10-Q 1 ehc-20230930.htm 10-Q ehc-20230930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 ______________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-10315
______________________________ 
Encompass Health Corporation
(Exact name of Registrant as specified in its Charter)
Delaware63-0860407
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
9001 Liberty Parkway
Birmingham, Alabama 35242
(Address of Principal Executive Offices)
(205) 967-7116
(Registrant’s telephone number)
 Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareEHCNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-Accelerated filer
Smaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes  No 
 
The registrant had 100,240,796 shares of common stock outstanding, net of treasury shares, as of October 23, 2023.



TABLE OF CONTENTS
NOTE TO READERS
As used in this report, the terms “Encompass Health,” “we,” “us,” “our,” and the “Company” refer to Encompass Health Corporation and its consolidated subsidiaries, unless otherwise stated or indicated by context. This drafting style is suggested by the Securities and Exchange Commission and is not meant to imply that Encompass Health Corporation, the publicly traded parent company, owns or operates any specific asset, business, or property. The hospitals, operations, and businesses described in this filing are primarily owned and operated by subsidiaries of the parent company. In addition, we use the term “Encompass Health Corporation” to refer to Encompass Health Corporation alone wherever a distinction between Encompass Health Corporation and its subsidiaries is required or aids in the understanding of this filing.
i


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to, among other things, future events, changes to Medicare reimbursement and other healthcare laws and regulations from time to time, our business strategy, labor cost trends, our dividend and stock repurchase strategies, our financial plans, our growth plans, our future financial performance, our projected business results, or our projected capital expenditures. In some cases, the reader can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties, many of which are beyond our control. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, the factors described below could cause, and in the case of the COVID-19 pandemic has already caused, actual results to differ materially from those estimated by us.
Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as uncertainties and factors discussed elsewhere in this Form 10-Q, including in the “Executive Overview—Key Challenges” section of Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our other filings from time to time with the SEC, or in materials incorporated therein by reference.
The spin off of our home health and hospice business exposes us to a number of risks and uncertainties, including reduced business diversification; exposure to potential litigation; and inability to realize anticipated benefits from the separation, any of which could adversely affect our business, financial results or condition, or stock price.
As a result of the spin off, we are highly concentrated in our primary line of business, particularly with respect to Medicare regulations and reimbursement.
Reductions or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our inability to obtain and retain favorable arrangements with third-party payors, could decrease our revenues and adversely affect other operating results.
Restrictive interpretations of the regulations governing the claims that are reimbursable by Medicare could decrease our revenues and adversely affect other operating results.
Reimbursement claims are subject to various audits from time to time and such audits may lead to assertions that we have been overpaid or have submitted improper claims, and such assertions have in the past and may in the future require us to incur additional costs to respond to requests for records and defend the validity of payments and claims and may ultimately require us to refund any amounts determined to have been overpaid.
The use by governmental agencies and contractors of statistical sampling and extrapolation may substantially expand claims of overpayment or noncompliance.
Delays and other substantive and procedural deficiencies in the administrative appeals process associated with denied Medicare reimbursement claims, including from various Medicare audit programs, have in the past and could in the future delay or reduce our reimbursement for services previously provided, including through recoupment from other claims due to us from Medicare.
Efforts to reduce payments to healthcare providers undertaken by third-party payors, conveners, and referral sources could adversely affect our revenues or profitability.
Changes in our payor mix or the acuity of our patients could reduce our revenues or profitability.
Changes in the rules and regulations of the healthcare industry at either or both of the federal and state levels, including those contemplated now and in the future as part of national healthcare reform and deficit reduction (such as the Inpatient Rehabilitation Facility Review Choice Demonstration, the re-basing of payment systems, the introduction of site neutral payments or case-mix weightings across post-acute settings, and other payment system reforms) could decrease revenues and increase the costs of complying with the rules and regulations and have done so in the past from time to time.
ii


The ongoing evolution of the healthcare delivery system, including alternative payment models and value-based purchasing initiatives, could decrease our patient volumes and reimbursement rate or increase costs associated with our operations.
Compliance with the extensive and frequently changing laws and regulations applicable to healthcare providers, including those related to data privacy and security, anti-trust, and employment practices, requires substantial time, effort and expense, and if we fail to comply, we could incur penalties and significant costs of investigating and defending asserted claims, whether meritorious or not, or be required to make significant changes to our operations.
Our inability to maintain proper local, state and federal licensing, including compliance with the Medicare conditions of participation and provider enrollment requirements could decrease our revenues.
Incidents affecting the proper operation, availability, or security of our or our vendors’ or partners’ information systems, including the patient information stored there, could cause substantial losses and adversely affect our operations and governmental mandates to increase use of electronic records and interoperability exacerbate that risk.
Any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings, including disclosed and undisclosed qui tam suits, could be difficult to predict and could adversely affect our financial results or condition or our operations, and we could experience increased costs of defending and insuring against alleged professional liability and other claims.
Our inability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with our growth strategy, including realization of anticipated revenues, cost savings, productivity improvements arising from the related operations and avoidance of unanticipated difficulties, costs or liabilities that could arise from acquisitions or integrations could adversely affect our financial results or condition.
Our inability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and potential union activity could increase staffing costs and adversely affect other financial and operating results and has done so in the past.
Competitive pressures in the healthcare industry, including from other providers that may be participating in integrated delivery payment arrangements in which we do not participate, and our response to those pressures could adversely affect our revenues or other financial results.
New or changing Medicare quality reporting requirements could adversely affect our operating costs or Medicare reimbursement.
Our inability to provide a consistently high quality of care, including as represented in metrics published by Medicare, could decrease our revenues.
Our inability to maintain or develop relationships with patient referral sources or managed care payors could decrease our revenues.
A pandemic, epidemic, or other widespread outbreak of an infectious disease or other public health crisis could decrease our patient volumes, pricing, and revenues, lead to staffing and supply shortages and associated cost increases, otherwise interrupt operations, or lead to increased litigation risk and, in the case of the COVID-19 pandemic, has already done so in many instances.
Governmental actions in response to a public health crisis, such as limitations on elective procedures, vaccine mandates, shelter-in-place orders, new workplace regulations, facility closures and quarantines, could reduce volumes, lead to staffing shortages, increase staffing costs, and otherwise impair our ability to operate and provide care and, in the case of the COVID-19 pandemic, already have done so.
Our inability to maintain infectious disease prevention and control efforts that are required and effectively minimize the spread among patients and employees could decrease our patient volumes and revenues, lead to staffing shortages or otherwise interrupt operations, or lead to increased litigation risk.
Our debt and the associated restrictive covenants could have negative consequences for our business and limit our ability to execute aspects of our business plan successfully.
The price of our common stock could adversely affect our willingness and ability to repurchase shares.
iii


