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What changed in Encompass Health Corp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Encompass Health Corp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+450 added−439 removedSource: 10-K (2024-02-28) vs 10-K (2023-02-27)

Top changes in Encompass Health Corp's 2023 10-K

450 paragraphs added · 439 removed · 357 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

113 edited+11 added−16 removed144 unchanged
Biggest changeWhen conducting an audit, the RACs receive claims data directly from MACs on a monthly or quarterly basis. 10 Table of Contents CMS has also established Unified Program Integrity Contractors (“UPICs”), previously known as Zone Program Integrity Contractors, to perform fraud, waste, and abuse detection, deterrence and prevention activities for Medicare and Medicaid claims.
Biggest changeCMS has also established Unified Program Integrity Contractors (“UPICs”) to perform fraud, waste, and abuse detection, deterrence and prevention activities for Medicare and Medicaid claims. Like the RACs, the UPICs conduct audits and have the ability to refer matters to the HHS-OIG or the United States Department of Justice (“DOJ”).
In our compensation and benefit programs: • we provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. • we engage nationally recognized outside compensation and benefits consulting firms to independently evaluate the effectiveness of our compensation and benefit programs, to provide benchmarking against our peers within the industry and by specific market, and to recommend design elements for those programs. • we base annual increases and incentive compensation on merit, which is communicated to employees through our talent management process as part of our annual review procedures. • all full-time and most part-time employees are eligible for health insurance, paid and unpaid leaves, a retirement plan, a wellness program, telemedicine, tuition reimbursement, an employee assistance program, and life and disability/accident coverage. • we provide an employer match on retirement plan contributions. • we also offer a wide variety of voluntary benefits that allow employees to select the options that meet their needs, including pre-paid legal services, dental insurance, vision insurance, hospital indemnity insurance, accident insurance, critical illness insurance, supplemental life insurance, disability insurance, health savings accounts, flexible spending accounts, auto/home insurance, and identity theft insurance. • we have various short-term incentive plans for field leadership, most marketing/sales employees, and executives. • we make annual grants of restricted stock to employees at various levels, including non-executive management, to foster a strong sense of ownership and align the interests of management with those of our stockholders.
In our compensation and benefit programs: • we provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. • we engage nationally recognized outside compensation and benefits consulting firms to independently evaluate the effectiveness of our compensation and benefit programs, to provide benchmarking against our peers within the industry and by specific market, and to recommend design elements for those programs. • we base annual increases and incentive compensation on merit, which is communicated to employees through our talent management process as part of our annual review procedures. • all full-time and most part-time employees are eligible for health insurance, paid and unpaid leaves, a retirement plan, a wellness program, telemedicine, tuition reimbursement, an employee assistance program, and life and disability/accident coverage. • we provide an employer match on retirement plan contributions. • we also offer a wide variety of voluntary benefits that allow employees to select the options that meet their needs, including pre-paid legal services, dental insurance, vision insurance, hospital indemnity insurance, accident insurance, critical illness insurance, supplemental life insurance, disability insurance, health savings accounts, flexible spending accounts, auto/home insurance, and identity theft insurance. • we have various year-long, quarterly, and short-term incentive plans for field leadership, most marketing/sales employees, and executives. • we make annual grants of restricted stock to employees at various levels, including non-executive management, to foster a strong sense of ownership and align the interests of management with those of our stockholders.
Those interpretations are not made through a notice and comment review process. We cannot predict how future CMS coverage rule interpretations or any new local coverage determinations will affect us. However, more restrictive coverage interpretations can limit or delay our reimbursement for services provided to potentially large pools of patients with similar medical conditions.
Those interpretations are not 10 made through a notice and comment review process. We cannot predict how future CMS coverage rule interpretations or any new local coverage determinations will affect us. However, more restrictive coverage interpretations can limit or delay our reimbursement for services provided to potentially large pools of patients with similar medical conditions.
Because we have hundreds of thousands of claims a year for which we are reimbursed by Medicare and other federal payors and there is a relatively long statute of limitations, a billing error, cost reporting error or disagreement over physician medical judgment could result in significant damages and civil and criminal penalties under the FCA.
Because we have hundreds of thousands of claims a year for which we are reimbursed by Medicare and other federal payors and there is a relatively long statute of limitations, a billing error, cost reporting error or disagreement over physician 14 medical judgment could result in significant damages and civil and criminal penalties under the FCA.
Each year, the Medicare Payment Advisory Commission (“MedPAC”), an independent agency that advises the United States Congress on issues affecting Medicare, makes payment policy recommendations to Congress for a variety of Medicare payment systems including, among others, the inpatient rehabilitation facility prospective payment system (the “IRF-PPS”). MedPAC also makes recommendations on regulatory actions to CMS.
Each year, the Medicare Payment Advisory Commission (“MedPAC”), an independent agency that advises the United States Congress on issues affecting Medicare, makes payment policy recommendations to Congress for a variety of Medicare payment systems including, among others, the inpatient rehabilitation facility prospective payment system (the “IRF-PPS”). MedPAC also makes 9 recommendations on regulatory actions to CMS.
Audits may also require us to incur additional costs to respond to requests for records and defend the validity of payments and claims, and ultimately require us to refund any amounts determined to have been overpaid. We cannot predict when or how these audit programs will affect us.
Audits also require us to incur additional costs to respond to requests for records and defend the validity of payments and claims, and ultimately require us to refund any amounts determined to have been overpaid. We cannot predict when or how these audit programs will affect us.
Once certified by Medicare, hospitals undergo periodic on-site surveys and revalidations in order to maintain their certification. All of our inpatient hospitals participate in the Medicare program. Failure to comply with applicable certification requirements may make our hospitals ineligible for Medicare or Medicaid reimbursement.
Once certified by Medicare, hospitals undergo periodic on-site surveys and revalidations in order to maintain their certification. All of our inpatient hospitals participate in the Medicare program. 13 Failure to comply with applicable certification requirements may make our hospitals ineligible for Medicare or Medicaid reimbursement.
Federal and, where applicable, state regulations require the submission of annual cost reports covering the revenue, costs, and expenses associated with the services provided by healthcare providers to Medicare beneficiaries and Medicaid recipients.
Federal and, where applicable, state regulations require the submission of annual cost reports covering the revenue, costs, and expenses associated with the services provided by healthcare providers to Medicare beneficiaries and 12 Medicaid recipients.
However, we believe our management arrangements satisfy the other requirements of the safe harbor for personal services and management contracts and comply with the Anti-Kickback Law. Physician Self-Referral Law .
However, we believe our management arrangements satisfy the other requirements of the safe harbor for personal services and management contracts and comply with the Anti-Kickback Law. 15 Physician Self-Referral Law .
For additional discussion of the risks associated with our concentration of revenues from the federal government or with potential changes to the statutes or regulations governing Medicare reimbursement, see Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview—Key Challenges.” Although reductions or changes in reimbursement from governmental or third-party payors and regulatory changes affecting our business represent one of the most significant challenges to our business, our operations are also affected by other rules and regulations that indirectly affect reimbursement for our services, such as data coding rules and patient coverage rules and determinations.
For additional discussion of the risks associated with our concentration of revenues from the federal government or with potential changes to the statutes or regulations governing Medicare reimbursement, see Item 1A, Risk Factors, “Reimbursement Risks” and “Other Regulatory Risks” and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview—Key Challenges.” Although reductions or changes in reimbursement from governmental or third-party payors and regulatory changes affecting our business represent one of the most significant challenges to our business, our operations are also affected by other rules and regulations that indirectly affect reimbursement for our services, such as data coding rules and patient coverage rules and determinations.
We reimbursed over $1.2 million in tuition and paid over $2.8 million toward employees’ student loan debt in 2022. • Academic Endowments. We endowed five scholarships for deserving students from underrepresented groups pursuing degrees in nursing and allied health fields. • Therapy Grants. We fund research projects to investigate the impact and effectiveness of therapy in the inpatient rehabilitation setting.
We reimbursed over $1.1 million in tuition and paid over $2.8 million toward employees’ student loan debt in 2023. • Academic Endowments. We endowed five scholarships for deserving students from underrepresented groups pursuing degrees in nursing and allied health fields. • Therapy Grants. We fund research projects to investigate the impact and effectiveness of therapy in the inpatient rehabilitation setting.
Available Information We make available through our website, www.encompasshealth.com , the following documents, free of charge: our annual reports (Form 10-K), our quarterly reports (Form 10-Q), our current reports (Form 8-K), and any amendments to those reports promptly after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission. 17 Table of Contents
Available Information We make available through our website, www.encompasshealth.com , the following documents, free of charge: our annual reports (Form 10-K), our quarterly reports (Form 10-Q), our current reports (Form 8-K), and any amendments to those reports promptly after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission. 17
The 2022 IRF Rule also included changes that impacted our hospital-by-hospital base rate for Medicare reimbursement. Such changes included, but were not limited to, revisions to the wage index and labor-related share values, updates to outlier payments and updates to the case-mix group relative weights and average lengths of stay values.
The 2023 IRF Rule also included changes that impacted our hospital-by-hospital base rate for Medicare reimbursement. Such changes included, but were not limited to, revisions to the wage index and labor-related share values, updates to outlier payments and updates to the case-mix group relative weights and average lengths of stay values.
Strategy and 2023 Strategic Priorities Our overall strategy is to expand our network of inpatient rehabilitation hospitals, add capacity to existing hospitals, further strengthen our relationships with healthcare systems, provider networks, and payors in order to connect patient care across the healthcare continuum, and to deliver superior patient outcomes in a cost-effective manner.
Strategy and 2024 Strategic Priorities Our overall strategy is to expand our network of inpatient rehabilitation hospitals, add capacity to existing hospitals, further strengthen our relationships with healthcare systems, provider networks, and payors in order to connect patient care across the healthcare continuum, and to deliver superior patient outcomes in a cost-effective manner.
Managed care contracts typically have terms between one and three years, although we have a number of managed care contracts that automatically renew each year (with pre-defined rate increases) unless a party elects to terminate the contract. In 2022, typical rate increases for our contracts ranged from 2-4%.
Managed care contracts typically have terms between one and three years, although we have a number of managed care contracts that automatically renew each year (with pre-defined rate increases) unless a party elects to terminate the contract. In 2023, typical rate increases for our contracts ranged from 2-4%.
False Claims The federal False Claims Act (the “FCA”) imposes liability for the knowing presentation of a false claim to the United States government and provides for penalties equal to three times the actual amount of any overpayments plus up to approximately $25,000 per claim. Federal civil penalties will be adjusted to account for inflation each year.
False Claims The federal False Claims Act (the “FCA”) imposes liability for the knowing presentation of a false claim to the United States government and provides for penalties equal to three times the actual amount of any overpayments plus up to approximately $27,000 per claim. Federal civil penalties will be adjusted to account for inflation each year.
HIPAA and related HHS regulations contain certain administrative simplification provisions that require the use of uniform electronic data transmission standards for certain healthcare claims and payment transactions submitted or received electronically. HIPAA regulations also regulate the use and disclosure of individually identifiable health-related information, whether communicated electronically, on paper, or orally.
HIPAA and related regulations contain certain administrative simplification provisions that require the use of uniform electronic data transmission standards for certain healthcare claims and payment transactions submitted or received electronically. HIPAA regulations also regulate the use and disclosure of individually identifiable health-related information, 16 whether communicated electronically, on paper, or orally.
For additional discussion of the Medicare payment rules and other regulatory and legislative initiatives affecting Medicare reimbursement that could impact our businesses, see Item 1A, Risk Factors , and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview—Key Challenges.” Medicare Advantage, Managed Care and Other Discount Plans We negotiate payment rates with certain large group purchasers of healthcare services, including Medicare Advantage plans, managed care plans, private insurance companies, and third-party administrators.
For additional discussion of the Medicare payment rules and other regulatory and legislative initiatives affecting Medicare reimbursement that could impact our businesses, see Item 1A, Risk Factors , “Reimbursement Risks” and “Other Regulatory Risks” and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview—Key Challenges.” Medicare Advantage, Managed Care and Other Discount Plans We negotiate payment rates with certain large group purchasers of healthcare services, including Medicare Advantage plans, managed care plans, private insurance companies, and third-party administrators.
