Q2 2025 Encompass Health Corp Earnings Call
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Good morning everyone and welcome to Encompass helps second quarter 2025 earnings conference call.
At this time, I would like to inform all participants that their lines will be in a listen-only mode.
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I will now turn the call over to Mark. Miller Encompass, Health's Chief investment.
Relations officer.
Thank you. All.
For joining Encompass, health.
Quarter 2022.
Before we begin if you do not already have a copy, the second quarter earnings release supplemental information and related Form 8K 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 actually 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 8K. The form 10K for the year. Ended December 31st 2024 the form 10. Q for the quarter ended, March 31st 2025, and the form 10q for the quarter ended, June 30th, 2025 when filed, we encourage you to read them.
Your caution not to place. Undue Reliance on the estimates projections, guidance. And other forward-looking information presented. Those 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 8K 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. Our discharge growth in the second quarter facilitated, an increase of 12% in revenue and 172.2% in adjusted Ava.
Total discharges for Q2 increased 7.2% including 4.7% in same store.
Our discharge growth was again broad-based across geographies. Payers and patient type.
Our Focus remains on successfully treating patients with complex medical conditions.
Neurological conditions and stroke, for which we have extensive, clinical expertise, grew 12% and 6.7% respectively in the quarter.
Our dedicated and highly competent clinical teams continue to deliver outstanding, patient, outcomes.
Our Q2 discharge community rate was 84.8%.
Our discharge to acute rate was 8.5% and our discharge to sniff rate was 5.8%.
Our performance on each of these quality metrics is favorable compared to the industry average.
In Q2, we opened a new 60-bed hospital in Fort Myers, Florida.
We also added 26 beds to an existing Hospital.
Florida and added 20 beds to an existing Hospital.
Over the balance of the year. We plan to open 5 additional hospitals.
For denovos with a total of 190 beds and a 50 bed, freestanding, satellite Hospital.
And add another 30 to 50 beds to existing hospitals.
Due in large part to our Q2 results we are again, increasing our 2025 guidance.
Demand for inpatient rehabilitation services remains considerably underserved, and continues to grow as the US 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 kegger of approximately 3%.
The average age of our Medicare beneficiary. Patient is 77 years old.
And the age 75 plus population is growing at approximately 4%.
Yet the supply of licensed Earth beds in the US has increased only nominally.
As a result, the demand for treatment of complex medical conditions, such as stroke. Necessitating Earth care intensity is significantly underserved
We treat more patients with Earth, appropriate conditions than any other provider.
This allows us to develop and refine best-in-class clinical protocols, which are then extrapolated across our hospitals via our continuous best practice initiatives.
The identification development and implementation of these clinical protocols is enhanced by our state-of-the-art information systems. Including our Earth specific, electronic medical record.
in addition to our strong performance on discharge Community rate, we outperform industry averages on many quality, patient safety and patient satisfaction measures including
Patients Mobility at discharge.
Their ability to care for themselves at discharge.
Medication management.
Pressure ulcers or pressure injuries that are new or worsened and patient. Net promoter score.
Referring hospitals. Know they can reliably send complex patients to our hospitals for post-acute services. Our attractiveness as a partner to acute care hospitals, is further Evidence, by the fact that 67 of our 169 hospitals are operated as joint ventures
Finally, on August 1st 2025, CMS released the 2026 Earth final rule.
this included a net Market Basket update of 2.6% which we estimate would result in approximately 2.7% increase in net revenue for discharge, for our Medicare patients, beginning, October 1st, 2025 based on our current patient meds,
With that, I'll turn it over to Doug.
Thank you, Mark and good morning everyone.
Revenue for the second quarter, increased 12% to 1.46 billion and adjusted ibida increased 17.2% to 3018.6 million.
The revenue increase was comprised of 7.2%, discharged growth and a 4.2% increase in net revenue per discharge.
Q2 net revenue for discharge benefited from a decrease of 90 basis points in bad debt expense to 2%
recall that Q2 24 bad debt, expense included, reserves associated with significant increase in prepayment claims reviews under tpe
Q22, swb per FTE, increased 4%.
Salaries, and wages per FTE, excluding contract, labor, and sign on and ship bonuses. Increased 3.4%,
1%.