We may be unable or unwilling to continue to declare and pay dividends on our common stock.
General conditions in the economy and capital markets, including inflation, any disruption, instability, or uncertainty related to armed conflict or an act of terrorism, a governmental impasse over approval of the United States federal budget or an increase to the debt ceiling, an international trade war, or a sovereign debt crisis could adversely affect our financial results or condition, including access to the capital markets.
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.
iv


PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
(In Millions, Except Per Share Data)
Net operating revenues$1,206.9 $1,089.5 $3,554.4 $3,211.3 
Operating expenses:  
Salaries and benefits658.6 605.6 1,923.8 1,778.9 
Other operating expenses183.7 172.0 534.3 500.3 
Occupancy costs14.2 12.4 42.3 41.6 
Supplies53.9 51.1 159.7 148.2 
General and administrative expenses49.8 37.9 148.6 111.5 
Depreciation and amortization67.3 62.1 203.8 180.3 
Total operating expenses1,027.5 941.1 3,012.5 2,760.8 
Loss on early extinguishment of debt   1.4 
Interest expense and amortization of debt discounts and fees35.9 38.2 108.6 138.2 
Other (income) expense(0.5)3.6 (6.8)13.6 
Equity in net income of nonconsolidated affiliates(1.0)(0.7)(2.3)(2.6)
Income from continuing operations before income tax expense145.0 107.3 442.4 299.9 
Provision for income tax expense30.3 21.8 95.0 68.2 
Income from continuing operations114.7 85.5 347.4 231.7 
(Loss) income from discontinued operations, net of tax(1.3)(18.5)(3.5)16.7 
Net and comprehensive income113.4 67.0 343.9 248.4 
Less: Net income attributable to noncontrolling interests included in continuing operations(28.1)(21.6)(79.5)(65.5)
Less: Net income attributable to noncontrolling interests included in discontinued operations   (1.3)
Less: Net and comprehensive income attributable to noncontrolling interests(28.1)(21.6)(79.5)(66.8)
Net and comprehensive income attributable to Encompass Health$85.3 $45.4 $264.4 $181.6 
Weighted average common shares outstanding:  
Basic99.5 99.2 99.5 99.2 
Diluted101.4 100.5 101.1 100.3 
Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:
 
Continuing operations
$0.86 $0.64 $2.68 $1.67 
Discontinued operations
(0.01)(0.19)(0.04)0.15 
Net income
$0.85 $0.45 $2.64 $1.82 
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations
$0.85 $0.63 $2.65 $1.66 
Discontinued operations
(0.01)(0.18)(0.03)0.15 
Net income
$0.84 $0.45 $2.62 $1.81 
Amounts attributable to Encompass Health common shareholders:
  
Income from continuing operations$86.6 $63.9 $267.9 $166.2 
(Loss) income from discontinued operations, net of tax(1.3)(18.5)(3.5)15.4 
Net income attributable to Encompass Health$85.3 $45.4 $264.4 $181.6 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
1


Encompass Health Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 30,
2023
December 31,
2022
 (In Millions)
Assets  
Current assets: 
Cash and cash equivalents$99.7 $21.8 
Restricted cash
41.5 31.6 
Accounts receivable
535.9 536.8 
Other current assets136.6 127.0 
Total current assets813.7 717.2 
Property and equipment, net3,186.3 2,939.2 
Operating lease right-of-use assets196.8 212.5 
Goodwill1,281.3 1,263.2 
Intangible assets, net276.4 282.3 
Other long-term assets209.8 222.1 
Total assets(1)
$5,964.3 $5,636.5 
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt$23.9 $25.2 
Current operating lease liabilities24.9 25.6 
Accounts payable165.4 132.9 
Accrued expenses and other current liabilities425.0 392.2 
Total current liabilities639.2 575.9 
Long-term debt, net of current portion2,692.7 2,741.8 
Long-term operating lease liabilities183.9 199.7 
Deferred income tax liabilities80.4 83.0 
Other long-term liabilities178.9 174.2 
 3,775.1 3,774.6 
Commitments and contingencies
Redeemable noncontrolling interests41.5 35.6 
Shareholders’ equity:  
Encompass Health shareholders’ equity1,560.4 1,310.3 
Noncontrolling interests587.3 516.0 
Total shareholders’ equity2,147.7 1,826.3 
Total liabilities(1) and shareholders’ equity
$5,964.3 $5,636.5 
(1)Our consolidated assets as of September 30, 2023 and December 31, 2022 include total assets of variable interest entities of $204.2 million and $207.8 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of September 30, 2023 and December 31, 2022 include total liabilities of the variable interest entities of $41.7 million and $47.9 million, respectively. See Note 4, Variable Interest Entities.
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
2



Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)


 Three Months Ended September 30, 2023
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common
Shares Outstanding
Common StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling
Interests
Total
Balance at beginning of period100.2 $1.2 $1,755.0 $264.6 $(545.5)$542.4 $2,017.7 
Net income— — — 85.3 — 26.2 111.5 
Receipt of treasury stock— — — — (0.4)— (0.4)
Dividends declared ($0.15 per share)
— — 0.4 (15.6)— — (15.2)
Stock-based compensation— — 13.7 — — — 13.7 
Distributions declared— — — — — (28.8)(28.8)
Capital contributions from consolidated affiliates— — — — — 49.0 49.0 
Other— — 2.5 — (0.8)(1.5)0.2 
Balance at end of period100.2 $1.2 $1,771.6 $334.3 $(546.7)$587.3 $2,147.7 

 Three Months Ended September 30, 2022
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common Shares OutstandingCommon StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling InterestsTotal
Balance at beginning of period99.8 $1.1 $2,310.8 $221.9 $(530.8)$498.3 $2,501.3 
Net income— — — 45.4 — 20.0 65.4 
Dividends declared ($0.15 per share)
— — (11.2)(3.9)— — (15.1)
Stock-based compensation— — 7.3 — — — 7.3 
Distributions declared— — — — — (27.4)(27.4)
Capital contributions from consolidated affiliates— — — — — 30.4 30.4 
Spin off of Enhabit, Inc.— — (602.1)(221.9)— (28.4)(852.4)
Other— — 5.7 0.1 (5.4)0.1 0.5 
Balance at end of period99.8 $1.1 $1,710.5 $41.6 $(536.2)$493.0 $1,710.0 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
3



Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity (Continued)
(Unaudited)

 Nine Months Ended September 30, 2023
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common
Shares Outstanding
Common StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling
Interests
Total
Balance at beginning of period99.8 $1.1 $1,730.2 $115.7 $(536.7)$516.0 $1,826.3 
Net income— — — 264.4 — 73.3 337.7 
Receipt of treasury stock(0.1)— — — (8.1)— (8.1)
Dividends declared ($0.45 per share)
— — 0.4 (45.8)— — (45.4)
Stock-based compensation— — 37.2 — — — 37.2 
Distributions declared— — — — — (87.5)(87.5)
Capital contributions from consolidated affiliates— — — — — 87.0 87.0 
Other0.5 0.1 3.8 — (1.9)(1.5)0.5 
Balance at end of period100.2 $1.2 $1,771.6 $334.3 $(546.7)$587.3 $2,147.7 

 Nine Months Ended September 30, 2022
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common Shares OutstandingCommon StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling InterestsTotal
Balance at beginning of period99.5 $1.1 $2,289.6 $141.8 $(521.2)$445.7 $2,357.0 
Net income— — — 181.6 — 61.8 243.4 
Receipt of treasury stock(0.1)— — — (7.7)— (7.7)
Dividends declared ($0.71 per share)
— — (11.2)(60.0)— — (71.2)
Stock-based compensation— — 23.6 — — — 23.6 
Distributions declared— — — — — (72.8)(72.8)
Capital contributions from consolidated affiliates— — — — — 74.6 74.6 
Spin off of Enhabit, Inc.— — (602.1)(221.9)— (28.4)(852.4)
Other0.4 — 10.6 0.1 (7.3)12.1 15.5 
Balance at end of period99.8 $1.1 $1,710.5 $41.6 $(536.2)$493.0 $1,710.0 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
4



Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 Nine Months Ended September 30,
 20232022
 (In Millions)
Cash flows from operating activities:  
Net income$343.9 $248.4 
Loss (income) from discontinued operations, net of tax3.5 (16.7)
Adjustments to reconcile net income to net cash provided by operating activities—  
Depreciation and amortization203.8 180.3 
Loss on early extinguishment of debt 1.4 
Equity in net income of nonconsolidated affiliates(2.3)(2.6)
Distributions from nonconsolidated affiliates0.6 3.7 
Stock-based compensation37.2 21.1 
Deferred tax benefit(2.9)(7.7)
Realized loss on sale of investments0.9 16.5 
Other, net10.8 9.7 
Change in assets and liabilities, net of acquisitions— 
Accounts receivable20.7 22.4 
Other assets(4.1)5.0 
Accounts payable(0.2)(0.3)
Accrued payroll24.1 (9.3)
Accrued interest payable(19.1)(20.7)
Other liabilities37.5 26.4 
Net cash (used in) provided by operating activities of discontinued operations(4.6)56.0 
Total adjustments302.4 301.9 
Net cash provided by operating activities649.8 533.6 
Cash flows from investing activities:
Purchases of property and equipment(360.5)(374.9)
Purchase of restricted investments(21.1)(25.1)
Other, net(13.1)(17.0)
Net cash used in investing activities of discontinued operations (3.6)
Net cash used in investing activities(394.7)(420.6)
Cash flows from financing activities:
Principal borrowings on notes20.0  
Principal payments on debt, including pre-payments(6.3)(345.3)
Borrowings on revolving credit facility60.0 180.0 
Payments on revolving credit facility(115.0)(340.0)
Principal payments under finance lease obligations(35.9)(14.3)
Debt amendment costs(0.1)(21.6)
Taxes paid on behalf of employees for shares withheld(8.1)(7.2)
Contributions from noncontrolling interests of consolidated affiliates54.7 55.1 
Dividends paid on common stock(45.5)(84.1)
Distributions paid to noncontrolling interests of consolidated affiliates(91.9)(68.2)
Other, net0.8 0.3 
Net cash provided by financing activities of discontinued operations 516.1 
Net cash used in financing activities(167.3)(129.2)
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
5



Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)

Nine Months Ended September 30,
20232022
(In Millions)
Increase (decrease) in cash, cash equivalents, and restricted cash$87.8 $(16.2)
Cash, cash equivalents, and restricted cash at beginning of period53.4 120.3 
Cash, cash equivalents, and restricted cash at end of period$141.2 $104.1 
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period
$21.8 $49.4 
Restricted cash at beginning of period
31.6 62.5 
Restricted cash included in other long-term assets at beginning of period
 0.4 
Cash, cash equivalents, and restricted cash in discontinued operations at beginning of period 8.0 
Cash, cash equivalents, and restricted cash at beginning of period
$53.4 $120.3 
Cash and cash equivalents at end of period
$99.7 $59.8 
Restricted cash at end of period
41.5 44.3 
Cash, cash equivalents, and restricted cash at end of period
$141.2 $104.1 
Supplemental schedule of noncash operating, investing, and financing activities:
Property and equipment additions through finance leases$21.4 $ 
Accrued purchases of property and equipment32.2 (1.2)
Operating lease additions and adjustments7.9 23.1 
Joint venture contributions32.2  
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
6


Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements

1.Basis of Presentation
Encompass Health Corporation (the “Company” or “Encompass Health”), incorporated in Delaware in 1984, including its subsidiaries, is a provider of inpatient rehabilitation services. Our national network of inpatient rehabilitation hospitals stretches across 37 states and Puerto Rico, with concentrations of hospitals in the eastern half of the United States and Texas. As of September 30, 2023, we operate 159 inpatient rehabilitation hospitals. We are the sole owner of 96 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 63 jointly owned hospitals.
The accompanying unaudited condensed consolidated financial statements of Encompass Health Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes contained in Encompass Health’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 27, 2023 (the “2022 Form 10‑K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in these interim statements, as allowed by such SEC rules and regulations. The condensed consolidated balance sheet as of December 31, 2022 has been derived from audited financial statements, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading.
The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. In our opinion, the accompanying condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state the financial position, results of operations, and cash flows for each interim period presented.
Net Operating Revenues
Our Net operating revenues disaggregated by payor source are as follows (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Medicare$786.5 $711.2 $2,306.1 $2,091.7 
Medicare Advantage
191.7 163.6 576.6 480.3 
Managed care
135.4 126.1 396.4 381.0 
Medicaid49.2 47.7 145.6 137.0 
Other third-party payors10.6 9.5 32.2 29.0 
Workers’ compensation6.6 6.9 19.6 18.9 
Patients3.8 3.5 10.4 12.8 
Other income23.1 21.0 67.5 60.6 
Total$1,206.9 $1,089.5 $3,554.4 $3,211.3 
See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2022 Form 10-K for our policy related to Net operating revenues.
Noncontrolling Interests in Consolidated Affiliates
On July 1, 2023, we entered into a joint venture agreement with the University of Maryland Rehabilitation Institute of Southern Maryland, LLC (“UM Rehab”) to operate our previously wholly owned 60-bed hospital in Bowie, Maryland. As a condition of the joint venture agreement, UM Rehab paid $26.3 million on June 30, 2023 for a 50% ownership interest in the hospital which became effective on July 1, 2023. This payment is included in Contributions from noncontrolling interests of consolidated affiliates on the condensed consolidated statement of cash flows for the nine months ended September 30, 2023.
Recently Adopted Accounting Pronouncements
We do not believe any recently issued, but not yet effective, accounting standards will have a material effect on our condensed consolidated financial position, results of operations, or cash flows.

7

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
2.Spin Off of Home Health and Hospice Business
On July 1, 2022, we completed the previously announced separation of our home health and hospice business through the distribution (the “Spin Off”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc. (“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record Date”). The Spin Off was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The Spin Off was structured as a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result of the Spin Off, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on the New York Stock Exchange.
In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as discontinued operations and, as such, have been excluded from continuing operations for the three and nine months ended September 30, 2022. Our presentation of discontinued operations excludes any allocation of general corporate and overhead costs as well as interest expense. Prior to July 1, 2022, we operated under two reporting segments. We now operate under a single reporting segment. In anticipation of the Spin Off, Enhabit transferred the “Encompass” trade name (net book value of $104.2 million) to us during the second quarter of 2022.
In connection with the Spin Off, on June 30, 2022, we entered into several agreements with Enhabit that govern the relationship of the parties following the Spin Off, including a Separation and Distribution Agreement, a Transition Services Agreement, a Tax Matters Agreement and an Employee Matters Agreement.
We will provide transition services to Enhabit predominately consisting of certain finance, information technology, human resources, employee benefits and other administrative services for a period of up to two years after the Spin Off. For the three and nine months ended September 30, 2023, income related to these transition services was $0.7 million and $2.6 million, respectively. For the three and nine months ended September 30, 2022, income related to these transition services was $1.1 million. These amounts were reflected as reductions to General and administrative expenses in our condensed consolidated statements of comprehensive income.
The following table presents the results of operations of Enhabit as discontinued operations (in millions):
Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
Net operating revenue$ $542.3 
Operating expenses:
Salaries and benefits 376.4 
Other operating expenses 47.6 
Occupancy costs 11.0 
Supplies 11.7 
General and administrative expenses19.8 54.8 
Depreciation and amortization 16.7 
Total operating expenses19.8 518.2 
Interest expense and amortization of debt discounts and fees 0.1 
(Loss) income from discontinued operations before income taxes(19.8)24.0 
Provision for income tax (benefit) expense(1.3)7.3 
(Loss) income from discontinued operations, net of tax(18.5)16.7 
Less: Net income attributable to noncontrolling interests included in discontinued operations (1.3)
Net (loss) income attributable to Encompass Health included in discontinued operations$(18.5)$15.4 
Transaction costs of $19.8 million and $52.3 million incurred during the three and nine months ended September 30, 2022, respectively, are included in general and administrative expenses in the table above and in (Loss) income from discontinued operations, net of tax, in the condensed consolidated statements of comprehensive income. These charges primarily relate to third-party advisory, consulting, legal and professional services, that are associated with the Spin Off.

