligned with our partnership opportunities out there.

On your -- at one point, when we had met during the summer, you had said that you may be looking at expanding your prefab capability that there were some geographic constraints on it. Where does that stand at this point? And what might that do for you if that -- if you are able to open that up to a broader geography?

Yes. So what A.J. is referencing specifically is right now, there are some geographical limitations on where we could utilize specifically full prefabrication of hospitals, and that relates to transportation loans right now the way that we are using food construction for larger projects is we're essentially building modules. And those modules are loaded on the [indiscernible] trucks and transported to the site. And we are using predominantly trucks because the modules are too wide to effectively utilize rail.

So we are looking at 2 things. One is, can we change the configuration of the module so they can fit on rail which is a more cost-effective mode of transportation and could increase the geography to which the replicable or do we need a second manufacturing site that would be close to those geographies, or there's a version of modular construction on prefab that is called panelized construction. So if you think about taking a cardboard box and folding it from where it's open, that changes the overall dimensions of that particular module, and it can potentially fit on rail. So there are a number of things underway that I would state are very much still in the evaluation stage.

I will say that the other thing that is changing is a dynamic, and this is more empirical or not anecdotal than it is completely empirical right now, is that we are seeing that increasingly for our type of construction, whereas we used to compare conventional to full prefab. There's really not much happening. There's no pure conventional anymore. Almost all conventional construction, certainly all that we're using at least uses componentized prefab construction, meaning the incorporation of prefab bathrooms or headwalls or both. So it's a bit of a hybrid model. And if that has become the norm, the cost differential has stayed relatively constant between the 2, which has been significant. But the construction time line, which had a significant advantage for full prefab is decreasing. And so the that's a dynamic we need to keep an eye on. favorable dynamic.

And we'll move to our next question, which comes from Brian Tanquilut with Jefferies.

Maybe, Doug, as I think about the salaries line, as a percentage of revenue, it looked pretty good this quarter. But tying it back to your comments on just some of the ramp. Just curious, how are you thinking about labor and then maybe EPOB, where that eventually optimizes once all the ramping of capacity happens?

Yes. So I'm going to ask first for Pat to comment on EPOB and then I'll talk maybe a little bit about just other trends within.

Thanks Doug. Brian, this is Pat. One of the comments on the quarter for EPOB, Part of it is related to the timing components of de novo activity. But the other piece ties back to the hiring that we've done in Q3. We had $162 million net RMs hired for the quarter. Outside of our ends, we had a really robust hiring quarter. And those are people that are currently in some form of orientation or presetting right now that is pushing EPOB up that will normalize in the future. And if retention stays where it is to the benefit of other buckets like premium pay.

Brian, as we've stated in the past, that $3.4 million number on EPOB, that's where we feel the right number. I mean if you -- there might be times when you have a volume increase, you might see the dropped down a little bit, but on an ongoing basis, we feel that's the right number to make sure that we are efficient. But yes, we are also responding to the staff and the ability to retain staff it's critically important. So that $3.4 million would be a number that we really try to work towards.

So in terms of labor trends and combining what Pat and Mark have offered on EPOB, we think that we've made great progress and more of the progress that we anticipated on reducing premium labor spend in 2025. And if we can hold that relatively steady on a nominal dollar basis moving into 2026, that would certainly be a positive even as volume grows, I think our assumption is that our core underlying SWB per FTE inflation is probably going to stabilize at least for the near term, somewhere around 3% to 3.25%. The benefits piece, which is about 10.5% of the total SWB line, predominantly because of group medical, which is 75% benefits, excluding payroll taxes is likely to have an inflation factor in 2026 in the high single digits.

Just to clarify that 162 net RMs hired was the same-store number as well.

Got it. And then maybe, Doug, just quickly on the ERP rollout. Just curious what you can share with us in terms of, number one, what you're seeing so far? And then number two, what kinds of efficiency gains should we expect on the P&L at some point and kind of like the time line in terms of achieving those targets?

So the good news is we threw the switch on October 3 and the lights didn't go out, right? But -- and this was a very comprehensive ERP conversion across all finance and accounting functions across supply chain, which is a big deal for us and across all HR functions. The overwhelming majority of modules within that work from the get-go smoothly and efficiently and as we had hoped. But as is the case with every one of these items, there are bugs that need to be fixed and refinements that need to be made. That's why you see the $3 million in incremental post implementation expenses that we've added to this year.

We, in anticipating that this would be the case asked our implementation consult, we did this back in the summer to continue to devote those same resources to us for a period of time post implementation to help us work through these things in the real term. And those -- we're nothing items off the list on a daily basis. As we stated from the get-go, unlike a lot of other ERPs that were driven because of inefficiencies or inconsistencies in the legacy system. That was not necessarily the case here. Again, many times the driver for an ERP conversion is a company that has grown through acquisitions and has not converted every one of their various business units over to a single unit. That wasn't applicable for us.