Contract labor, FTE represented, 1.3% of total FTE.
Increased by 18%.
Benefits. Expense growth continues to be driven by an increase in the frequency of high dollar medical claims.
We expect Group Medical expense growth to moderate in the second half of the year as we anniversary. The increase. We experienced in 2024,
net pre-opening in ramp up costs were 4 million dollars in Q2 taking the first half total to 6.1 million.
We expect these costs for the full year to be in a range of 18 to 22 million.
Q2 adjusted free cash. Flow increased 30.5% to approximately 186 million bringing year-to-date adjusted free. Cash flow to approximately 408 million a 31.7% increase from the first half of 2024,
On the basis of our strong Q2 performance and the tax benefit of additional bonus depreciation resulting from recent legislation. We now expect 2025 adjusted free cash flow of 705 to 795 million.
Our leverage and liquidity, remain very favorable.
Net. Leverage at quarter end was 2 times.
We ended the quarter with approximately 100 million in unrestricted, cash.
and in excess of 950 million available on our 1 billion dollar revolving credit facility,
During the second quarter, we repurchased approximately 232,000 shares of our common stock for 24.7 million.
We recently announced increased our quarterly dividend next payable in October to 19 cents per share.
That can be seen on page 13 of our supplemental. Materials, we have again, increased. Our anticipated growth capex estimate for 2025
You will recall that following q1, we raised our estimated 2025 spend by 15 to 20 million dollars to pull forward. A number of bed expansions in response to our increasing occupancy rates.
We are now further increasing our 2025, estimated spend on fed expansions by 25 million predominantly related to our recently announced Co approval for a free standing Hospital in Cleveland Tennessee, which we intend to operate as a satellite of an existing Hospital.
Production of this fully pre-fabricated hospital will commence shortly.
We also added 5 million dollars to our anticipated, 20125 to Novo spend, as we've elected to accelerate the land purchase of a future period denovo.
Moving on to guidance.
We are raising our 2025 guidance as follows.
Net, operating revenue of 5.88 to 5.98 billion.
Adjusted EBA 1.22 to 1.25 billion.
And adjusted earnings per share of 5.12 to 5.34.
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 questions.
Thank you at this time. If you would like to ask a question, please press star 1 now on your telephone keypad to withdraw yourself from the queue. You may press star 2. You will be limited to 1 question and 1 follow-up question.
Thank you.
We'll take our first question from Andrew mock of Barclays. Your line is open.
Morning.
Occupancy rates have increased more than 200 basis points. Uh, year-over-year through the first half of the year. I think some of that, uh, has benefited from a shift to single bedrooms, but if you just look purely at your single room single bedroom facilities, like where is mature occupancy and what levels are you comfortable operating at, thanks?
Uh, to your point occupancy in Q2 with 76.6%, that's up, 210 basis points. Over the second quarter of last year, uh, when we're looking at it all private room facility, when the occupancy starts to stabilize north of 80%, we start putting it on a list, we put it on a list to start thinking about a future period, bed expansion.
Now the capacity, in those facilities can run into the mid to high 90s because you're not facing issues of gender or germ compatibility.
Uh, it's lower than that, for the, the hospitals that are still semi-private rooms, we call, as we move into the back, half of the Year based on the opening schedule, that Mark, highlighted during his comments, you're going to see a little bit of a downward pressure on the occupancy because we've got that new capacity coming on board.
Great. And maybe just as a follow-up, there was some discussion of quality ratings in previous, CMS rate proposals, but I don't think any of that has moved forward yet. Just curious to get your thoughts on. Um, those initiatives, what you, what would you be willing to? Um, whether you support that and uh, where you can do stand if those quality initiatives? Ultimately came to play. Thanks.
Yeah. Andrews marks the quote initiative, any change in those did not get included uh in the final rule that did take out some of the ones around uh Co there were coid specific. Uh I mean, we worked with our trade associations. We are uh fine with looking at uh and including various quality uh, measurements. And think that we would do extremely well on that. We just want to make sure as an industry that we all agree on what those would be and how they would be measured.
Great. Thank you.
Thank you, we'll take our next question from Matthew Gilmour of KeyBank. Please go ahead.