For additional discussion of our strategic priorities as well as our progress toward our priorities in 2022, including operating results, growth, and shareholder distributions, and our business outlook, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview,” “Results of Operations,” and “Liquidity and Capital Resources.” Human Capital Management Overview of Our Employees .
For additional discussion of our strategic priorities as well as our progress toward our priorities in 2023, including operating results, growth, and shareholder distributions, and our business outlook, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , “Executive Overview,” “Results of Operations,” and “Liquidity and Capital Resources.” Human Capital Management Overview of Our Employees .
The formation of our COVID Task Force allowed us to centralize decision-making while 2 Table of Contents empowering the hospitals to enact the protocols needed as the pandemic cycled through the country. Our therapy teams developed plans for COVID patients while maintaining our expected high-quality outcomes. • Strategic Relationships .
The formation of our COVID Task Force allowed us to centralize decision-making while 2 empowering our hospitals to enact the protocols needed as the pandemic cycled through the country. Our therapy teams developed plans for COVID patients while maintaining our expected high-quality outcomes. • Strategic Relationships .
The program is open to qualified candidates, including employees. • Other Employee Development Programs: * career ladders that offer paths to develop, demonstrate, and be rewarded for expanded responsibility in nursing, therapy and case management; * formal coaching online development library that provides access to a wide range of readily available internal and external content on many topics important for success in current or desired jobs; * developing future leaders program that develops nurses and therapists for supervisory positions and develops nurse and therapy supervisors for higher level positions; * leadership precepting that provides new leaders 6-12 months of structured mentoring from experienced, high-performing peers; * leadership coaching that provides six months of executive coaching to high performing leaders; 7 Table of Contents * developing future chief nursing officers program that provides 12-18 months of intensive on-the-job experience to develop participants for future chief nursing officer job openings; and * developing future chief executive officers program that provides 18-24 months of intensive on-the-job experience to develop participants for future hospital chief executive officer openings.
The program is open to qualified candidates, including employees. • Other Employee Development Programs: ▪ career ladders that offer paths to develop, demonstrate, and be rewarded for expanded responsibility in nursing, therapy and case management; 7 ▪ online development library that provides access to a wide range of readily available internal and external content on many topics important for success in current or desired jobs; ▪ developing future leaders program that develops nurses and therapists for supervisory positions and develops nurse and therapy supervisors for higher level positions; ▪ leadership precepting that provides new leaders 6-12 months of structured mentoring from experienced, high-performing peers; ▪ leadership coaching that provides six months of executive coaching to high performing leaders; and ▪ DFCEO program that provides 18-24 months of intensive on-the-job experience to develop participants for future hospital chief executive officer openings.
We believe this strategy, along with our demonstrated ability to adapt to changes in healthcare, positions us for success in the evolving healthcare delivery system. In pursuit of our strategy, we established the following priorities for 2023. • Growth .
We believe this strategy, along with our demonstrated ability to adapt to changes in healthcare, positions us for success in the evolving healthcare delivery system. In pursuit of our strategy, we established the following priorities for 2024. • Growth .
The Medicare statutes are subject to change from time to time. With respect to Medicare reimbursement, the ACA provides for specific reductions to healthcare providers’ annual market basket updates and other payment policy changes.
The Medicare statutes are subject to change from time to time. With respect to Medicare reimbursement, the ACA provided for specific reductions to healthcare providers’ annual market basket updates and other payment policy changes.
We have devoted substantial resources, effort and expertise to leveraging technology to create post-acute solutions that improve patient care and operating efficiencies. 3 Table of Contents Patients and Demographic Trends Demographic trends, such as population aging, should continue to increase long-term demand for the services we provide.
We have devoted substantial resources, effort and expertise to leveraging technology to create post-acute solutions that improve patient care and operating efficiencies. 3 Patients and Demographic Trends Demographic trends, such as population aging, should continue to increase long-term demand for the services we provide.
There are several privately held companies offering post-acute rehabilitation services that compete with us primarily in select geographic markets. In addition, there is a public company that is primarily focused on other post-acute care services but also operates 31 freestanding inpatient rehabilitation hospitals. Other providers of post-acute care services compete for some rehabilitation patients.
There are several privately held companies offering post-acute rehabilitation services that compete with us primarily in select geographic markets. In addition, there is a public company that is primarily focused on other post-acute care services but also operates 33 inpatient rehabilitation hospitals. Other providers of post-acute care services compete for some rehabilitation patients.
The federal law commonly known as the “Stark law” and CMS regulations promulgated under the Stark law prohibit physicians from making referrals for “designated health services” including inpatient and outpatient hospital services, physical therapy, occupational therapy, radiology services, and home health services, to an entity in 15 Table of Contents which the physician (or an immediate family member) has an investment interest or other financial relationship, subject to certain exceptions.
The federal law commonly known as the “Stark law” and CMS regulations promulgated under the Stark law prohibit physicians from making referrals for “designated health services” including inpatient and outpatient hospital services, physical therapy, occupational therapy, radiology services, and home health services, to an entity in which the physician (or an immediate family member) has an investment interest or other financial relationship, subject to certain exceptions.
We focus on the following strategic human capital imperatives: • Maintaining competitive compensation and benefit programs that reward and recognize employee performance; • Fostering a strong culture that values diversity, equity, and inclusion; and 5 Table of Contents • Emphasizing employee development and engagement to attract talent and reduce turnover. Compensation and Benefits .
We focus on the following strategic human capital imperatives: • Maintaining competitive compensation and benefit programs that reward and recognize employee performance; • Fostering a strong culture that values diversity, equity, and inclusion; and • Emphasizing employee development and engagement to attract talent and reduce turnover. 5 Compensation and Benefits .
In response to the public health emergency associated with the pandemic, Congress and the President suspended sequestration through March 31, 2022. Additional Medicare payment reductions are also possible under the Statutory Pay-As- 9 Table of Contents You-Go Act of 2010 (“Statutory PAYGO”).
In response to the public health emergency associated with the pandemic, Congress and the President suspended sequestration through March 31, 2022. Additional Medicare payment reductions are also possible under the Statutory Pay-As-You-Go Act of 2010 (“Statutory PAYGO”).
Our teams of highly skilled nurses and physical, occupational, and speech therapists utilize proven technology and clinical protocols with the objective of restoring our patients’ 1 Table of Contents physical and cognitive abilities.
Our teams of highly skilled nurses and physical, occupational, and speech therapists utilize proven technology and clinical protocols with the objective of restoring our patients’ 1 physical and cognitive abilities.
We believe 8 Table of Contents we have the necessary capabilities — change agility, strategic relationships, quality of patient outcomes, cost effectiveness, and ability to capitalize on growth opportunities — to adapt to and succeed in a dynamic, highly regulated industry, and we have a proven track record of doing so.
We believe we have the necessary capabilities—change agility, strategic relationships, quality of patient outcomes, cost effectiveness, and ability to capitalize on growth opportunities—to adapt to and succeed in a dynamic, highly regulated industry, and we have a proven track record of doing so.
Every three to five years, we engage a third-party consulting agency to help us evaluate our program and explore possible enhancements. We then provide the feedback to our board of directors. We have published a series of video conversations with various employees and members of executive management to highlight personal experience to promote DE&I throughout the organization.
Every three to four years, we engage a third-party consulting agency to help us evaluate our program and explore possible enhancements. We then provide the feedback to our board of directors. We have published a series of video conversations and written communications with various employees and members of executive management to highlight personal experience to promote DE&I throughout the organization.
Medicare, through its Medicare Advantage program, offers Medicare-eligible individuals an opportunity to participate in managed care plans. Revenues from Medicare and Medicare Advantage represent approximately 80% of total revenues.
Medicare, through its Medicare Advantage program, offers Medicare-eligible individuals an opportunity to participate in managed care plans. Revenues from Medicare and Medicare Advantage represent approximately 81% of total revenues.
The sources and relative mix of our revenues for the last three years are: For the Year Ended December 31, 2022 2021 2020 Medicare 65.3 % 64.4 % 66.7 % Medicare Advantage 15.1 % 15.2 % 15.3 % Managed care 11.6 % 12.1 % 10.4 % Medicaid 4.2 % 4.1 % 3.9 % Other third-party payors 0.9 % 1.1 % 1.2 % Workers' compensation 0.6 % 0.6 % 0.6 % Patients 0.4 % 0.5 % 0.5 % Other income 1.9 % 2.0 % 1.4 % Total 100.0 % 100.0 % 100.0 % Medicare Reimbursement Medicare is a federal program that provides hospital and medical insurance benefits to persons aged 65 and over, qualified disabled persons, and persons with end-stage renal disease.
The sources and relative mix of our revenues for the last three years are: For the Year Ended December 31, 2023 2022 2021 Medicare 65.0 % 65.3 % 64.4 % Medicare Advantage 16.2 % 15.1 % 15.2 % Managed care 11.1 % 11.6 % 12.1 % Medicaid 4.0 % 4.2 % 4.1 % Other third-party payors 0.9 % 0.9 % 1.1 % Workers' compensation 0.5 % 0.6 % 0.6 % Patients 0.3 % 0.4 % 0.5 % Other income 2.0 % 1.9 % 2.0 % Total 100.0 % 100.0 % 100.0 % Medicare Reimbursement Medicare is a federal program that provides hospital and medical insurance benefits to persons aged 65 and over, qualified disabled persons, and persons with end-stage renal disease.
The ACA amended the FCA to expand the 14 Table of Contents definition of false claim, to make it easier for the government to initiate and conduct investigations, to enhance the monetary reward to relators where prosecutions are ultimately successful, and to extend the statute of limitations on claims by the government.
The ACA amended the FCA to expand the definition of false claim, to make it easier for the government to initiate and conduct investigations, to enhance the monetary reward to relators where prosecutions are ultimately successful, and to extend the statute of limitations on claims by the government.
For example, reimbursement based on the type of patient/treatment required, commonly referred to as the case mix group basis (“CMG”), is typically greater than reimbursement on a per-diem rate basis, and we increased the percentage of our Medicare Advantage revenue paid based on CMG from approximately 58% in 2017 to approximately 88% in 2022.
For example, reimbursement based on the type of patient/treatment required, commonly referred to as the case mix group basis (“CMG”), is typically greater than reimbursement on a per-diem rate basis, and we increased the percentage of our Medicare Advantage revenue paid based on CMG from approximately 58% in 2017 to approximately 90% in 2023.
Medicare also makes retroactive 12 Table of Contents adjustments to payments for certain low-income patients after comparing subsequently published statistical data from CMS to the cost report data. We cannot predict what retroactive adjustments, if any, will be made, but we do not anticipate these adjustments will have a material impact on us.
Medicare also makes retroactive adjustments to payments for certain low-income patients after comparing subsequently published statistical data from CMS to the cost report data. We cannot predict what retroactive adjustments, if any, will be made, but we do not anticipate these adjustments will have a material impact on us.
Even the assertion of a violation could have an adverse effect upon our stock price or reputation. For additional discussion, see Item 1A, Risk Factors , and Note 18, Contingencies and Other Commitments , to the accompanying consolidated financial statements. Relationships with Physicians and Other Providers Anti-Kickback Law .
Even the assertion of a violation could have an adverse effect upon our stock price or reputation. For additional discussion, see Item 1A, Risk Factors , “Reimbursement Risks” and “Other Regulatory Risks” and Note 18, Contingencies and Other Commitments , to the accompanying consolidated financial statements. Relationships with Physicians and Other Providers Anti-Kickback Law .
Our other community initiatives include an annual report that provides information on our DE&I initiatives to people outside the company. We also have memberships and active involvement in local chapters of the National Association of Health Service Executives, an organization that promotes the advancement and development of minority healthcare leaders.
In 2023, we sponsored seven students. Our other community initiatives include an annual report that provides information on our DE&I initiatives to people outside the Company. We also have memberships and active involvement in local chapters of the National Association of Health Service Executives, an organization that promotes the advancement and development of minority healthcare leaders.
In addition, Medicare or Medicaid may seek retroactive reimbursement from noncompliant hospitals 13 Table of Contents or otherwise impose sanctions for noncompliance. Non-governmental payors often have the right to terminate provider contracts if the provider loses its Medicare or Medicaid certification. All Medicare providers are subject to employee screening requirements and associated fees.