We were on a single operating system. Everybody was basically on PeopleSoft products, and we were operating efficiently. I say that because ultimately, we do believe that there will be enhanced efficiencies and workflows from the full implementation of Fusion. But it's not something that was done for a specific ROI. And therefore, we're not looking to quantify a specific impact on our P&L.

Brian, this is Mark. I mentioned it in my script, but I do want to give a call out our teams here in Birmingham as well as our teams down in the hospitals as part of this conversion. They've worked day and night plus the weekends to make sure that this execution was near flawless and not just any organization can do this in the manner they did. I'm really proud of what they've done.

And we can move to our next questioner, Jared Haase with William Blair.

All the details thus far. I'll ask another one on sort of the backdrop or outlook for Medicare Advantage. And I'm curious, we've heard a lot about the plans sort of talking about them moving members from more flexible PPO products towards these HMOs. And I'm curious when you see kind of that shift in mix towards more of a managed care product like that. Does that have any impact on Encompass either from kind of a preauthorization perspective or maybe your ability to be a part of those, call it, narrow or tighter networks?

Jared, this is Pat. We have not seen much change in the MA side on the pre-op perspective and don't anticipate changes as we head into 2026. As Doug said, we have a lot of success on the prior of perspective. And as we navigate the layers of appeal, but it's still a grind every day dealing with those plans, but our teams are persistent and advocating for the patients in those markets that deserve our level of care.

Okay. Great. That's helpful. And then maybe just a follow-up on occupancy. When we think about the influence of your, I guess, 2025 capacity investments maturing, and then the additions that you have planned for next year, any nuances we should keep in mind from, I guess, a cadence perspective next year on the occupancy rate? Or should we sort of pencil that in staying relatively constant in the mid-70s range?

Yes. I think just maybe thinking initially about the Q4, Q1 dynamic. So remember, we had our highest ever occupancy level in Q1 of last year. And then as you look maybe to Q3 and Q4 of this year, we're adding a lot of our bulk capacity, meaning the de novos coming online late in the year. So we had an opening that occurred very late in September. And then we've got one each in October, November and December. So those are all still going to be very much in ramp mode as we move into the first quarter of next year.

So it wouldn't -- and I haven't put a pen to the paper yet. But I wouldn't surprise me if you saw some downward pressure in terms of the year-over-year comparison in occupancy rates in the first quarter of next year. Of course, all of that can change depending on the intensity of a flu season. I guess you got to throw COVID into the mix and all that other kind of stuff. And anyway, there will be period-to-period fluctuations as a result of the timing of capacity additions, but our overall occupancy rates remain on an upward trajectory.

Jared, in our supplemental slides on Slide 17, we have the development activity and when the hospitals will come on in 2026. So just draw your attention to that.

[Operator Instructions]

We will go next to Raj Kumar.

Maybe just kind of, on the kind of satellite consolidation. And maybe I missed the comment, but what's kind of embedded from a year-on-year standpoint in 4Q? In terms of the growth headwind? And then maybe just one on the kind of potential impacts from the negative headlines that came out earlier in the 3Q. Do you kind of see any changes to referral patterns as a result of that? Or was it kind of business as usual?

I'll take your -- I'll answer the last question first. This is Mark. We've not seen any impact among our referral patterns. As we stated on last quarter's call, we were very proactive in terms of communicating with our joint venture partners, with our referral sources and they're all aware of our quality, and we share that openly. So we've not seen any negative fallout from that article.

With regard to the Q4 potential headwind from the 2 satellite closures, again, we estimated that at 35 basis points even before we add the beds in Cincinnati, we should start seeing a resumption of -- or consolidation of some of that volume into the remaining hospitals in that market. So I would say it will probably be a little bit less, maybe 25 to 30 basis points in Q4.

Got it. And then as my follow-up, just kind of thinking about the preopening and start-up costs, $11 million year-to-date, I think roughly $7 million from the low end of what's embedded for this year. So maybe kind of helping us think about from the 3 hospitals that are opening in 4Q, how much of that was realized in the third quarter? And it seems like you have like a back half weighted pipeline next year as well from an opening standpoint. So maybe what's kind of being assumed in 4Q spend related to the first half hospitals in '26?

Yes. So it's going to be on kind of a rolling basis. So the estimate for the year is 18% to 22%. You're at 11% through 3 quarters probably pegging the midpoint of that range is not a bad place to be in terms of the Q4 estimate. Most of that is going to be related to the openings that occur in Q4, a portion is applicable to the early openings in 2026, probably a good proxy for where we might land with regard to number is something in the same range that we asked for the full year this year. And two, when you get to the latter stages of 2026, that is going to include some expenses related to '27 openings.

At this time, there are no additional questions. I'd like to turn the program over to Mark Miller for any closing remarks.

Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.