Hey, thanks.
Hey, good morning. Um, I just wanted to do a quick follow-up. On Andrew's question around quality. Um, can you just remind us how you share, you know, your quality results with different stakeholders? Um, I guess I was thinking referral sources in, in JB partners and are there any particular areas of quality that are sort of most relevant or important uh, to the stakeholders?
Yeah, so uh, we work uh, closely uh, with joint commission. And a matter of fact, they do our Medicare validation surveys for all of our new uh startup denovos and relative to outcome metrics the ones that we really focus on and and share. Although our joint ventures
You know, we can go as deep as they they want to but the ones that really focus on it, just charge a community discharge to acute discharge and sniff and then we always include the patient satisfaction measurement with the net promoter score.
Uh, those have all been, uh, prioritized by Medicare in the past, I think they are a good representation of the functionality of the patients at the time of discharge. And as you heard me, uh, in my prepared remarks, those are the ones that we, uh, do extremely well in, uh, we do well in others. They are 16 measurements as part of the CMS care compare. Uh, but we're very proud of our of our outcomes and and have been so for many years and and continue to improve our outcomes. As a matter of fact, if you look at the discharge Community, uh, as well as to acute, those were all uh the highest we've had in in recent quarters. So we're very proud of our quality and make it a priority, you know, in addition to the acute care hospitals, obviously, another important constituency are the Physicians who refer patients to us and and and many of these oversee, the care of those patients. When they come into our facility
And they tend to be very data driven and so we share with them. A lot of the patient Improvement scores that Mark cited uh in his comments earlier today. So we're looking at the gains that they have in uh in functional capabilities and the ability to care for themselves and so forth. And again that's all uh those are very numerically driven scores that Physicians, uh like to see and that that they really study very hard
Great, I appreciate that. I'm not. I wanted to ask a follow-up on payer mix. Um it seems like the Medicare fee for service. Mix was pretty stable this quarter but maybe Managed Care, ticked up a little bit and I I noticed you increase the um I think your your Managed Care pricing. Assumption of I was curious if there was a story around that to tell or, or you know, what's driving that Trend or perhaps it's to swim with within kind of normal variation of what you'd expect.
A bit of a story there and that has to do specifically with the VA Community Care Network uh contract. And so, we have been seeing and that again is administered by uh
2 companies in the US, 1 is a a division of Optum and the other is Tri West more of our hospitals fall under the administration of Optum. When I say it's administered by those companies uh it is on behalf of the VA but unlike uh, Medicare Advantage the VA is still the party. That is making authorization decisions regarding patients that are referred to that Network.
So over the last 3 years, we've seen growth in that line of business that's been in the, uh, in the mid teens, uh, and it now comprises almost 18% of our overall managed care business, uh, and importantly, it pays at the Medicare CMG. So that has been a driver of the, the growth in the managed care and also the improved pricing
Great. Thank you.
Thank you. We'll take our next question from Pedo Chickering of Deutsche Bank. Your line is open.
Hey, uh, good morning, guys. Had to take my questions. Uh, nice quarter. Um.
Let me get the evit. Uh, the first half year, was it back half a year? Can you sort of Bridge to us, sort of what the implied guidance is? How, how would you be thinking about startup losses in the back half of the year changes to employee preoccupied, bed and back half of the year or any other changes. As we Bridge the first half of the year, in the back half of the year.
Yeah. Absolutely. And so as we move into the back, half of the year, we do expect to incur the line share of the pre-opening and ramp up cost. Again, if you're at the midpoint of the 18 to 22 million for the year and you subtract out the $6 million in the first half, you're looking at about a 14% bad debt number for the first half of the Year. We hope that continues, but in our guidance assumptions, we've assumed that there is some resumption of tpe activity, which would cause that number to go higher. So, you know, pick your your point for the second half of the Year between 2 and 2 and a half percent, you'd see an increase there. Uh, it's a smaller number but we had favorable Insurance adjustments of about 4 million dollars in the first half of the Year. We're not necessarily anticipating that those would continue, uh, even though it was down on a year-over-year basis. The Neti impact from provider taxes was about 7 million dollars. There's no guarantee that that continues in the second half of the year.