In addition, Medicare or Medicaid may seek retroactive reimbursement from noncompliant hospitals or otherwise impose sanctions for noncompliance. Non-governmental payors often have the right to terminate provider contracts if the provider loses its Medicare or Medicaid certification. All Medicare providers are subject to employee screening requirements and associated fees.
Our free cash flow is the primary source of funding for the considerable investment in our de novo and bed addition growth plans. As an additional source of liquidity, we can access our $1 billion revolving credit facility of which $912 million was available for borrowing as of December 31, 2022.
Our free cash flow is the primary source of funding for the considerable investment in our de novo and bed addition growth plans. As an additional source of liquidity, we can access our $1 billion revolving credit facility of which $968 million was available for borrowing as of December 31, 2023.
With this new onsite hemodialysis system, we can provide our patients dialysis without interrupting therapy or requiring patient travel, which lowers our cost of treatment and improves patient satisfaction. As of December 31, 2022, we had installed these systems in 41 of our hospitals. • Capital Structure .
With this new onsite hemodialysis system, we can provide our patients dialysis without interrupting therapy or requiring patient travel, which lowers our cost of treatment and improves patient satisfaction. As of December 31, 2023, we had installed these systems in 83 of our hospitals. • Capital Structure .
As of December 31, 2022, we employed approximately 35,000 individuals. In the healthcare services sector, many professionals, such as nurses, desire flexible work arrangements. Accordingly, part-time and per diem employees represent a large percentage of our employee population.
As of December 31, 2023, we employed approximately 38,000 individuals. In the healthcare services sector, many professionals, such as nurses, desire flexible work arrangements. Accordingly, part-time and per diem employees represent a large percentage of our employee population.
As of December 31, 2022, approximately 40% of our licensed beds are in states or U.S. territories that have CON laws. CON laws require a reviewing authority or agency to determine the public need for additional or expanded healthcare facilities and services.
As of December 31, 2023, approximately 36% of our licensed beds are in states or U.S. territories that have CON laws. CON laws require a reviewing authority or agency to determine the public need for additional or expanded healthcare facilities and services.
Unlike our inpatient services, our outpatient services are primarily reimbursed under the Medicare Part B physician fee schedule. On November 1, 2022, CMS released its final notice of rulemaking for the payment policies under the physician fee schedule and other revisions to Part B policies for calendar year 2023.
Unlike our inpatient services, our outpatient services are primarily reimbursed under the Medicare Part B physician fee schedule. On November 2, 2023, CMS released its final notice of rulemaking for the payment policies under the physician fee schedule and other revisions to Part B policies for calendar year 2024.
In 2019, Florida enacted legislation to repeal CON laws for several provider types, including IRFs. We believe CON-related legislation and regulation changes, including both repeal and expansion of CON requirements, will continue to be proposed in various states for the foreseeable future.
In 2019, Florida enacted legislation to repeal CON laws for several provider types, including IRFs. Similarly, in 2023, South Carolina enacted legislation to repeal CON laws for several provider types, including IRFs. We believe CON-related legislation and regulation changes, including both repeal and expansion of CON requirements, will continue to be proposed in various states for the foreseeable future.
These requirements relate to, among other things, pre-admission screening, and individual treatment planning that all delineate the role of physicians in ordering and overseeing patient care. For example, a physician must approve admission of each patient and in doing so determine that the treatment of the patient in an IRF setting is reasonable and necessary.
These requirements relate to, among other things, pre-admission screening, and individual treatment planning that all delineate the role of physicians in ordering and overseeing patient care. For example, physicians must approve patient admissions and in doing so determine that the treatment of the patients in an IRF setting is reasonable and necessary.
Currently, we operate 131 hospitals that hold one or more Joint Commission Disease-Specific Care Certifications, such as stroke rehabilitation, hip fracture rehabilitation, brain injury rehabilitation, amputee rehabilitation, Parkinson’s Disease rehabilitation, and spinal cord injury rehabilitation certification.
Currently, we operate 137 hospitals that hold one or more Joint Commission Disease-Specific Care Certifications, such as stroke rehabilitation, hip fracture rehabilitation, brain injury rehabilitation, amputee rehabilitation, Parkinson’s Disease rehabilitation, and spinal cord injury rehabilitation certification. • Cost Effectiveness .
We offer our nurses an opportunity to advance their academic degrees at a reduced tuition rate of 20% to 50% of the total program cost. To date, approximately 1,521 of our nurses have taken advantage of this opportunity.
We offer our nurses an opportunity to advance their academic degrees at a reduced tuition rate of 25% to 50% of the total program cost. To date, approximately 1,167 of our nurses have taken advantage of this opportunity.
Diversity, Equity, and Inclusion . We believe fostering a strong culture that values diversity, equity, and inclusion, or DE&I, allows us to recruit and retain diverse employees and provide high-quality care to our diverse patients. We maintain a DE&I program that is overseen by a DE&I department and supported by Hospital Diversity Committees.
Diversity, Equity, and Inclusion . We believe fostering a strong culture that values diversity, equity, and inclusion, or DE&I, allows us to recruit and retain diverse employees and provide high-quality care to our diverse patients. We maintain a DE&I program that is overseen by a DE&I staff at our corporate office and supported by hospital diversity committees.
Based on our analysis, which utilizes, among other things, the acuity of our patients annualized over the twelve-month prior period ended June 30, 2022, our experience with outlier payments over 11 Table of Contents that same time frame, and other factors, we believe the 2023 IRF Rule will result in a net increase to our Medicare payment rates of approximately 4.0% effective October 1, 2022.
Based on our analysis, which utilizes, among other things, the acuity of our patients annualized over the twelve-month prior period ended June 30, 2023, our experience with outlier payments over that same time frame, and other factors, we believe the 2024 IRF Rule will result in a net increase to our Medicare payment rates of approximately 3.3% effective October 1, 2023.
Any regulatory or legislative changes impacting the healthcare industry ultimately may affect, among other things, reimbursement of healthcare providers, consumers’ access to coverage of health services, including among non-Medicare aged population segments within commercial insurance markets and Medicaid enrollees, and competition among providers.
The future of many aspects of healthcare regulation remains uncertain. Any regulatory or legislative changes impacting the healthcare industry ultimately may affect, among other things, reimbursement of healthcare providers, consumers’ access to coverage of health services, including among non-Medicare aged population segments within commercial insurance markets and Medicaid enrollees, and competition among providers.
We believe our award-winning culture is essential to attracting and retaining talent. For further discussion of our human capital management and our award-winning culture, see the section titled “Human Capital Management” below. • Change Agility . We have a demonstrated ability to adapt in the face of numerous and significant regulatory, legislative, and operating environment changes.
For further discussion of our human capital management and our award-winning culture, see the section titled “Human Capital Management” below. • Change Agility . We have a demonstrated ability to adapt in the face of numerous and significant regulatory, legislative, and operating environment changes.
The 2022 IRF Rule implemented a net 1.9% market basket increase (market basket update of 2.6% reduced by a productivity adjustment of 0.7%) effective for discharges between October 1, 2021 and September 30, 2022. The productivity adjustment equals the trailing 10-year average of changes in annual economy-wide private nonfarm business multi-factor productivity.
The 2023 IRF Rule implemented a net 3.9% market basket increase (market basket update of 4.2% reduced by a productivity adjustment of 0.3%) effective for discharges between October 1, 2022 and September 30, 2023. The productivity adjustment 11 equals the trailing 10-year average of changes in annual economy-wide private nonfarm business multi-factor productivity.
As of December 31, 2022, we have a strong, well-capitalized balance sheet, including ownership of approximately 76% of our hospital real estate, no significant debt maturities prior to 2025, and ample availability under our revolving credit facility, which along with the cash flows generated from operations should, we believe, provide sufficient support for our business strategy. • Advanced Technology and Innovation .
As of December 31, 2023, we have a strong, well-capitalized balance sheet, including ownership of approximately 78% of our hospital real estate, no significant debt maturities in 2024, and ample availability under our revolving credit facility, which along with the cash flows generated from operations should, we believe, provide sufficient support for our business strategy. • Advanced Technology and Innovation .
As of December 31, 2022, 130 of our 153 hospitals held stroke-specific certifications that required us to demonstrate effective use of evidence-based clinical practice guidelines to manage and optimize stroke care and an organized approach to performance measurement and evaluation of clinical outcomes.
As of December 31, 2023, 136 of our 161 hospitals held stroke-specific certifications that required us to demonstrate effective use of evidence-based clinical practice guidelines to manage and optimize stroke care and an organized approach to performance measurement and evaluation of clinical outcomes.
As the Medicaid program is administered by the individual states under the oversight of CMS in accordance with certain regulatory and statutory guidelines, there are substantial differences in reimbursement methodologies and coverage policies from state to state. Many states have experienced shortfalls in their Medicaid budgets and are implementing significant cuts in Medicaid reimbursement rates.
As the Medicaid program is administered by the individual states under the oversight of CMS in accordance with certain regulatory and statutory guidelines, there are substantial differences in reimbursement methodologies and coverage policies from state to state. Historically, states experiencing shortfalls in their Medicaid budgets have implemented cuts in Medicaid reimbursement rates.
Medicare Advantage payors represented 8.4% of our net operating revenues in 2017 and 15.1% in 2022. We believe our outcomes and quality of care data have helped drive a significant improvement in the payments we receive from Medicare Advantage payors.
Medicare Advantage payors represented 8.4% of our net operating revenues in 2017 and 16.2% in 2023. We believe our outcomes and quality of care data have helped drive a significant improvement in the payments we receive from Medicare Advantage payors.
The table below shows those turnover rates for 2022 and 2021. 2022 2021 Therapist 9.1% 7.9% Nurse 28.1% 27.4% We support the long-term career aspirations of our employees through education and personal development. • Education Opportunities.
The table below shows those turnover rates for 2023 and 2022. 2023 2022 Therapist 7.8% 9.1% Nurse 23.1% 28.1% We support the long-term career aspirations of our employees through education and personal development. • Education Opportunities.
To respond to the strong demand for our services, we continue to develop our current markets through bed additions and to construct or acquire hospitals in new markets. Since 2012, we have opened or acquired 53 new hospitals and increased the number of licensed beds we operate by approximately 56%, or 3,700 beds.
To respond to the strong demand for our services, we continue to develop our current markets through bed additions and to construct or acquire hospitals in new markets. Since 2012, we have opened or acquired 61 new hospitals and increased the number of licensed beds we operate by approximately 62%, or 4,122 beds.
We will continue to develop and implement post-acute solutions that allow us to apply our clinical expertise, large post-acute datasets, electronic medical record technologies, and strategic partnerships to drive improved patient outcomes and lower the cost of care across the entire post-acute episode, such as our fall prevention model rolled out to hospitals in late 2021.
We will continue to develop and implement post-acute solutions that allow us to apply our clinical expertise, large post-acute datasets, electronic medical record technologies, and strategic partnerships to drive improved patient outcomes and lower the cost of care across the entire post-acute episode, such as our reducing acute-care transfer model updated in 2022 and our fall prevention model implemented in 2022.
Together, they design and execute initiatives that strengthen relationships, improve communication, and increase understanding, so we can better serve each other, our patients, and our communities. We believe our DE&I program furthers our efforts to provide culturally competent care.
Together, they design and execute initiatives that strengthen relationships, improve communication, and increase understanding, so we can better serve each other, our patients, and our communities. We believe our DE&I program furthers our efforts to provide culturally competent care. The key components of our DE&I program are: • Workforce Attraction and Development.
In 2022, approximately 48 % of M edicare beneficiaries enrolled in Medicare Advantage plans. This percentage has steadily increased over time since 2003. The Congressional Budget Office projects that the share of all Medicare beneficiaries enrolled in Medicare Advantage plans will rise to about 61% by 2032 .
In 2023 , approximately 50% of M edicare beneficiaries enrolled in Medicare Advantage plans. This percentage has steadily increased over time since 2003. The Congressional Budget Office projects that the share of all Medicare beneficiaries enrolled in Medicare Advantage plans will rise to about 62% by 2033 .