8

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
See Note 2, Spin Off of Home Health and Hospice Business, to the consolidated financial statements accompanying the 2022 Form 10‑K for additional information.
3.Business Combinations
During the nine months ended September 30, 2023, we completed the following acquisitions, none of which were individually material to our financial position, results of operations, or cash flows. Each acquisition was made to enhance our position and ability to provide inpatient rehabilitation services to patients in the applicable geographic areas.
In March 2023, we acquired 50% of the operations of a 24-bed inpatient rehabilitation unit in Eau Claire, Wisconsin when Hospital Sisters Health System contributed those operations to our existing joint venture.
In March 2023, we acquired 50% of the operations of a 48-bed inpatient rehabilitation unit in Knoxville, Tennessee when Covenant Health contributed those operations to our existing joint venture.
In September 2023, we acquired 50% of the operations of a 29-bed inpatient rehabilitation unit in Columbus, Georgia when Piedmont Healthcare, Inc. contributed those operations to our existing joint venture.
We accounted for these transactions under the acquisition method of accounting and reported the results of operations of the acquired hospitals from the respective dates of acquisition. Assets acquired were recorded at their estimated fair values as of the acquisition date. Estimated fair values were based on various valuation methodologies including: an income approach using discounted cash flow techniques for the noncompete intangible assets; an income approach utilizing the relief from royalty method for the trade name intangible assets; and an income approach utilizing the excess earnings method for the certificates of need intangible assets. The aforementioned income methods utilize management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital. The excess of the fair value of the consideration conveyed over the fair value of the assets acquired was recorded as goodwill. The goodwill reflects our expectations of our ability to gain access to and penetrate the acquired hospitals’ historical patient base and the benefits of being able to leverage operational efficiencies with favorable growth opportunities based on positive demographic trends in these markets. The goodwill recorded as a result of these transactions that is deductible for federal income tax purposes is $7.4 million.
The fair values recorded were based upon a preliminary valuation. Estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary valuation that are not yet finalized relate to the fair value of amounts for intangible assets and the final amount of residual goodwill. We expect to continue to obtain information to assist us in determining the fair value of the net assets acquired at the acquisition date during the measurement period.
The fair value of the assets acquired at the acquisition dates were as follows (in millions):
Property and equipment, net$0.1 
Identifiable intangible assets: 
Noncompete agreements (useful lives of 3 years)
0.5 
Trade names (useful lives of 20 years)
1.8 
Certificates of need (useful lives of 20 years)
10.6 
Goodwill18.1 
Total assets acquired$31.1 
Information regarding the net cash paid for the acquisitions during each period presented is as follows (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Fair value of assets acquired
$3.6 $0.3 $13.0 $0.3 
Goodwill10.6 10.4 18.1 10.4 
Fair value of noncontrolling interest owned by joint venture partner
(14.2)(10.7)(31.1)(10.7)
Net cash paid for acquisitions$ $ $ $ 

9

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Pro Forma Results of Operations
The following table summarizes the results of operations of the above mentioned acquisitions from the dates of acquisitions included in our consolidated results of operations and the unaudited pro forma results of operations of the combined entity had the dates of the acquisitions been January 1, 2022 (in millions):
Net Operating RevenuesNet Income Attributable to Encompass Health
Acquired entities only: Actual from acquisition date to September 30, 2023$ $ 
Combined entity: Supplemental pro forma from 07/01/23-09/30/231,209.0 85.7 
Combined entity: Supplemental pro forma from 07/01/22-09/30/221,097.2 46.3 
Combined entity: Supplemental pro forma from 01/01/23-09/30/233,566.0 266.3 
Combined entity: Supplemental pro forma from 01/01/22-09/30/223,234.4 184.3 
The information presented above is for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisitions had occurred as of the beginning of our 2022 reporting period. See Note 3, Business Combinations, to the consolidated financial statements accompanying the 2022 Form 10‑K for information regarding acquisitions completed in 2022.