Uh and then the the item that you suggested is we rented a 3.34 EPO in the first half of the Year. We'd expect that to be closer to 3.40, particularly given the new capacity coming on board in the, uh, in the second half of the year. Uh, going the other way, is the Q4 pricing update at least a portion of which will be offset by our annual Merit cycle.
I think those are most of the pieces pedo. I hope that was responsive to your question.
Yeah. Uh,
That's perfect. I I can you
Uh, uh, you look at the script. You talked about it, but what was the premium?
Flavor.
The first quarter.
Sequentially. Just looking at the contract employees. They're basically flat sequentially and I'm wondering if you saw a reduction over time as you brought on more employees in the second quarter. Uh and then any other comments you have on the ease of hiring today versus turnover on the full-time employees. Thanks.
Yeah, so uh, sign on and shift, bonus from q1 to Q2 and q1. It was 12.2 million. It was 10.9 in Q2, in terms of the ship bonus component, it was 10.7 in q1 and 8.4 in Q2, so, nice Improvement there with regard to contract labor, we went from, uh, 16.4 in q1 up. Just slightly to 16.7 in Q2, uh, contract, labor FTE. I think you actually hit this number moved slightly from
375 to 379.
Peter, I might ask.
Pat, toured to weigh in, on what he's saying. In terms of Labor, he and the operations team have been working real hard specifically on, uh, the Recruitment and the retention, uh, as we've mentioned in past calls.
And from a turnover perspective, we are, are hovering around pre-pandemic levels. Just a 21%, that's up slightly from q1. But it is well below, uh, the turnover rates that we saw during the pandemic. And
Our local teams are focused on making sure that the the employees in their markets are paid competitively. We've also created a number of career ladders and we're focused on enrolling as many folks that qualify for those into those ladders. We have shown, if we can get an employee a nurse specifically on the clinical ladder, uh, they're turning over about a quarter of the rate of our, uh, non- laddered nurses. So, um,
the, the other 2 things I'll point out is, um, from a
retention standpoint. We've put some effort in the workflow analysis. Just to make sure that we're reducing the burden on our clinical employees and making their workday as efficient as possible. And then another benefit of the centralized Talent acquisition function is that with that recruitment function being centralized, our local HR folks have been able to focus more heavily on the engagement side which is also helped retention Peter. Those uh turnover numbers were specific to nursing which obviously has been a huge Focus for us too. But I mean we we are also focused on um uh therapy openings and and making sure we uh retain our therapists as well. So uh fill out for making some continued progress.
Here and what continues to be, you know, a challenging Market out there.
Great. Thanks so much guys. This quarter.
Thank you. We'll take our next question, from Whit Mayo of lank Partners. Please go ahead.
With hey guys. Um, maybe just to follow up on the hiring efforts. I was just thinking that we never talked about the physiatrist Market, only nurses and therapists. How does that market look like today? And maybe talk about how you find bring doctors in to to New Markets.
Hey, where am I asked pat pat to deal on that. I, I I will say before he gets on specifics. We have, um, we have a team of physician recruiters here uh, at Encompass and that is somewhat centralized, but we've also had to use um, market and Regional uh, recruiters as well. Uh, I would say that overall, the physiatry market um, is, is is challenging, but has been fairly stable over the last 2 to 3 years. But all that Pat give you some specifics.
Thanks with. So just a couple of specifics. We
Some so from Market to Market, this can vary. But I would say the supply has stabilized as Mark has eluded in a number of our markets, we partner with, or have established residency programs with universities that have helped, uh, from a recruitment perspective. And then we also have a strong component of internal medicine, physicians that, uh, also have have worked to become rehab Physicians, uh, in markets, that may be challenging to get a pm&r physician. So,
I would say, we're, we have been able to fill all the needs that we currently have, and, uh, as Mark alluded, we have a, a pretty strong recruitment team that, that focuses solely on this. You know, if she remains challenged, I will say over the last decade we've seen a, a pleasant, uh, Trend and what used to be 10 years ago, a lot of physiatrists primarily wanted to do outpatient in in some cases, pain management. And then we've seen a nice Trend in the last couple of years, where, uh, you know, these desires are very interested in in inpatient setting and and treating, uh, complex patients. So that's that's been a nice little uh, push as we've gone out to recruit doctors.