Except for 50 employees at one hospital (approximately 15% of that hospital’s workforce), none of our employees are represented by a labor union as of December 31, 2022. The chart below includes a breakdown of our employees.
Except for 47 employees at one hospital (approximately 14.5% of that hospital’s workforce), none of our employees are represented by a labor union as of December 31, 2023. The chart below includes a breakdown of our employees.
As of or for the Year Ended December 31, 2022 2021 2020 Consolidated data: (Actual Amounts) Inpatient rehabilitation: Number of hospitals 153 145 137 Discharges 211,116 197,639 181,897 Number of licensed beds 10,356 9,924 9,505 Net operating revenues: (In Millions) Inpatient $ 4,251.6 $ 3,918.0 $ 3,496.1 Outpatient and other 97.0 96.9 70.2 Total $ 4,348.6 $ 4,014.9 $ 3,566.3 Our inpatient rehabilitation hospitals offer specialized rehabilitative care across an array of diagnoses and deliver comprehensive, high-quality, cost-effective patient care services.
As of or for the Year Ended December 31, 2023 2022 2021 Consolidated data: (Actual Amounts) Inpatient rehabilitation: Number of hospitals 161 153 145 Discharges 229,480 211,116 197,639 Number of licensed beds 10,778 10,356 9,924 Net operating revenues: (In Millions) Inpatient $ 4,693.8 $ 4,251.6 $ 3,918.0 Outpatient and other 107.4 97.0 96.9 Total $ 4,801.2 $ 4,348.6 $ 4,014.9 Our inpatient rehabilitation hospitals offer specialized rehabilitative care across an array of diagnoses and deliver comprehensive, high-quality, cost-effective patient care services.
Our other DE&I initiatives include scholastic partnerships with historically black colleges, recruitment tools to help identify and attract diverse talent, a website career tool to help veterans find jobs that closely align with their specific skills, and ongoing policy and procedure reviews to incorporate guidance and practices that align with our DE&I mission. • Community Partnership – We establish and maintain relationships with local organizations to improve health outcomes in our communities.
Our other DE&I initiatives include scholastic partnerships with historically black colleges, recruitment tools to help identify and attract diverse talent, a website career tool to help veterans find jobs that closely align with their specific skills, and ongoing policy and procedure reviews to incorporate guidance and practices that align with our DE&I mission.
State and local healthcare regulation may cover additional matters such as nurse staffing ratios, healthcare worker safety, marijuana legalization, and assisted suicide. We are also subject to the broader federal and state regulations that prohibit fraud and abuse in the delivery of healthcare services. Congress, HHS-OIG, and the DOJ have historically focused on fraud and abuse in healthcare.
State and local healthcare regulation may cover additional matters such as nurse staffing ratios, healthcare worker safety, disclosure of charges for services provided, marijuana legalization, and assisted suicide. We are also subject to the broader federal and state regulations that prohibit fraud and abuse in the delivery of healthcare services.
Violators of the Stark law and regulations may be subject to recoupments, civil monetary sanctions (up to $27,750 for each violation and assessments up to three times the amount claimed for each prohibited service) and exclusion from any federal, state, or other governmental healthcare programs. The statute also provides a penalty of up to $185,000 for a circumvention scheme.
Violators of the Stark law and regulations may be subject to recoupments, civil monetary sanctions (up to approximately $30,000 for each violation and assessments up to three times the amount claimed for each prohibited service) and exclusion from any federal, state, or other governmental healthcare programs.
To further aid in employee development, we have invested money in best-in-class technology to offer on-demand learning and development programs, and leadership coaching programs. Another important aspect of employee development is succession planning. We annually review our talent to identify potential successors for key positions and to identify candidates for accelerated development based on their performance and potential.
To further aid in employee development, we have invested in best-in-class technology to offer on-demand learning and development programs. Additionally, we annually review our talent to identify potential successors for key positions and to identify candidates for accelerated development based on their performance and potential.
Federal civil penalties will be adjusted to account for inflation each year. There are statutory exceptions to the Stark law for many of the customary financial arrangements between physicians and providers, including personal services contracts and leases.
The statute also provides a penalty of up to approximately $200,000 for a circumvention scheme. Federal civil penalties will be adjusted to account for inflation each year. There are statutory exceptions to the Stark law for many of the customary financial arrangements between physicians and providers, including personal services contracts and leases.
In 4 Table of Contents 2022, approximately 6% of patients recovering from a stroke in the U.S. were treated at our hospitals, accounting for approximately 19% of our overall patient mix.
In 4 2023, approximately 7% of patients recovering from a stroke in the U.S. were treated at our hospitals, accounting for approximately 18% of our overall patient mix.
We believe promoting employee development and engagement furthers our ability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment where staffing shortages are not uncommon.
Employee Development and Engagement . Our employee development and engagement further our ability to attract and retain healthcare professionals in a highly competitive environment where staffing shortages are not uncommon.
The HHS Office of Civil Rights (“HHS-OCR”) implemented a permanent HIPAA audit program for healthcare providers nationwide in 2016. As of December 31, 2022, we have not been selected for audit.
The United States Department of Health and Human Services Office of Civil Rights (“HHS-OCR”) implemented a permanent HIPAA audit program for healthcare providers nationwide in 2016. As of December 31, 2023, we have not been selected for audit.
Under these rules, improper acquisition, access, use, or disclosure is presumed to be a reportable breach, unless the potentially breaching party can demonstrate a low probability that protected health information has been compromised. In December 2020, HHS-OCR proposed a new rule that would modify HIPAA regulations.
Under these rules, improper acquisition, access, use, or disclosure is presumed to be a reportable breach, unless the potentially breaching party can demonstrate a low probability that protected health information has been compromised.
An example of this type of partnership is our arrangement with Holy Family Cristo Rey Catholic High School in Birmingham. This partnership allows adolescents from disadvantaged groups to gain tangible work experience in our corporate office while earning funds for school tuition. In 2022, we sponsored six students.
We establish and maintain relationships with local organizations to improve health outcomes in our communities. An example of this type of partnership is our arrangement with Holy Family Cristo Rey Catholic High School in Birmingham. This partnership allows adolescents from disadvantaged groups to gain tangible work experience in our corporate office while earning funds for school tuition.
We target the addition of 6 to 10 new inpatient rehabilitation hospitals and 80 to 120 beds to existing hospitals per year. In 2021, we opened 8 new hospitals (350 beds total) and added 117 beds to existing hospitals. In 2022, we opened 9 new hospitals (410 beds total) and added 87 beds to existing hospitals.
We target the addition of 6 to 10 new inpatient rehabilitation hospitals and 80 to 120 beds to existing hospitals per year. In 2023, we opened 8 new hospitals (395 beds total) and added 46 beds to existing hospitals.
The regulations provide patients with significant rights related to understanding and controlling how their health information is used or disclosed and require healthcare providers to implement administrative, physical, and technical practices to protect the security of individually identifiable health information. 16 Table of Contents The Health Information Technology for Economic and Clinical Health (“HITECH”) Act modifies and expands the privacy and security requirements of HIPAA.
The regulations provide patients with significant rights related to understanding and controlling how their health information is used or disclosed and require healthcare providers to implement administrative, physical, and technical practices to protect the security of individually identifiable health information.
We track and measure therapist and nurse turnover for our full-time employees (excluding those at new stores and most at the corporate office) on a quarterly and annual basis for significant trends and outliers, but we do not believe comparisons to benchmarks are material given the variations in survey data across markets, hospital sizes, practice settings, and practice specialties.
We track and measure therapist and nurse turnover for our full-time employees on a quarterly and annual basis for significant trends and outliers, but we do not believe comparisons of our data to external turnover benchmarks are a valid representation, as they do not account for the variations in survey data across markets, hospital sizes, practice settings, and practice specialties.
In addition, the DE&I department works closely with the quality, clinical and case management departments to improve health equity and ensure our interprofessional health care teams have the resources they need to provide culturally competent care. Employee Development and Engagement .
In addition, the DE&I department works closely with the quality, clinical and case management departments to improve health equity (including through development of our social determinants of health risk assessment for use by patient case managers) and ensure our interprofessional health care teams have the resources they need to provide culturally competent care.
HHS-OCR is responsible for enforcing the requirement that covered entities notify HHS and any individual whose protected health information has been improperly acquired, accessed, used, or disclosed. In certain cases, notice of a breach is required to be made to media outlets. The heightened penalties for noncompliance range from $100 to $50,000 per violation for most violations.
HHS-OCR is responsible for enforcing the requirement that covered entities notify the United States Department of Health and Human Services (“HHS”) and any individual whose protected health information has been improperly acquired, accessed, used, or disclosed. In certain cases, notice of a breach is required to be made to media outlets.
We believe these factors align with our strengths in, and focus on, inpatient rehabilitation services. Despite the growing demand for inpatient rehabilitation services, the number of inpatient rehabilitation facilities has remained relatively stable — decreasing modestly from 1,182 in 2015 to 1,180 in 2021.
We believe these factors align with our strengths in, and focus on, inpatient rehabilitation services. Despite the growing demand for inpatient rehabilitation services, the number of inpatient rehabilitation facilities has remained relatively stable — increasing just 0.17% from 1,179 in 2010 to 1,181 in 2022.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOther Regulatory Risks The ongoing evolution of the healthcare delivery system, including alternative payment models and value-based purchasing initiatives, in the United States may significantly affect our business and results of operations. The healthcare industry in general is facing regulatory uncertainty around attempts to improve outcomes and reduce costs, including coordinated care and integrated payment models.
Biggest changeRegardless, we, like other healthcare providers, are likely to incur additional expenses in an effort to comply with additional and changing quality reporting requirements. 24 Other Regulatory Risks The ongoing evolution of the healthcare delivery system, including alternative payment models and value-based purchasing initiatives, in the United States may significantly affect our business and results of operations.
Effective on January 1, 2021, the hospital price transparency rule requires hospitals to publish on the internet in a consumer-friendly format their standard charges based on negotiated rates for all items and services and up to 300 common shoppable services.
Effective January 1, 2021, the hospital price transparency rule requires hospitals to publish on the internet in a consumer-friendly format their standard charges based on negotiated rates for all items and services and up to 300 common shoppable services.
It has been widely reported that the challenging working conditions in healthcare associated with the COVID-19 pandemic have led to prevalent job dissatisfaction among clinicians. Availability of clinical staff, elevated turnover and staffing costs continue to be a challenge for us and other healthcare providers. The availability of staff may be exacerbated if immigration is limited in the future.
It has been widely reported that the challenging working conditions in healthcare associated with the COVID-19 pandemic have led to prevalent job dissatisfaction among clinicians. Availability of clinical staff, elevated turnover and staffing costs continue to be a challenge for us and other healthcare providers. The availability of staff may be exacerbated if immigration is significantly limited in the future.
The intent of tracking and publishing this data is to evaluate a given provider’s payment efficiency relative to the efficiency of the national median provider in that provider’s post-acute segment. CMS believes this measure will encourage improved efficiency and coordination of care in the post-acute setting by holding providers accountable for Medicare resource use during an episode of care.
The intent of tracking and publishing this data is to evaluate a given provider’s payment efficiency relative to the efficiency of the national median provider in that provider’s post-acute segment. CMS believes this measure will encourage improved efficiency and coordination of care in the post-acute setting by holding providers accountable for Medicare resource use during an episode of 26 care.
The charges for an individual item or service to be published include: • gross charge (charge as reflected on a hospital’s chargemaster, absent any discounts), • payer-specific negotiated charge (charge negotiated with a third party payer for an item or service), • de-identified minimum negotiated charge (lowest charge negotiated with all third-party payers), • de-identified maximum negotiated charge (highest charge negotiated with all third-party payers), and • discounted cash price (charge that applies to an individual who pays cash).
The charges for an individual item or service to be published include: • gross charge (charge as reflected on a hospital’s chargemaster, absent any discounts), • payer-specific negotiated charge (charge negotiated with a third party payer for an item or service), • de-identified minimum negotiated charge (lowest charge negotiated with all third-party payers), • de-identified maximum negotiated charge (highest charge negotiated with all third-party payers), and 33 • discounted cash price (charge that applies to an individual who pays cash).