10

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
4.Variable Interest Entities
As of September 30, 2023 and December 31, 2022, we consolidated eight limited partnership-like entities that are variable interest entities (“VIEs”) and of which we are the primary beneficiary. Our ownership percentages in these entities range from 50.0% to 75.0% as of September 30, 2023. Through partnership and management agreements with or governing each of these entities, we manage all of these entities and handle all day-to-day operating decisions. Accordingly, we have the decision making power over the activities that most significantly impact the economic performance of our VIEs and an obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. These decisions and significant activities include, but are not limited to, marketing efforts, oversight of patient admissions, medical training, nurse and therapist scheduling, provision of healthcare services, billing, collections, and creation and maintenance of medical records. The terms of the agreements governing each of our VIEs prohibit us from using the assets of each VIE to satisfy the obligations of other entities.
The carrying amounts and classifications of the consolidated VIEs’ assets and liabilities, which are included in our condensed consolidated balance sheets, are as follows (in millions):
September 30, 2023December 31, 2022
Assets 
Current assets: 
Cash and cash equivalents$0.8 $0.2 
Accounts receivable
32.6 34.0 
Other current assets7.5 6.7 
Total current assets40.9 40.9 
Property and equipment, net126.3 129.0 
Operating lease right-of-use assets1.3 1.7 
Goodwill15.9 15.9 
Intangible assets, net1.2 1.5 
Other long-term assets18.6 18.8 
Total assets$204.2 $207.8 
Liabilities
Current liabilities:
Current portion of long-term debt$0.9 $0.8 
Current operating lease liabilities 0.4 
Accounts payable7.5 7.0 
Accrued expenses and other current liabilities18.2 23.9 
Total current liabilities26.6 32.1 
Long-term debt, net of current portion13.8 14.5 
Long-term operating lease liabilities1.3 1.3 
Total liabilities$41.7 $47.9 

11

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
5.Long-term Debt
Our long-term debt outstanding consists of the following (in millions):
September 30, 2023December 31, 2022
Credit Agreement—  
Advances under revolving credit facility$ $55.0 
Bonds payable—
5.75% Senior Notes due 2025
348.3 347.7 
4.50% Senior Notes due 2028
784.2 781.8 
4.75% Senior Notes due 2030
780.9 779.0 
4.625% Senior Notes due 2031
391.3 390.6 
Other notes payable66.6 53.1 
Finance lease obligations345.3 359.8 
2,716.6 2,767.0 
Less: Current portion(23.9)(25.2)
Long-term debt, net of current portion$2,692.7 $2,741.8 
The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter (in millions):
Face AmountNet Amount
October 1 through December 31, 2023$5.5 $5.5 
202440.4 40.4 
2025382.3 380.6 
202629.2 29.2 
202743.2 43.2 
2028831.7 815.9 
Thereafter1,429.8 1,401.8 
Total$2,762.1 $2,716.6 
In September 2023, we purchased our Treasure Coast hospital real estate in Vero Beach, Florida from Ocean Health Associates, LTD. (“Ocean Health”) for $21.4 million. Prior to the purchase, we leased the real estate from Ocean Health. As a result of our determination in the third quarter of 2023, the lease classification was changed from an operating lease to a financing lease. The $21.4 million payment is included in Principal payments under finance lease obligations on the condensed consolidated statement of cash flows for the nine months ended September 30, 2023.
On December 9, 2021, we announced the commencement of a consent solicitation of holders of our 5.75% Senior Notes due 2025, 4.50% Senior Notes due 2028 (the “2028 Notes”), 4.75% Senior Notes due 2030 (the “2030 Notes”), and 4.625% Senior Notes due 2031 (the “2031 Notes” and collectively the “Senior Notes”) for the adoption of certain amendments to an indenture (the “Base Indenture”) dated as of December 1, 2009, as supplemented by each Senior Notes’ respective supplemental indenture (together with the Base Indenture, the “Indenture”), which provided us with greater flexibility in effecting the Spin Off discussed in Note 2, Spin Off of Home Health and Hospice Business. Each Indenture contains restrictive covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to make certain asset dispositions, investments, and distributions to holders of our capital stock. The amendments to the Indentures permitted us, subject to the leverage ratio condition set forth below, to distribute to our equity holders in one or more transactions (a “Distribution”) some or all of the common stock of a subsidiary that holds substantially all of the assets of our home health and hospice business. We were permitted to make any such distribution so long as the Leverage Ratio (as defined in each Indenture) was no more than 3.5 to 1.0 on a pro forma basis after giving effect thereto. The amendments also reduced the capacity under our restricted payments builder basket under each existing Indenture for the 2028 Notes, 2030 Notes, and 2031 Notes by $200 million and amended the definition of “Consolidated Net Income” to allow us to exclude from Consolidated Net Income (a component of the Leverage Ratio) any fees, expenses or charges related to any Distribution and the solicitation of consents

12

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
from the holders of the Senior Notes. In December 2021 and January 2022, we received the requisite consents for the adoption of these amendments. Under the terms of the amendments, we agreed to pay the holders of the Senior Notes a total of $40.5 million, excluding fees. We paid $20.0 million and $20.5 million in January and June 2022, respectively.
In March 2022, we redeemed the remaining $100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the “2023 Notes”) using capacity under our revolving credit facility. Pursuant to the terms of the 2023 Notes, this optional redemption was made at a price of par. As a result of this redemption, we recorded a $0.3 million Loss on early extinguishment of debt during the three months ended March 31, 2022.
In June 2022, Enhabit distributed $566.6 million to Encompass Health who used it to fully repay both the $250 million outstanding balance of the Encompass Health revolving credit facility and approximately $236 million of the Encompass Health term loan. As a result of this repayment, we recorded a $1.1 million Loss on early extinguishment of debt during the three months ended June 30, 2022.
6.Redeemable Noncontrolling Interests
The following is a summary of the activity related to our Redeemable noncontrolling interests (in millions):
Nine Months Ended September 30,
20232022
Balance at beginning of period$35.6 $42.2 
Net income attributable to noncontrolling interests6.2 5.0 
Distributions declared(0.3)(4.3)
Spin off of Enhabit, Inc. (5.1)
Balance at end of period$41.5 $37.8 
The following table reconciles the net income attributable to nonredeemable Noncontrolling interests, as recorded in the shareholders’ equity section of the condensed consolidated balance sheets, and the net income attributable to Redeemable noncontrolling interests, as recorded in the mezzanine section of the condensed consolidated balance sheets, to the Net and comprehensive income attributable to noncontrolling interests presented in the condensed consolidated statements of comprehensive income (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net income attributable to nonredeemable noncontrolling interests$26.2 $20.0 $73.3 $61.8 
Net income attributable to redeemable noncontrolling interests1.9 1.6 6.2 5.0 
Net income attributable to noncontrolling interests$28.1 $21.6 $79.5 $66.8 
See also Note 7, Fair Value Measurements.