Okay. Um, my follow-up is I'm looking at my model here and it's got leverage now below 2 times. Now, are we not at a floor where you should look to maybe hold it steady and take that excess capital and prioritize larger buybacks? I appreciate the increase in the growth CapEx, but it seems like you can probably balance both. Thanks.
So even as we increase our capital expenditures, we're getting a favorable cash flow from the tax benefit also. And so the likely place to go is going to be with more share repurchase activity.
Okay, great. Thanks.
Thank you, we'll take our next question. From Joanna, geek of Bank of America. Please go ahead.
Morning Joe. Hey hey hi. Thank you for taking a quick question. So I guess first, um,
Uh, maybe first, I guess that the follow up on the, on this, uh, last, um, I guess discussion around the capital deployment priorities such instead of likely more sharp any considerations around Acquisitions. I think I've asked you this before, it sounds like, you know, you believe when it comes to your core business, The Invention we have, you believe, you know, the novels and better additions, you know, still, uh, you know, you prefer those because of the returns over over over deals. But, uh, any consideration around looking outside of the inpatient, we have, um, I just want to ask the just in case and thank you.
Right now we have not identified any particular service lines or capabilities that are important to our key constituencies uh that we don't currently provide. And so there are no agencies that are are on our radar screen to move into. We would consider those only to the extent some of those
Key constituencies, whether it was referral sources or payers came to us and said, you could be meaningfully more valuable to us as a partner. If in addition to Earth Services, you can do.
This additional thing and you know that has not Arisen in any of our discussions yet.
Uh with regard to Acquisitions within the Earth space. You know, we continue to to use the model as part of our business development effort, where we will acquire a unit and existing hospital and have it folded into a new denovo as a market, uh, entrance strategy, uh, that will continue to be an arrow that we have in our quiver. Uh, as we've mentioned before, there are some portfolios of freestanding Earths that are out there predominantly sponsored by private Equity. Uh, some of those have experienced attractive growth and have some favorable operating, uh, characteristics. As those become available, we would probably evaluate those. But uh, it's a pretty high bar to surpass the returns that we're getting from our denovo activity. So the real focus of our cash flow and our Capital, allocation, in terms of capacity expansion is going to be, uh, is going to remain on our own denovo, activity and then bed expansions that existing hospitals,
Thanks for that. And my question, uh, about the same store volumes are very nice in the quarter. Um, can you talk about? Um, I guess the metrics by specialty, sometimes you give us these metrics. So just curious about whether there's any, uh, outlier or are we going to categories going similar with? Similarly, thank you.
Yes.
So, we can provide you with some of that.
Uh, so if we look in Mark, hit on some of these numbers in his comments in the quarter. Neurological was very strong, up 12.5%. We saw another good quarter of stroke growth; that was up 6.7%. Our brain injury is a smaller, but still a significant category that was up over 12%.
uh, so good growth in in a lot of those areas where we focused in terms of being able to treat more medically, complex, higher Acuity patients, that's been a portion of our differentiation strategy for more than a decade now
We appreciate it. Thank you.
Thank you.
Our next question is from an Hines of mizuho Securities. Please go ahead.
Good, good morning, thank you. Um, I know there is a few coins, um, states, that might relax this Co coins. Um, maybe, North Carolina, South Carolina and Tennessee. Can you just give us the update, um, on the status of those and maybe how you view, um, didn't didn't over activity in those States once the, um, coins are listed, thanks.
Yeah, and so we we have a presence as, you know, and, and South Carolina, uh, up to and and all around. Uh, the the Charlotte Marketplace that their co uh will um subside uh, January 1st of 2027.
Instead of North Carolina. Uh, we have 1 Hospital uh now in the state of North Carolina and and Winston Salem.
And uh, believe that the that state with its growth and its demographics, uh, and it's uh uh, shortage of rehab beds. Uh, would be a state that uh would look not dissimilar to what uh Florida had looked for us in terms of our ability to be um uh a a first mover in the state and and have a significant number of attractive markets in which to pursue
Um, perfect. And then on, um, you know, a big theme is this quarter with the payers are just, you know, increased coding. Um, and maybe more of the use of AI with documentation, how we, how is um, encompassed using AI to code and document better. Thanks.