For example, acute-care hospitals, including those owned and operated by large public companies, may choose to expand or begin offering post-acute rehabilitation services. Given that approximately 91% of our hospitals’ referrals come from acute-care hospitals, that increase in competition could materially and adversely affect our admission referrals in the related markets.
For example, acute-care hospitals, including those owned and operated by large public companies, may choose to expand or begin offering post-acute rehabilitation services. Given that approximately 91% of our hospitals’ admissions come from acute-care hospitals, that increase in competition could materially and adversely affect our admission referrals in the related markets.
In particular, if staffing costs rise at an annual rate greater than our net annual market basket update from Medicare, as occurred in 2022, or we experience a significant shift in our payor mix to lower rate payors such as Medicaid, our results of operations and cash flows will be adversely affected.
In particular, if staffing costs rise at an annual rate greater than our net annual market basket update from Medicare, as occurred in 2022 and 2023, or we experience a significant shift in our payor mix to lower rate payors such as Medicaid, our results of operations and cash flows will be adversely affected.
Any allegations of a failure to adequately address data privacy or security-related concerns, even if unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data privacy and security, could result in additional cost and liability to us, damage our relationships with patients and have a material adverse effect on our business.
Any allegations of a failure to adequately address data privacy or security-related concerns, even if unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data privacy and security, could result in additional cost and liability to us, damage our relationships with patients and business partners and have a material adverse effect on our business.
Without procedural protections, sub-regulatory guidance poses a risk above and beyond reasonable efforts to follow validly promulgated regulations, particularly when the agency or MAC seeking to enforce such sub-regulatory guidance is not the agency or MAC issuing the guidance and therefore not as familiar with the substance and nature of the underlying regulations or even clinical issues involved.
Without procedural protections, sub-regulatory guidance poses a risk above and beyond reasonable efforts to follow validly promulgated regulations, particularly when the agency or MAC seeking to enforce such sub-regulatory guidance is not the agency or MAC 29 issuing the guidance and therefore not as familiar with the substance and nature of the underlying regulations or even clinical issues involved.
If we are unable to generate sufficient cash flow from operations in the future to service our debt and meet our other needs or have an unanticipated cash payment obligation, we may have to refinance all or a portion of our debt, obtain additional financing or reduce expenditures or sell assets we deem necessary to our business.
If we are unable to generate sufficient cash flow from operations in the future to service our debt and meet our other needs or have an unanticipated cash payment obligation, we may have to 41 refinance all or a portion of our debt, obtain additional financing or reduce expenditures or sell assets we deem necessary to our business.
We monitor legal developments in data privacy and security regulations at the local, state and federal level, however, the regulatory framework for data privacy and security worldwide is continuously evolving and developing and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future.
We monitor legal developments in data privacy and security regulations at the local, state and federal level, however, the regulatory framework for data privacy and 31 security worldwide is continuously evolving and developing and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future.
Our clinicians must frequently assist patients who have difficulty with mobility. We cannot predict the impact any claims arising out of the care being provided (regardless of their ultimate outcomes) could have on our business or reputation or on our ability to attract and retain patients and employees.
Our clinicians must frequently assist patients who have difficulty with mobility. We cannot predict the impact any claims arising out of the care being provided (regardless of their ultimate outcomes) could have on our 39 business or reputation or on our ability to attract and retain patients and employees.
For example, in 2022, our wage and benefit costs increased at a rate in excess of our aggregate Medicare reimbursement rate increases. In any given year, the net effect of statutory and regulatory changes may result in a decrease in our reimbursement rate, and that decrease may occur at a time when our expenses are increasing.
For example, in 2022 and 2023, our wage and benefit costs increased at a rate in excess of our aggregate Medicare reimbursement rate increases. In any given year, the net effect of statutory and regulatory changes may result in a decrease in our reimbursement rate, and that decrease may occur at a time when our expenses are increasing.
Any contractual protections we have from our service providers may not be sufficient to adequately protect us from any such liabilities and losses, and we may be unable to enforce any such contractual protections. In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-regulatory standards from time to time.
Any contractual protections we have from our service providers may not be sufficient to adequately protect us from any such liabilities and losses, and we may be unable to enforce any such contractual protections. 32 In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-regulatory standards from time to time.
Additionally, interoperability and the sharing of health information have received increasingly negative publicity. There is at least one well publicized instance where organizations received significant negative publicity for sharing health data despite having appeared to comply in all respects with privacy law.
Additionally, interoperability and the sharing of health information have received increasingly negative publicity. There is at least one well publicized instance where organizations received significant negative publicity for sharing health data 30 despite having appeared to comply in all respects with privacy law.
They exercise independent medical judgment. We and our hospital medical directors, who are independent contractors, provide training on a regular basis to the physicians who treat patients at our hospitals regarding appropriate documentation. However, we ultimately do not and cannot control the physicians’ medical judgment.
They exercise independent medical judgment. We and our 28 hospital medical directors, who are independent contractors, provide training on a regular basis to the physicians who treat patients at our hospitals regarding appropriate documentation. However, we ultimately do not and cannot control the physicians’ medical judgment.
The nature and timing of the evolution or transformation of the current healthcare system to coordinated care delivery and integrated payment models and value-based purchasing remain uncertain. The development of new delivery and payment systems will almost certainly take significant time and expense.
The nature and timing of the evolution or transformation of the current healthcare system to coordinated care delivery and integrated payment models and value-based 25 purchasing remain uncertain. The development of new delivery and payment systems will almost certainly take significant time and expense.
We may be more vulnerable to the effects of a public health emergency than other businesses due to the nature of our patients, and a regional or global socio-political or other catastrophic event could severely disrupt our business .
We may be more vulnerable to the effects of a public health emergency than other businesses due to the nature of our patients, and a regional or global socio-political, weather or other catastrophic event could severely disrupt our business .
Furthermore, the proliferation of Medicare and Medicaid managed care programs could have a material adverse impact on the results of our operations as a result of more complicated authorization, billing and collection requirements implemented by such programs.
Furthermore, the proliferation of Medicare and Medicaid managed care programs could have a material adverse impact on the 23 results of our operations as a result of more complicated authorization, billing and collection requirements implemented by such programs.
The lack of availability of clinical personnel is a significant operating issue facing healthcare providers. The operating conditions associated with the COVID-19 pandemic significantly affected the availability and turnover of clinical staff and, in turn, increased staffing costs.
The lack of availability of clinical personnel is a significant operating issue facing healthcare providers. The operating 38 conditions associated with the COVID-19 pandemic significantly affected the availability and turnover of clinical staff and, in turn, increased staffing costs.
The amount of any such taxes for which we would be responsible may be significant, and if we were unable to obtain indemnification payments from Enhabit to which we are entitled under the tax matters agreement or other agreements entered into in connection with the Spin Off, we would incur significant losses. 18 Table of Contents Reimbursement Risks Reductions or changes in reimbursement from government or third-party payors could adversely affect our Net operating revenues and other operating results.
The amount of any such taxes for which we would be responsible may be significant, and if we were unable to obtain indemnification payments from Enhabit to which we are entitled under the tax matters agreement or other agreements entered into in connection with the Spin Off, we would incur significant losses. 18 Reimbursement Risks Reductions or changes in reimbursement from government or third-party payors could adversely affect our Net operating revenues and other operating results.
In December 2017, we received notice of a UPIC audit at one of our hospitals. The UPIC sampled 100 claims and challenged the propriety of a subset of the sample representing $1.3 million in previously paid claims.
In December 2017, we received notice of a UPIC audit at one of our hospitals. The UPIC sampled 100 21 claims and challenged the propriety of a subset of the sample representing $1.3 million in previously paid claims.
We also expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security proposed and enacted in various jurisdictions. The U.S.
We expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security proposed and enacted in various jurisdictions. The U.S.
Our inability, or the inability of our partners or vendors, to continue to maintain and upgrade information systems, software, and hardware could disrupt or reduce the efficiency of our operations, including affecting patient care.
Our inability, or the inability of our partners or vendors, to continue to secure, maintain and upgrade information systems, software, and hardware could disrupt or reduce the efficiency of our operations, including affecting patient care.
In a recent federal court case, the Fifth Circuit Court of Appeals ruled in favor of CMS and affirmed the application of extrapolation errors identified in a sample of claims to support larger claims for overpayment. As discussed under "Reimbursement Risks” above, we are currently challenging, among other things, the use of extrapolation in a 2017 UPIC audit.
In a recent federal court case, the Fifth Circuit Court of Appeals ruled in favor of CMS and affirmed the application of extrapolation errors identified in a sample of claims to support larger claims for overpayment. As discussed under “Reimbursement Risks” above, we are currently challenging, among other things, the use of extrapolation in a 2017 UPIC audit.
In 2017, the California Supreme Court held that plaintiffs bringing suit under PAGA are generally entitled to request and receive a significant amount of information from the employer early in the litigation, which creates pressure for employers to settle early to avoid substantial litigation costs and which has resulted in a significant increase PAGA claims in recent years.
In 2017, the California Supreme Court held that plaintiffs bringing suit under PAGA are generally entitled to request and receive a significant amount of information from the employer early in the litigation, which creates pressure for employers to settle early to avoid substantial litigation burdens and which has resulted in a significant increase in PAGA claims in recent years.
For example, CMS recently established new case-mix classification models for 19 Table of Contents both home health and skilled nursing facilities which rely on patient characteristics rather than the amount of therapy received to determine payments. Another example is CMS’s implementation of the new patient assessment measures for IRFs discussed below.
For example, CMS recently established new case-mix classification models for 19 both home health and skilled nursing facilities which rely on patient characteristics rather than the amount of therapy received to determine payments. Another example is CMS’s implementation of the new patient assessment measures for IRFs discussed below.
However, given the increasing cyber security threats in the healthcare industry, there can be no assurance we will not experience business interruptions; data loss, ransom, misappropriation or corruption; theft or misuse of proprietary data, patient or other personally identifiable information; or litigation, investigation, or regulatory action related to any of those, any of which could have a material adverse effect on our patient care, ability to admit patients, financial position, and results of operations and harm our business reputation.
However, given the increasing cybersecurity threats in the healthcare industry, there can be no assurance we will not experience business interruptions; data loss, ransom, misappropriation or corruption, theft, or misuse of proprietary data, patient or other personally identifiable information; or litigation, investigation, or regulatory action related to any of those, any of which could have a material adverse effect on our patient care, ability to admit patients, financial position, and results of operations and harm our business reputation.
We currently have a minimal number of union employees, so an increase in labor union activity could have a significant impact on our staffing costs. Our failure to recruit and retain qualified medical personnel, or to control our staffing costs, could have a material adverse effect on our business, financial position, results of operations, and cash flows.
We currently have a minimal number of union employees, so an increase in labor union activity could have a significant impact on our staffing costs. Our failure to recruit and retain qualified clinical personnel, or to control our staffing costs, could have a material adverse effect on our business, financial position, results of operations, and cash flows.
These contractors conduct audits with a focus on potential fraud and abuse issues. Like the RACs, the UPICs conduct audits and have the ability to refer matters to the HHS-OIG or the United States Department of Justice (“DOJ”). Unlike RACs, however, UPICs do not receive a specific financial incentive based on the amount of the error.
The UPICs conduct audits with a focus on potential fraud and abuse issues. Like the RACs, the UPICs conduct audits and have the ability to refer matters to the HHS-OIG or the United States Department of Justice (“DOJ”). Unlike RACs, however, UPICs do not receive a specific financial incentive based on the amount of the error.
Although we remained in compliance with the financial ratios and financial condition tests as of December 31, 2022, we cannot provide assurance we will continue to do so. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests.
Although we remained in compliance with the financial ratios and financial condition tests as of December 31, 2023, we cannot provide assurance we will continue to do so. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests.
The HIPAA privacy and security regulations protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend, and seek accounting of their own health information, and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose.
The HIPAA privacy and security regulations protect medical records and other PHI by limiting their use and disclosure, giving individuals the right to access, amend, and seek accounting of their own health information, and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose.
Under the pre-claim review choice, services could begin prior to the submission of the review request and continue while the decision is being made. The pre-claim review request with required documentation must be submitted and reviewed before the final claim is submitted for payment.
Under the pre-claim review choice, services may begin prior to the submission of the review request and continue while the decision is being made. The pre-claim review request with required documentation must be submitted and reviewed before the final claim is submitted for payment.