13

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
7.Fair Value Measurements
Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):
  Fair Value Measurements at Reporting Date Using
As of September 30, 2023Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Valuation Technique (1)
Equity securities (2)
$122.0 $3.7 $118.3 $ M
Redeemable noncontrolling interests41.5   41.5 I
As of December 31, 2022
Equity securities (2)
$110.0 $3.7 $106.3 $ M
Redeemable noncontrolling interests35.6   35.6 I
(1) The three valuation techniques are: market approach (M), cost approach (C), and income approach (I).
(2) As of September 30, 2023, $37.2 million are included in Other current assets and $84.8 million are included in Other long-term assets in the condensed consolidated balance sheet. As of December 31, 2022, $30.9 million are included in Other current assets and $79.1 million are included in Other long-term assets in the condensed consolidated balance sheet.
There are assets and liabilities that are not required to be measured at fair value on a recurring basis. However, these assets may be recorded at fair value as a result of impairment charges or other adjustments made to the carrying value of the applicable assets. During the three and nine months ended September 30, 2023 and 2022, we did not record any material gains or losses related to these assets.
As discussed in Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the 2022 Form 10‑K, the carrying value equals fair value for our financial instruments that are not included in the table below and are classified as current in our condensed consolidated balance sheets. The carrying amounts and estimated fair values for all of our other financial instruments are presented in the following table (in millions):
 As of September 30, 2023As of December 31, 2022
 Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Long-term debt:    
Advances under revolving credit facility$ $ $55.0 $55.0 
5.75% Senior Notes due 2025
348.3 343.7 347.7 347.7 
4.50% Senior Notes due 2028
784.2 731.1 781.8 726.7 
4.75% Senior Notes due 2030
780.9 708.7 779.0 703.7 
4.625% Senior Notes due 2031
391.3 339.2 390.6 342.2 
Other notes payable66.6 66.6 53.1 53.1 
Financial commitments:
Letters of credit 33.7  32.7 
Fair values for our long-term debt and financial commitments are determined using inputs, including quoted prices in nonactive markets, that are observable either directly or indirectly, or Level 2 inputs within the fair value hierarchy. See Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the 2022 Form 10‑K.

14

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
8.Share-Based Payments
During the nine months ended September 30, 2023, we issued a total of 0.6 million restricted stock awards to members of our management team and our board of directors. Of the restricted stock awards issued to members of our management team, 0.3 million contain only a service condition, while the remainder contain a service and/or performance condition as well as a market condition for certain members of management. For the awards that include a performance and market condition, the number of shares that will ultimately be granted to employees may vary based on the Company’s performance during the applicable two year performance measurement period and the applicable three year market condition measurement period. Additionally, we granted 0.1 million stock options to members of our management team. The fair value of these awards and options was determined using the policies described in Note 1, Summary of Significant Accounting Policies, and Note 14, Share-Based Payments, to the consolidated financial statements accompanying the 2022 Form 10‑K.
9.Income Taxes
Our Provision for income tax expense of $30.3 million and $95.0 million for the three and nine months ended September 30, 2023, respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rate.
Our Provision for income tax expense of $21.8 million for the three months ended September 30, 2022 primarily resulted from the application of our estimated effective blended federal and state income tax rate as well as state rate and apportionment changes offset by the release of a portion of an uncertain tax position related to the Spin Off. Our Provision for income tax expense of $68.2 million for the nine months ended September 30, 2022 primarily resulted from the application of our estimated effective blended federal and state income tax rate as well as the establishment of an uncertain tax position related to the Spin Off.

15

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
10.Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Basic:
Numerator:  
Income from continuing operations$114.7 $85.5 $347.4 $231.7 
Less: Net income attributable to noncontrolling interests included in continuing operations
(28.1)(21.6)(79.5)(65.5)
Less: Income from continuing operations allocated to participating securities(0.6)(0.3)(1.8)(0.6)
Income from continuing operations attributable to Encompass Health common shareholders86.0 63.6 266.1 165.6 
(Loss) income from discontinued operations, net of tax(1.3)(18.5)(3.5)16.7 
Less: Net income attributable to noncontrolling interests included in discontinued operations   (1.3)
Less: Income from discontinued operations allocated to participating securities
   (0.1)
(Loss) income from discontinued operations attributable to Encompass Health common shareholders(1.3)(18.5)(3.5)15.3 
Net income attributable to Encompass Health common shareholders$84.7 $45.1 $262.6 $180.9 
Denominator:
Basic weighted average common shares outstanding
99.5 99.2 99.5 99.2 
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations
$0.86 $0.64 $2.68 $1.67 
Discontinued operations
(0.01)(0.19)(0.04)0.15 
Net income
$0.85 $0.45 $2.64 $1.82 
Diluted:
Numerator:
Income from continuing operations$114.7 $85.5 $347.4 $231.7 
Less: Net income attributable to noncontrolling interests included in continuing operations
(28.1)(21.6)(79.5)(65.5)
Income from continuing operations attributable to Encompass Health common shareholders
86.6 63.9 267.9 166.2 
(Loss) income from discontinued operations, net of tax(1.3)(18.5)(3.5)16.7 
Less: Net income attributable to noncontrolling interests included in discontinued operations   (1.3)
(Loss) income from discontinued operations attributable to Encompass Health common shareholders(1.3)(18.5)(3.5)15.4 
Net income attributable to Encompass Health common shareholders$85.3 $45.4 $264.4 $181.6 
Denominator:
Diluted weighted average common shares outstanding
101.4 100.5 101.1 100.3 
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations
$0.85 $0.63 $2.65 $1.66 
Discontinued operations
(0.01)(0.18)(0.03)0.15 
Net income
$0.84 $0.45 $2.62 $1.81 