Yeah. So we've mentioned previously, we do have a partnership with palantir and what we're really looking to do is utilize Ai and Pat mentioned this and some of his remarks earlier to reduce the administrative burden on our staff and also just to improve the consistency with which we're presenting information. It also allows us for instance, when we get a medical record on a patient who's transferring to us from an acute care hospital. It is voluminous and it's very tax.
Ing on, uh, on our staff to have to comb through that record and make sure that we're pulling forward. The most pertinent information in our own documentation, and AI can really facilitate that process now, nothing that we're doing with AI is overriding individual clinical judgment. Uh, we make sure that there is a, a, a
Stringent manual review of these processes as well but it it is a tool that ultimately we think can reduce administrative burden, improve accuracy and in. So doing also increase the job satisfaction of our staff.
Of that has been, uh, you just bought our nurse Leah on to go out and do patient evaluations, which can take a lot of time. And many of these patients don't turn into, uh, admissions. So, I mean, anything we can do to help these, uh, nurse liaison become more efficient, and we've done that, uh, working with pound tier as they use their iPad to do the assessment and all the documentation around that and we've been able to reduce the time, uh, for documentation out of the assessment, by 20 minutes, which uh, you start multiplying that out by all the Lea ones that we have and the patients that are being evaluated and and uh you can see a significant gain in efficiency and it's also a job satisfaction uh plus uh for the for those liaison. But that's just 1 specific application.
Of how we're applying Ai and the use of uh, working specifically with palantir and and and Oracle in some cases this is and ultimately it endures to the benefit of both. The the acute care hospital that is the referral source and the patient.
You know it allows us to be more responsive and to respond faster which has the potential to free up that bed in the acute care hospital. Also means that if we can make a faster decision and the patient comes into our facility, they're going to start their therapy regime earlier which has substantial clinical benefits.
And I was just going to add, this is Pat. We also use Predictive Analytics and modeling to help us with our fall risk model. So since 2020 when we implemented this model our fall rate is improved by 30% and that model looks at 50 different clinical elements consolidates those into a risk score and and informs our clinicians but patients that enhance fall risk and then the other is on acute care transfers. Um back in 2015 we developed a react model which continues to be refined and that has led to a rate Improvement of 24% since 2020. So 2 other examples of where we're using Predictive Analytics within our systems to help uh improve quality in the clinical process.
Thank you. We'll take our next question. From AJ rice of UBS. Your line is open.
Hi everybody. Um, just on the Managed Care. Contracting any? Um,
From a couple other questions, anything with the depression, they're experiencing changing the Dynamics terms, discussion and rate updates. You're seeing
Uh, AJ, you were a little bit garbled there. I think the question was specifically around Managed Care Contracting. As we go through some of the renewals, are we seeing anything that is significantly different from recent historical? I mentioned earlier because it's contained within the Managed Care bucket for us on payer mix, the impact of the, the VA work in the uh in the community Care Network, that has been very favorable and that's uh, led to the higher than anticipated price increase their, uh, also good growth because it's been increasing the last 2, 2 2 plus years at a growth rate in the mid teens. Other than that, I'd say it's been fairly standard uh in terms of annual price increases kind of in that 2 and a half to 3% range and you know volume growth is not all that significant.
Another 1 you're pacing on uh denovo New Deals Partnerships Etc. Has been very steady uh if not improving increasing a little bit but I always
Want to be aware of the pipeline and what you're seeing up there um if the discussion with um, Acute Care Partners and potentials on JVS and things like that. Is there any?
Change in that, or, uh, in the depth of the potential backlog that you see any anything to call out there.
No. You know we uh we included the supplemental slides, the uh development activity that has been announced and there are 18 projects including those that have already opened up this year uh, consistent with what we've said before, we maintain an active dialogue or an active pipeline of right at about 50 projects. And it's, it's stayed pretty steady at about that level. So, uh, feel good about the the visibility to continue at this level of growth for the next several years. Hey, Joe, I think 1 thing that's notable on this, uh, on this development list is the fact that we're growing not only in states, where we already have a presence, uh, like such as Pennsylvania, or or Georgia, but, uh, we also have some, some new states that were, uh, entering and we'll open up our first hospital in Danbury, Connecticut here, uh, in in Q3, uh, and then we'll also be, uh, and the outer years will be looking at adding hospital and and Utah.