After the initial four states, CMS intends to expand the demonstration to include additional IRFs based on the Medicare Administrative Contractor to which those IRFs submit claims. Under the demonstration, participating IRFs would have an initial choice between pre-claim or post-payment review of 100% of claims submitted to demonstrate compliance with applicable Medicare coverage and clinical documentation requirements.
After the initial four states, CMS intends to expand the demonstration to include additional IRFs based on the Medicare Administrative Contractor to which those IRFs submit claims. Under the IRF RCD, participating IRFs have an initial choice between pre-claim or post-payment review of 100% of claims submitted to demonstrate compliance with applicable Medicare coverage and clinical documentation requirements.
DOJ has pursued and recovered record amounts based on alleged healthcare fraud. The increased enforcement efforts have frequently included aggressive arguments and interpretations of laws and regulations that pose risks for all providers. For example, the federal government has increasingly asserted that incidents of 29 Table of Contents erroneous billing or record keeping may represent violations of the FCA.
DOJ has pursued and recovered record amounts based on alleged healthcare fraud. The increased enforcement efforts have frequently included aggressive arguments and interpretations of laws and regulations that pose risks for all providers. For example, the federal government has increasingly asserted that incidents of erroneous billing or record keeping may represent violations of the FCA.
If a default occurs, the lenders could exercise their rights, including declaring all the funds borrowed (together with accrued and unpaid interest) to be immediately 40 Table of Contents due and payable, terminating their commitments or instituting foreclosure proceedings against our assets, which, in turn, could cause the default and acceleration of the maturity of our other indebtedness.
If a default occurs, the lenders could exercise their rights, including declaring all the funds borrowed (together with accrued and unpaid interest) to be immediately due and payable, terminating their commitments or instituting foreclosure proceedings against our assets, which, in turn, could cause the default and acceleration of the maturity of our other indebtedness.
Any associated loss of revenue or increased legal costs could materially and adversely affect our financial position, results of operations, and cash flows. 30 Table of Contents Efforts to comply with regulatory mandates to increase the use of electronic health data and health system interoperability may lead to enforcement and negative publicity which could adversely affect our business.
Any associated loss of revenue or increased legal costs could materially and adversely affect our financial position, results of operations, and cash flows. Efforts to comply with regulatory mandates to increase the use of electronic health data and health system interoperability may lead to enforcement and negative publicity which could adversely affect our business.
Additionally, in states with CON laws, it is not unusual for third-party providers to challenge the initial awards of CONs, the increase in the number of approved beds 36 Table of Contents in an existing CON, or the expansion of the area served, and the adjudication of those challenges and related appeals may take many years.
Additionally, in states with CON laws, it is not unusual for third-party providers to challenge the initial awards of CONs, the increase in the number of approved beds in an existing CON, or the expansion of the area served, and the adjudication of those challenges and related appeals may take many years.
Local, regional or national governments might limit or ban public interactions to halt or delay the spread of diseases causing business disruptions and the temporary 39 Table of Contents suspension of our services. Accordingly, certain public health catastrophes could have a material adverse effect on our financial condition and results of operations.
Local, regional or national governments might limit or ban public interactions to halt or delay the spread of diseases causing business disruptions and the temporary suspension of our services. Accordingly, certain public health catastrophes could have a material adverse effect on our financial condition and results of operations.
A compromise of our network security measures or other controls, or of those businesses or vendors with whom we interact, including our direct and indirect cloud service providers, which results in confidential information being accessed, obtained, damaged or used by unauthorized persons, or unavailability of systems necessary to the operation of our business, could impact patient care, harm our reputation, and expose us to significant remedial costs as well as regulatory actions (fines and penalties) and claims from patients, financial institutions, regulatory and law enforcement agencies, and other persons, any of which could have a material adverse effect on our business, financial position, results of operations and cash flows.
A compromise of the network security measures or other controls of those businesses, vendors, or governmental agencies and their contractors with whom we interact, including our direct and indirect cloud service providers and CMS, which results in confidential information being accessed, obtained, damaged or used by unauthorized persons, or unavailability of systems necessary to the operation of our business, could impact patient care, claims billing and collection, harm our reputation, and expose us to significant remedial costs as well as regulatory actions (fines and penalties) and claims from patients, financial institutions, regulatory and law enforcement agencies, and other persons, any of which could have a material adverse effect on our business, financial position, results of operations and cash flows.
We may experience temporary decreases in Net operating revenues and in cash flow, or we may incur costs associated with patient care for which the Medicare claim is subsequently denied, which could have an adverse effect on our financial position, results of operations, and liquidity.
We may ultimately experience decreases in Net operating revenues and in cash flow, or we may incur costs associated with patient care for which the Medicare claim is subsequently denied, any of which could have an adverse effect on our financial position, results of operations, and liquidity.
Following this audit, the HHS-OIG 28 Table of Contents announced in December 2021 its recommendation to CMS to establish an IRF transfer payment policy for early discharges to home health care in which the IRF would only receive a per diem rate in lieu of the full case-mix payment.
Following this audit, the HHS-OIG announced in December 2021 its recommendation to CMS to establish an IRF transfer payment policy for early discharges to home health care in which the IRF would only receive a per diem rate in lieu of the full case-mix payment.
Moreover, from time to time, concerns may be expressed about whether our products and services compromise the privacy of patients and others. Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our businesses, discourage potential patients from our products and services and have a material adverse effect on our business.
Moreover, from time to time, concerns may be expressed about whether our services or business practices compromise the privacy of patients and others. Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our businesses, discourage potential patients from seeking our services and have a material adverse effect on our business.
We operate in the competitive, fragmented inpatient rehabilitation industry. Although we are the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals, in any particular market we may encounter competition from local or national entities with longer operating histories or other competitive advantages.
Although we are the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals, in any particular market we may encounter competition from local or national entities with longer operating histories or other competitive advantages.
Generally, we, working with our cyber security vendors, attempt to monitor various channels and sources to identify vulnerabilities and threats in both third-party vendor software and services as well as our own systems and to mitigate the risks promptly.
Generally, we, working with our cybersecurity vendors, attempt to monitor various channels and sources to identify vulnerabilities and threats in both third-party vendor software and services as well as our own systems and to mitigate the risks promptly.
We settled the DOJ investigation, together with the related qui tam or whistleblower lawsuits, in 2019 for a total payment of $48 million. In return for the settlement payment, the plaintiffs dismissed with prejudice their pending qui tam claims, and DOJ provided Encompass Health and all its subsidiaries with a release from civil liability.
We settled the DOJ investigation, together with the related qui tam or whistleblower lawsuits, in 2019 for a total payment of $48 million, and we expressly denied any wrongdoing. In return for the settlement payment, the plaintiffs dismissed with prejudice their pending qui tam claims, and DOJ provided Encompass Health and all its subsidiaries with a release from civil liability.
Some contractors are paid a percentage of the overpayments recovered. One type of audit contractor, the Recovery Audit Contractors (“RACs”), receive claims data directly from MACs on a monthly or quarterly basis and are authorized to review previously paid claims. RAC audits of IRFs have focused on reviews of patient coding, medical necessity, and billing accuracy.
One type of audit contractor, the Recovery Audit Contractors (“RACs”), receive claims data directly from MACs on a monthly or quarterly basis and are authorized to review previously paid claims. RAC audits of IRFs have focused on reviews of patient coding, medical necessity, and billing accuracy.
In addition, all 50 U.S. states and the District of Columbia have enacted breach notification laws that may require us to notify patients, employees or regulators in the event of unauthorized access to or disclosure of personal or confidential information experienced by us or our service providers.
In addition, all 50 U.S. states and the District of Columbia have enacted breach notification laws that may require us to notify patients, employees, third parties, regulators and the general public in the event of unauthorized access to or disclosure of personal or confidential information experienced by us or our service providers.
There are a number of federal and state laws, rules and regulations, as well as contractual obligations, relating to the protection, collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information, including certain patient health information, such as patient records.
There are a number of federal, state and local laws, rules and regulations, as well as contractual obligations, relating to the protection, collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information, including protected health information (“PHI”), such as patient medical records.
During 2022 high yield, investment grade, and sovereign credit markets were affected by geopolitical turmoil, inflationary pressures, and changing central bank policies. These conditions resulted in unsettled credit markets for much of the year.
In recent years, high yield, investment grade, and sovereign credit markets were affected by geopolitical turmoil, inflationary pressures, and changing central bank policies. These conditions resulted in unsettled credit markets for much of the year.
Congress is not obligated to adopt MedPAC recommendations, and, based on outcomes in previous years, there can be no assurance Congress will adopt MedPAC’s recommendations in a given year. However, MedPAC’s recommendations have, and could in the future, become the basis for legislative or regulatory action.
Neither Congress nor CMS is obligated to adopt MedPAC recommendations, and, based on outcomes in previous years, there can be no assurance MedPAC’s recommendations will be adopted in a given year. However, MedPAC’s recommendations have, and could in the future, become the basis for legislative or regulatory action.
Although we have contractual protections with many of our service providers, any actual or perceived security breach could harm our reputation and brand, expose us to potential liability or require us to expend significant resources on data security and in responding to any such actual or perceived breach.
Although we have contractual protections with many of our service providers, any actual or perceived security breach could harm our reputation and brand, expose us to potential liability or require us to expend significant resources on data security and in responding to any such actual or perceived breach, including defending class action litigation.
Congress has considered, but not yet passed, several comprehensive federal data privacy bills over the past few years, such as the CONSENT Act, which was intended to be similar to the landmark 2018 European Union General Data Protection Regulation.
Congress has considered, but not yet passed, several comprehensive federal data privacy bills over the past few years, such as the CONSENT Act, which was intended to be similar to the landmark 2018 European Union General Data Protection Regulation. We expect federal data privacy laws to continue to evolve.
However, the measures may be misleading as they do not incorporate patient outcomes associated with those resources used. CMS has not proposed to compare payment efficiency across provider segments. On December 14, 2020, CMS announced the proposal of a five-year review choice demonstration for inpatient rehabilitation services (the “IRF RCD”).
However, the measures may be misleading as they do not incorporate patient outcomes associated with those resources used. CMS has not proposed to compare payment efficiency across provider segments. On December 14, 2020, CMS announced the proposal of a five-year review choice demonstration for inpatient rehabilitation services (the “IRF RCD”). IRF RCD began in Alabama in August 2023.
In recent years, this protracted appeals process led to a significant backlog of appeals of denials, which a federal judge ultimately ordered HHS to resolve by the end of 2022. By December 31, 2022, we cleared substantially all of our backlog awaiting ALJ hearing.
In recent years, this protracted appeals process led to a significant backlog of appeals of denials, which a federal judge ultimately ordered HHS to resolve by the end of 2022. By December 31, 2022, substantially all of our backlog awaiting ALJ hearing had been resolved.
In connection with CMS’s final rulemaking for the IRF-PPS in each year since 2008, MedPAC has recommended either no updates to payments or reductions to payments. For example, in a March 2020 report to Congress, MedPAC recommended, among other things, legislative changes to reduce by 5% the base payment rate under IRF-PPS.
In connection with CMS’s final rulemaking for the IRF-PPS in each year since 2008, MedPAC has recommended either no updates to payments or reductions to payments. For example, in its March 2023 report to Congress, MedPAC recommended, among other things, legislative changes to reduce by 3% the base payment rate under IRF-PPS.
Under the TPE program, MACs use data analysis to identify healthcare providers with high claim error rates and items and services that have high national error rates. Once a MAC selects a provider for claims review, the initial volume of claims review is limited to 20 to 40 claims.
Under CMS’s Targeted Probe and Educate (“TPE”) program, MACs use data analysis to identify healthcare providers with high claim error rates and items and services that have high national error rates. Once a MAC selects a provider for claims review, the initial volume of claims review is limited to 20 to 40 claims.
To the extent we are attempting to integrate multiple businesses at the same time, we may not be able to do so as efficiently or 37 Table of Contents effectively as we initially anticipate.
To the extent we are attempting to integrate multiple businesses at the same time, we may not be able to do so as efficiently or effectively as we initially anticipate.
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.
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.