16

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
The following table sets forth the reconciliation between basic weighted average common shares outstanding and diluted weighted average common shares outstanding (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Basic weighted average common shares outstanding99.5 99.2 99.5 99.2 
Restricted stock awards, dilutive stock options, and restricted stock units
1.9 1.3 1.6 1.1 
Diluted weighted average common shares outstanding101.4 100.5 101.1 100.3 
See Note 17, Earnings per Common Share, to the consolidated financial statements accompanying the 2022 Form 10‑K for additional information related to our common stock.
11.Contingencies and Other Commitments
We provide services in the highly regulated healthcare industry. Furthermore, operating inpatient rehabilitation hospitals requires significant staffing and involves intensive therapy for individuals suffering from significant physical or cognitive disabilities or injuries. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims, or legal and regulatory proceedings could materially and adversely affect our financial position, results of operations, and cash flows in a given period.
Other Matters—
The False Claims Act allows private citizens, called “relators,” to institute civil proceedings on behalf of the United States alleging violations of the False Claims Act. These lawsuits, also known as “whistleblower” or “qui tam” actions, can involve significant monetary damages, fines, attorneys’ fees and the award of bounties to the relators who successfully prosecute or bring these suits to the government. Qui tam cases are sealed at the time of filing, which means knowledge of the information contained in the complaint typically is limited to the relator, the federal government, and the presiding court. The defendant in a qui tam action may remain unaware of the existence of a sealed complaint or its specific claims for years. While the complaint is under seal, the government reviews the merits of the case and may conduct a broad investigation and seek discovery from the defendant and other parties before deciding whether to intervene in the case and take the lead on litigating the claims. The court lifts the seal when the government makes its decision on whether to intervene. If the government decides not to intervene, the relator may elect to continue to pursue the lawsuit individually on behalf of the government. It is possible that qui tam lawsuits have been filed against us, which suits remain under seal, or that we are unaware of such filings or precluded by existing law or court order from discussing or disclosing the filing of such suits. We may be subject to liability under one or more undisclosed qui tam cases brought pursuant to the False Claims Act.
It is our obligation as a participant in Medicare and other federal healthcare programs to routinely conduct audits and reviews of the accuracy of our billing systems and other regulatory compliance matters. As a result of these reviews, we have made, and will continue to make, disclosures to the United States Department of Health and Human Services Office of Inspector General and the Centers for Medicare & Medicaid Services relating to amounts we suspect represent over-payments from these programs, whether due to inaccurate billing or otherwise. Some of these disclosures have resulted in, and may in the future result in, Encompass Health refunding amounts to Medicare or other federal healthcare programs.

17


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to Encompass Health Corporation and its subsidiaries and should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report. In addition, the following MD&A should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2022, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 1, Business, and Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed on February 27, 2023 (collectively, the “2022 Form 10‑K”).
This MD&A is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. See “Cautionary Statement Regarding Forward-Looking Statements” on page ii of this report, which is incorporated herein by reference for a description of important factors that could cause actual results to differ from expected results. See also Item 1A, Risk Factors, of this report and to the 2022 Form 10‑K.
Executive Overview
Our Business
We are the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals. We provide specialized rehabilitative treatment on an inpatient basis. We operate hospitals in 37 states and Puerto Rico, with concentrations in the eastern half of the United States and Texas. As of September 30, 2023, we operate 159 inpatient rehabilitation hospitals. For additional information about our business, see Item 1, Business, and Item 1A, Risk Factors, of the 2022 Form 10‑K.
Spin Off of Home Health and Hospice Business
On July 1, 2022, we completed the previously announced separation of our home health and hospice business through the distribution (the “Spin Off”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc. (“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record Date”). The Spin Off was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The Spin Off was structured as a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result of the Spin Off, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on the New York Stock Exchange.
In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. Our presentation of discontinued operations excludes any allocation of general corporate and overhead costs as well as interest expense. Prior to July 1, 2022, we operated under two reporting segments. We now operate under a single reporting segment. For additional information see Note 2, Spin Off of Home Health and Hospice Business, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
In connection with the Spin Off, on June 30, 2022, we entered into several agreements with Enhabit that govern the relationship of the parties following the Spin Off, including a Separation and Distribution Agreement, a Transition Services Agreement, a Tax Matters Agreement and an Employee Matters Agreement. See also Note 2, Spin Off of Home Health and Hospice Business, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

18


2023 Overview
During the three and nine months ended September 30, 2023, Net operating rev