And another out in in Nevada. So we're, we're looking at where we have Market density, as well as some opportunities to, to open up in new States.
Okay, great. Thanks so much.
Thank you. We'll take our next question from Jared Hass of William Blair. Your line is open.
hey Jared, Jared
Hey, good morning. Uh thanks for taking the questions. Um maybe. Uh, I'll ask 1 around the benefits expense and and I think you said that was up 18% in the period. Um a couple quick ones 1 just can you remind us the split in total SWV spend between wages and benefit costs. And then I assume much of that growth is is driven by kind of specialty Pharmaceuticals, but just wanted to confirm that and then I guess with that being the case, assuming things like specialty, Pharmaceuticals are a big driver. You know, it doesn't seem like that's going away anytime soon. So I'm wondering if there's anything incremental to sort of your strategy to manage benefits expense going forward.
Yeah, so uh lot to unpack there, so the uh in response to the first question, total benefits runs at about 10 and a half percent of the Total swb Line.
Right. Between 10 and a half and, and 11%, even with the recent, uh, increases that we've seen the, uh, double digit increases that we've been seeing for the last year, have been driven predominantly by an increased frequency of high dollar claims, which we typically classify as an individual claim of over a hundred thousand dollars. Some of that is due to overall inflation in the Health Care system
So those patients, even if they're uh experiencing a malady similar to what they had previously, whereas the cost of treatment may have been less than $100,000. It's over a 100,000.
It's not really been driven by the specialty Pharma with 1 except that I'll go through in a minute. And so, I think, when a lot of folks think of specialty Pharma, you're thinking of things like the glp owns and then also, some of the other, uh, notable
Spend on those drugs.
Um where we are seeing the impact of specialty. Drugs is what some of the cancer treatments and that gets picked up in the medical claims versus the Pharma claims. Because those are administered on an inpatient basis.
Got it. Um, that that's really helpful color. I, I appreciate all that. Uh, and then maybe just as a quick follow-up, I'll ask on free cash flow, a nice quarter. I think it was up about 31% if I look at the revised guidance that I get implies about 9% or so, for the full year 9% growth. Um, I think you you you kind of clarified some of the bridging items in the second half and sort of the timing of the capital investment. But maybe the question if I think longer term any guard rails or parameters, you would frame in terms of how we should think about free cash flow growth going forward. Either, in terms of a total, annual growth rate or conversion relative to I
Yeah, I think it's going to be relatively similar, uh, so I think that capex is, is going to be roughly similar over the next several years. Obviously, we would anticipate further growth in ebida and as we mentioned earlier, we've gotten the benefit this year and would expect to see a benefit over the next several years. As well, from the change in the tax legislation regarding bonus depreciation
And so that should enhance the flow through.
Okay, that's perfect. I'll hop back in queue. Thank you.
Thank you. We'll take our next question from Brian Tank. Will, Jeffrey, your line is open.
Morning, good morning. Congrats to the quarter. Um, maybe just a question Doug. As I think about, you know, tariffs. And I know you're expanding your capex budget for the year. Are you seeing any changes there that we need to be thinking about, as we think through 2026 budgeting for capex? Uh, construction costs?
Not yet. Obviously there's still a whole lot that is in flux. You know, we've talked previously about uh, how we Source our materials. Uh, we don't have a lot of exposure, for instance, to concrete, which is, predominantly sourced out of, uh, Mexico. Given the building composition, from a steel perspective. A lot of the steel that we use is recycled steel that we're able to procure in the US. Uh, so thus far, we haven't seen a pronounced impact from, uh, from tariffs on construction cost inflation. But it's obviously something that remains in flux for, uh, for everybody who's out there. And we continue to keep an eye on them.
I appreciate that. And then, maybe Mark, appreciate all the comments on the quality and the discussions. Um, you you're having with, you know, the the JV Partners, maybe curious, if you can share with us, you know, any feedback or any discussion since July that you or your staff and your team have had with the referral partners.