As of December 31, 2022, we have approximately $2.4 billion of long-term debt outstanding (including that portion of long-term debt classified as current and excluding $359.8 million in finance leases). See Note 10, Long-term Debt , to the accompanying consolidated financial statements.
As of December 31, 2023, we have approximately $2.4 billion of long-term debt outstanding (including that portion of long-term debt classified as current and excluding $340.1 million in finance leases). See Note 10, Long-term Debt , to the accompanying consolidated financial statements.
We may experience decreases in Net operating revenues and decreases in cash flow as a result of the increasing unresolved denials and the associated increasing accounts receivable, which may in turn force us to change the patients we admit and conditions we treat.
We may experience additional decreases in Net operating revenues and decreases in cash flow as a result of greater frequency of unfavorable resolution of denials or increasing unresolved denials and the associated increasing accounts receivable, which may in turn force us to change the patients we admit and conditions we treat.
The management of protected health information (“PHI”) is subject to several regulations at the federal level, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the HITECH Act.
The management of PHI is subject to several regulations at the federal level, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the HITECH Act.
As of December 31, 2022, approximately 68% of our consolidated Property and equipment, net was held by our company and its guarantor subsidiaries under its credit agreement.
As of December 31, 2023, approximately 67% of our consolidated Property and equipment, net was held by our Company and its guarantor subsidiaries under its credit agreement.
In recent years, several hospitals have reported being victims of ransomware attacks in which they lost access to their systems, including clinical systems, during the course of the attacks.
In recent years, a number of hospitals and hospital systems have reported being victims of ransomware attacks in which they lost access to their systems, including clinical systems, during the course of the attacks.
For additional discussion of these laws, see Item 1, Business , “Regulation.” We expend significant capital to protect against the threat of security breaches, including cyber attacks, email phishing schemes, malware and ransomware.
For additional discussion of these laws see Item 1, Business , “Regulation” and our cybersecurity program see Item 1C, Cybersecurity . We expend significant capital to protect against the threat of security breaches, including cyber attacks, email phishing schemes, malware and ransomware.
For additional discussion of how we are reimbursed by Medicare, see Item 1, Business , “Regulatory and Reimbursement Challenges” and “Sources of Revenues—Medicare Reimbursement.” In addition, there are increasing pressures, including as a result of the ACA, from many third-party payors to control healthcare costs and to reduce or limit increases in reimbursement rates for medical services.
For additional discussion of how we are reimbursed by Medicare, see Item 1, Business , “Regulatory and Reimbursement Challenges” and “Sources of Revenues—Medicare Reimbursement.” In addition, there are increasing pressures from managed care, including Medicare Advantage, and other third-party payors to control healthcare costs and to reduce or limit increases in reimbursement rates for medical services.
We cannot predict when or how these audit programs will affect us. Our third-party payors may also, from time to time, request audits of the amounts paid, or to be paid, to us.
We cannot predict when or how these audit programs will affect us. Our managed care, including Medicare Advantage, and other third-party payors may also, from time to time, request audits of the amounts paid, or to be paid, to us.
Our ability to attract patients could be adversely affected if any of our hospitals fail to provide or maintain a reputation for providing high-quality care on a cost-effective basis as compared to other providers.
Our ability to attract patients could be adversely affected if any of our hospitals fail to provide or maintain a reputation for providing high-quality care on a cost-effective basis as compared to other providers. Quality reporting requirements could adversely affect the Medicare reimbursement we receive.
These laws and regulations relate to, among other things: • licensure, certification, enrollments, and accreditation; • policies, either at the national or local level, delineating what conditions must be met to qualify for reimbursement under Medicare (also referred to as coverage requirements); • coding and billing for services; • requirements of the 60% compliance threshold under the 2007 Medicare Act; • relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws; • quality of medical care; • use and maintenance of medical supplies and equipment; • maintenance and security of patient information and medical records; • minimum staffing; • acquisition and dispensing of pharmaceuticals and controlled substances; and • disposal of medical and hazardous waste.
These laws and regulations relate to, among other things: • licensure, certification, enrollments, and accreditation; • policies, either at the national or local level, delineating what conditions must be met to qualify for reimbursement under Medicare (also referred to as coverage requirements); • coding and billing for services; • requirements of the “60% Rule” applicable to inpatient rehabilitation facilities; 27 • relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws; • quality of medical care; • use and maintenance of medical supplies and equipment; • maintenance and security of patient information and medical records; • minimum staffing; • acquisition and dispensing of pharmaceuticals and controlled substances; • pricing transparency and similar consumer protection rules; and • disposal of medical and hazardous waste.
Our loss of, or failure to maintain, existing relationships or our failure to develop new relationships could adversely affect our ability to grow our business and operate profitably. We may have difficulty completing joint ventures, investments and transactions that increase our capacity consistent with our growth strategy.
Our loss of, or failure to maintain, existing relationships, including because of closures of referral sources in concentrated markets, or our failure to develop new relationships could adversely affect our ability to grow our business and operate profitably. 36 We may have difficulty completing joint ventures, investments and transactions that increase our capacity consistent with our growth strategy.
In addition, costs, unexpected problems, and interruptions associated with the implementation or transition to new systems or technology or with adequate support of those systems or technology across numerous hospitals could have a material adverse effect on our business, financial position, results of operations, and cash flows. We face intense competition for patients from other healthcare providers.
In addition, costs, unexpected problems, and interruptions associated with the implementation or transition to new systems or technology or with adequate support of those systems or technology across numerous hospitals could have a material adverse effect on our business, financial position, results of operations, and cash flows.
When the government or its contractors reject the medical judgment of physicians or impose documentation and other requirements beyond the language of the statutes and regulations, patient access to inpatient rehabilitation as well as our Medicare reimbursement from the related claims may be adversely affected. In August 2017, CMS announced the Targeted Probe and Educate (“TPE”) initiative.
When the government or its contractors reject the medical judgment of physicians or impose documentation and other requirements beyond the language of the statutes and regulations, patient access to inpatient rehabilitation as well as our Medicare reimbursement from the related claims may be adversely affected.
Due to the sheer number of appeals by all Medicare providers and various administrative inefficiencies, including a shortage of judges, appeals that are required by statute to be resolved in a matter of months have commonly taken years to complete.
We have historically appealed a majority of our claims denials. Due to the sheer number of appeals by all Medicare providers and various administrative inefficiencies, including a shortage of judges, appeals that are required by statute to be resolved in a matter of months have in the past taken years to complete.
A change in our estimates of collectability or a delay in collection of accounts receivable could adversely affect our results of operations and liquidity. The estimates are based on a variety of factors, including the length of time receivables are past due, significant one-time events, contractual rights, client funding, political pressures, discussions with clients, and historical experience.
A change in our estimates of collectability or a delay in collection of accounts receivable could adversely affect our results of operations and liquidity. The estimates are based on a variety of factors, including the length of time receivables are past due, significant one-time events, contractual rights, the nature of the underlying payment denials, and historical experience.
Failure to maintain proper function, security, or availability of our information systems or protect our data against unauthorized access, or the failure of one or more of our key partners, vendors, or other counterparties to do these things, could have a material adverse effect on our business, financial position, results of operations, and cash flows.
The failure of our business partners and vendors to maintain the proper function, availability, or security of their information systems or to protect against unauthorized access could have a material adverse effect on our business, financial position, results of operations, and cash flows.
Other unforeseen events, including acts of violence, war, terrorism and other international, regional or local instability or conflicts (including labor issues), embargoes, natural disasters such as earthquakes, whether occurring in the United States or abroad, could restrict or disrupt our operations.
Other unforeseen events, including acts of violence, war, terrorism and other international, regional or local instability or conflicts (including labor issues), embargoes, short-term and long-term weather-related events, natural disasters such as earthquakes and floods, whether occurring in the United States or abroad, could restrict or disrupt our operations and negatively affect our results of operations and cash flows.
Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may conflict with each other, which significantly complicates compliance efforts.
New legislation proposed or enacted will continue to shape the data privacy environment. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may conflict with each other, which significantly complicates compliance efforts.
For example, in both 2021 and 2022, Microsoft reported a vulnerability within its widely deployed email exchange services. In December 2021, widespread exploitation of a vulnerable logging software installed within commonly used applications, services, and websites gave threat actors the ability to execute code remotely and potentially take control of affected systems.
For example, in December 2021, widespread exploitation of a vulnerable logging software installed within commonly used applications, services, and websites 34 gave threat actors the ability to execute code remotely and potentially take control of affected systems.
There can be no assurance all of our hospitals will meet quality reporting requirements or quality performance in the future which may result in one or more of our hospitals seeing a reduction in its Medicare reimbursements.
In healthcare generally, the burdens associated with collecting, recording, and reporting quality data are increasing. There can be no assurance all of our hospitals will meet quality reporting requirements or quality performance in the future which may result in one or more of our hospitals seeing a reduction in its Medicare reimbursements.
Because one MAC has jurisdiction over a significant number of our hospitals and our hospitals derive a substantial portion of their revenue from Medicare, the adoption of restrictive or otherwise incorrect interpretations of coverage rules by that MAC could result in a large number of payment denials and materially and adversely affect our financial position, results of operations, and cash flows. 22 Table of Contents Delays in the administrative appeals process associated with denied Medicare reimbursement claims could delay or reduce our reimbursement for services previously provided.
Because one MAC has jurisdiction over a significant number of our hospitals and our hospitals derive a substantial portion of their revenue from Medicare, the adoption of restrictive or otherwise incorrect interpretations of coverage rules by that MAC could result in a large number of payment denials and materially and adversely affect our financial position, results of operations, and cash flows.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe do not believe any one of our individual properties is material to our consolidated operations. 41 Table of Contents The following table sets forth information regarding our hospital locations as of December 31, 2022: Number of Hospitals State Licensed Beds Building and Land Owned Building Owned and Land Leased Building and Land Leased Total Alabama * 457 3 3 1 7 Arizona 396 1 2 3 6 Arkansas 368 3 1 1 5 California 251 4 — — 4 Colorado 124 1 — 1 2 Delaware * 40 — 1 — 1 Florida 1,323 17 1 1 19 Georgia * 280 4 (1) 1 — 5 Idaho 40 — 1 — 1 Illinois * 205 2 2 — 4 Indiana 98 1 — — 1 Iowa 40 1 — — 1 Kansas 177 1 — 1 2 Kentucky * 343 2 1 — 3 Louisiana 87 2 — — 2 Maine * 100 — — 1 1 Maryland * 74 1 — — 1 Massachusetts * 529 2 — 2 4 Mississippi * 43 — — 1 1 Missouri * 196 — 2 — 2 Nevada * 219 2 — 1 3 New Hampshire 50 — 1 — 1 New Jersey * 199 1 1 1 3 New Mexico 87 1 — — 1 North Carolina * 68 1 — — 1 North Dakota 40 — — 1 1 Ohio 260 2 1 1 4 Oklahoma 60 — 1 — 1 Pennsylvania 709 5 — 4 9 Puerto Rico * 75 — — 2 2 South Carolina * 496 3 4 1 8 South Dakota 40 1 — — 1 Tennessee * 493 6 3 — 9 Texas 1,746 13 3 10 26 Utah 84 1 — — 1 Virginia * 297 2 1 3 6 West Virginia * 262 2 2 — 4 10,356 85 32 36 153 * Hospital certificate of need state or U.S. territory. 42 Table of Contents (1) The inpatient rehabilitation hospitals in Augusta and Newnan, Georgia are parties to industrial development bond financings that reduce the ad valorem taxes payable by each hospital.