Yeah, so Brian, we we were very transparent. Uh and reached out to Partners, we are uh, aware that uh this uh, article may come out. We didn't know when it was going to come out. We didn't know what it was going to say. Uh, but we reached out to all of our partners and said, uh, this this may be out there. Um, we um, we have always been, um, uh, transparent with our partners, uh, relative to, to our quality outcomes or anything that might be out in terms of changes and regulations, or or otherwise. Um, but uh, you know, I think that um, our our partners certainly are referring Physicians are referring hospitals, and the patients themselves, recognize our quality uh and uh as it leads to the outcomes that we can get relative to return back to the community, or the net promoter score or their, uh, likelihood or, or
Low likelihood of being readmitted back to KARE hospitals and and that's what they appreciate. We think it's, um, you know, the, the article that took, um, 0.001% of our total discharges for that, uh, time period reviewed in in the article, uh, and tried to use that to cast, what we consider to be a mischaracterization across. Uh, our quality was, um, you know, it's disappointing.
No really helpful commentary. Thank you, Mark.
Thank you. And once again, if you would like to ask a question, please press *1 now on your telephone keypad.
Thank you. We'll take our next question from Raj Kumar of Stevens. Your line is open.
Garage.
Uh, maybe kind of just balancing in insights from Upstream acute, care hospital providers and how they're seeing monitoring volume growth to more normalized levels. Uh, and then, you know, also kind of a tougher comp backdrop for Encompass. Now, how do you see, you know, same store growth in the back half and then, you know, there's a lot of new facilities coming on line in the back half as well. So, maybe kind of
Providing a framing of growth relative to that 6% to 8% target, in the back half between same store and new store.
I I I think you've hit on the right factors which is you're going to have more capacity coming on board of the second half, which will help in terms of new store growth. But some of that capacity is coming on very late in the year. So it's not going to impact uh, this year as much as it will benefit next year, in terms of new store, growth from the same store perspective, you're absolutely right. It's great. We've had 12 consecutive quarters, north of 4%, that has raised the bar in terms of the comp that we're up against. Uh, we, uh, as, as it relates to, what you may be seeing Upstream at the acute care. Hospitals. Just a reminder that although it feels like because we get in excess of 90% of our referrals from acute care hospitals, that there ought to be a high correlation between our volumes and acute care hospitals. But it does not exist and it does not exist because only less than 5% of the patients being discharged from acute care. Hospitals in the US,
Wind up going to the Earth setting and that portion of their volume because it relates to non-discretionary illnesses that ultimately qualify for treatment in Earth. Non-discretionary illnesses are not very volatile. So the volatility that the acute care hospitals see, that we do not, is predominantly around discretionary treatments.
Thank you for the call and then maybe just separately on a smaller portion of business. You know, outpatient visits was up nicely sequentially although still down year over year and then pricing has been going up drastically in that business as well. So maybe you know what was that driver of growth was just kind of like a 1-time surprised like we saw in like fee for service and inpatient side and in the first quarter or is there something being strategically done to? Maybe stabilize that business since pricing has been kind of accommodated.
So, is your question more around? Yeah. Is your question more about outpatient revenue or outpatient volume? Because the outpatient Revenue increases largely attributable to the increase in Medicaid, supplemental, payments, that, that category is outpatient and other. If you're looking at page 5 of our supplemental slides,
Yeah I was more referring to these volumes. As kind of up 8% quarter of a quarter which is seems much more higher than how it has been historically between 1 q and 2q.
Thanks. Raj, this is Pat. So outpatient, we only have a small number of locations and we have intentionally um lowered that that footprint over time, including the closure of of 3 outpatient facilities uh, within the last year. So I I would just say that the the operations that we still have running have a good book of business. They're they're well known in their communities and they often, um, are specialized from an outpatient therapy perspective that that draws volume in. So I wouldn't say that it is a nationwide intentional strategy, but a very Market specific strategy with the teams that have outpatient in their communities.
Got it. Thank you very much.
Thank you and it does appear that we have no further questions at this time. I'd be happy to return the call to Mark Miller 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. This does conclude today's conference. You may now disconnect your lines, and everyone have a great day.