Biggest changeWe do not believe any one of our individual properties is material to our consolidated operations. 45 The following table sets forth information regarding our hospital locations as of December 31, 2023: Number of Hospitals State Licensed Beds Building and Land Owned Building Owned and Land Leased Building and Land Leased Total Alabama * 457 3 3 1 7 Arizona 396 1 2 3 6 Arkansas 368 3 1 1 5 California 251 4 — — 4 Colorado 124 1 — 1 2 Delaware * 40 — 1 — 1 Florida 1,373 19 1 — 20 Georgia * 330 5 (1) 1 — 6 Idaho 40 — 1 — 1 Illinois * 205 2 2 — 4 Indiana 98 1 — — 1 Iowa * 40 1 — — 1 Kansas 177 1 — 1 2 Kentucky * 343 2 1 — 3 Louisiana 87 2 — — 2 Maine * 100 — — 1 1 Maryland * 134 2 — — 2 Massachusetts * 529 2 — 2 4 Mississippi * 43 — — 1 1 Missouri * 196 — 2 — 2 Nevada 219 2 — 1 3 New Hampshire 50 — 1 — 1 New Jersey * 199 1 1 1 3 New Mexico 87 1 — — 1 North Carolina * 68 1 — — 1 North Dakota 40 — — 1 1 Ohio 260 2 1 1 4 Oklahoma 100 1 1 — 2 Pennsylvania 690 5 — 4 9 Puerto Rico * 75 — — 2 2 South Carolina 496 3 4 1 8 South Dakota 40 1 — — 1 Tennessee * 566 7 3 — 10 Texas 1,812 14 3 10 27 Utah 84 1 — — 1 Virginia * 297 2 1 3 6 West Virginia * 272 2 2 — 4 Wisconsin 92 1 — 1 2 10,778 93 32 36 161 * Hospital certificate of need state or U.S. territory.
Added
In 2023, South Carolina enacted legislation to repeal CON laws for several provider types, including inpatient rehabilitation hospitals. 46 (1) The inpatient rehabilitation hospitals in Augusta and Newnan, Georgia are parties to industrial development bond financings that reduce the ad valorem taxes payable by each hospital.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings We provide services in the highly regulated healthcare industry. In the ordinary course of our business, we are a party to various legal actions, proceedings, and claims as well as regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties.
Biggest changeIn the ordinary course of our business, we are subject to regulatory and other governmental audits and investigations and are party to various legal actions, proceedings, and claims, including employment and personal injury claims. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties.
Therefore, from time to time, we may be party to one or more undisclosed qui tam cases brought pursuant to the FCA. Information relating to certain legal proceedings in which we are involved is included in Note 18, Contingencies and Other Commitments , to the accompanying consolidated financial statements. Item 4.
Therefore, from time to time, we may be party to one or more undisclosed qui tam cases brought pursuant to the FCA. Information relating to certain legal proceedings in which we are involved is included in Note 18, Contingencies and Other Commitments , to the accompanying consolidated financial statements. Item 4. Mine Safety Disclosures Not applicable. 47 PART II
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Mine Safety Disclosures Not applicable. 43 Table of Contents PART II
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Item 3. Legal Proceedings 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.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeCOMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN Among Encompass Health Corporation, the S&P 500 Index, and the S&P Health Care Services Select Industry Index For the Year Ended December 31, Base Period Cumulative Total Return Company/Index Name 2017 2018 2019 2020 2021 2022 Encompass Health Corporation 100.00 126.89 144.98 176.03 141.00 165.08 S&P 500 100.00 95.62 125.72 148.85 191.58 156.88 SPSIHP 100.00 103.02 122.78 164.29 180.72 145.15 Item 6. [Reserved] 46 Table of Contents
Biggest changeCOMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN Among Encompass Health Corporation, the S&P 500 Index, and the S&P Health Care Services Select Industry Index For the Year Ended December 31, Base Period Cumulative Total Return Company/Index Name 2018 2019 2020 2021 2022 2023 Encompass Health Corporation 100.00 114.26 138.73 111.12 130.10 146.52 S&P 500 100.00 131.49 155.68 200.37 164.08 207.21 SPSIHP 100.00 119.18 159.48 175.42 140.90 148.19 Item 6. [Reserved] 50
(4) This amount represents 104,567 restr icted stock units issued under the 2004 Amended and Restated Director Incentive Plan, the material terms of which are described below. 2004 Amended and Restated Director Incentive Plan The 2004 Amended and Restated Director Incentive Plan (the “2004 Plan”) provided for the grant of common stock, awards of restricted common stock, and the right to receive awards of common stock, which we refer to as “restricted stock units,” to our non-employee directors.
(4) This amount represents restr icted stock units issued under the 2004 Amended and Restated Director Incentive Plan, the material terms of which are described below. 2004 Amended and Restated Director Incentive Plan The 2004 Amended and Restated Director Incentive Plan (the “2004 Plan”) provided for the grant of common stock, awards of restricted common stock, and the right to receive awards of common stock, which we refer to as “restricted stock units,” to our non-employee directors.
Our compensation committee has in prior years used the SPSIHP as a benchmark for a portion of the awards under our long-term incentive program. The graph assumes $100 invested on December 31, 2017 in our common stock and each of the indices. The returns below assume reinvestment of dividends paid on the related common stock.
Our compensation committee has in prior years used the SPSIHP as a benchmark for a portion of the awards under our long-term incentive program. The graph assumes $100 invested on December 31, 2018 in our common stock and each of the indices. The returns below assume reinvestment of dividends paid on the related common stock.
Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth, as of December 31, 2022, information concerning compensation plans under which our securities are authorized for issuance. The table does not reflect grants, awards, exercises, terminations, or expirations since that date.
Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth, as of December 31, 2023, information concerning compensation plans under which our securities are authorized for issuance. The table does not reflect grants, awards, exercises, terminations, or expirations since that date.
In October, 1,418 shares were purchased pursuant to our Directors’ Deferred Stock Investment Plan. This plan is a nonqualified deferral plan allowing non-employee directors to make advance elections to defer a fixed percentage of their director fees. The plan administrator acquires the shares in the open market which are then held in a rabbi trust.
In October, 545 shares were purchased pursuant to our Directors’ Deferred Stock Investment Plan. This plan is a nonqualified deferral plan allowing non-employee directors to make advance elections to defer a fixed percentage of their director fees. The plan administrator acquires the shares in the open market which are then held in a rabbi trust.
The information contained in the performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC nor shall such information be deemed incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such filing. 45 Table of Contents The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
The information contained in the performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC nor shall such information be deemed incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such filing. 49 The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
Awards of restricted stock units were fully vested when awarded and will be settled in 44 Table of Contents shares of common stock on the earlier of the six-month anniversary of the date on which the director ceases to serve on the board of directors or certain change in control events. The restricted stock units generally cannot be transferred.
Awards of restricted stock units were fully vested when awarded and will be settled in 48 shares of common stock on the earlier of the six-month anniversary of the date on which the director ceases to serve on the board of directors or certain change in control events. The restricted stock units generally cannot be transferred.
Purchases of Equity Securities The following table summarizes our repurchases of equity securities during the three months ended December 31, 2022: Period Total Number of Shares (or Units) Purchased (1) Average Price Paid per Share (or Unit) ($) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (2) October 1 through October 31, 2022 1,793 $ 49.16 — 198,053,924 November 1 through November 30, 2022 — — — 198,053,924 December 1 through December 31, 2022 158 57.99 — 198,053,924 Total 1,951 $ 49.87 — (1) Except as noted in the following sentence, the number of shares reported in this column represents shares tendered by an employee as payment of the tax liabilities incident to the vesting of previously awarded shares of restricted stock.
Purchases of Equity Securities The following table summarizes our repurchases of equity securities during the three months ended December 31, 2023: Period Total Number of Shares (or Units) Purchased (1) Average Price Paid per Share (or Unit) ($) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (2) October 1 through October 31, 2023 545 $ 64.58 — 198,053,924 November 1 through November 30, 2023 808 62.76 — 198,053,924 December 1 through December 31, 2023 — — — 198,053,924 Total 1,353 $ 63.49 — (1) Except as noted in the following sentence, the number of shares reported in this column represents shares tendered by an employee as payment of the tax liabilities incident to the vesting of previously awarded shares of restricted stock.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Shares of our common stock trade on the New York Stock Exchange under the ticker symbol “EHC.” Holders As of February 13, 2023, there were 99,727,422 shares of Encompass Health common stock issued and outstanding, net of treasury shares, held by approximately 6,613 holders of record (participant positions at The Depository Trust Corporation plus record holders).
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Shares of our common stock trade on the New York Stock Exchange under the ticker symbol “EHC.” Holders As of February 14, 2024, there were 100,140,031 shares of Encompass Health common stock issued and outstanding, net of treasury shares, held by approximately 6,438 holders of record (participant positions at The Depository Trust Corporation plus record holders).
Dividends On February 23, 2023, our board of directors declared a cash dividend of $0.15 per share, payable on April 17, 2023 to stockholders of record on April 3, 2023. We expect comparable quarterly dividends to continue to be paid in January, April, July, and October.
Dividends On October 19, 2023, our board of directors declared a cash dividend of $0.15 per share, payable on January 16, 2024 to stockholders of record on January 2, 2024. We expect quarterly dividends to continue to be paid in January, April, July, and October.
Number of securities to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options (1) Number of securities available for future issuance Plans approved by stockholders 3,084,813 (2) $ 47.12 8,879,281 (3) Plans not approved by stockholders 104,567 (4) — Total 3,189,380 $ 47.12 8,879,281 (1) This calculation does not take into account awards of restricted stock, restricted stock units, or performance share units.
Number of securities to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options (1) Number of securities available for future issuance Plans approved by stockholders 3,354,824 (2) $ 49.51 8,204,463 (3) Plans not approved by stockholders 104,567 (4) — Total 3,459,391 $ 49.51 8,204,463 (1) This calculation does not take into account awards of restricted stock, restricted stock units, or performance share units.
Awards are generally protected against dilution upon the issuance of stock dividends and in the event of a stock split, recapitalization, or other major corporate restructuring.
Awards are generally protected against dilution in the event of dividends as well as a spin-off stock distribution, stock split, recapitalization, or other major corporate restructuring.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

94 edited+22 added−44 removed96 unchanged
Biggest changeOur Results Our consolidated results of operations were as follows: For the Year Ended December 31, Percentage Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 (In Millions) Net operating revenues $ 4,348.6 $ 4,014.9 $ 3,566.3 8.3 % 12.6 % Operating expenses: Salaries and benefits 2,393.3 2,127.3 1,903.8 12.5 % 11.7 % Other operating expenses 670.4 595.9 545.1 12.5 % 9.3 % Occupancy costs 54.7 59.0 61.4 (7.3) % (3.9) % Supplies 202.1 184.2 171.0 9.7 % 7.7 % General and administrative expenses 154.3 169.5 151.6 (9.0) % 11.8 % Depreciation and amortization 243.6 219.6 203.0 10.9 % 8.2 % Government, class action, and related settlements — — 2.8 — % (100.0) % Total operating expenses 3,718.4 3,355.5 3,038.7 10.8 % 10.4 % Loss on early extinguishment of debt 1.4 1.0 2.3 40.0 % (56.5) % Interest expense and amortization of debt discounts and fees 175.7 164.3 183.7 6.9 % (10.6) % Other expense (income) 5.2 (7.5) (8.4) (169.3) % (10.7) % Equity in net income of nonconsolidated affiliates (2.9) (3.4) (2.9) (14.7) % 17.2 % Income from continuing operations before income tax expense 450.8 505.0 352.9 (10.7) % 43.1 % Provision for income tax expense 100.1 101.9 74.7 (1.8) % 36.4 % Income from continuing operations 350.7 403.1 278.2 (13.0) % 44.9 % Income from discontinued operations, net of tax 15.2 114.1 90.6 (86.7) % 25.9 % Net income 365.9 517.2 368.8 (29.3) % 40.2 % Less: Net income attributable to noncontrolling interests included in continuing operations (93.6) (103.2) (83.3) (9.3) % 23.9 % Less: Net income attributable to noncontrolling interests included in discontinued operations (1.3) (1.8) (1.3) (27.8) % 38.5 % Less: Net and comprehensive income attributable to noncontrolling interests (94.9) (105.0) (84.6) (9.6) % 24.1 % Net income attributable to Encompass Health 271.0 412.2 284.2 (34.3) % 45.0 % 52 Table of Contents Operating Expenses as a % of Net Operating Revenues For the Year Ended December 31, 2022 2021 2020 Operating expenses: Salaries and benefits 55.0 % 53.0 % 53.4 % Other operating expenses 15.4 % 14.8 % 15.3 % Occupancy costs 1.3 % 1.5 % 1.7 % Supplies 4.6 % 4.6 % 4.8 % General and administrative expenses 3.5 % 4.2 % 4.3 % Depreciation and amortization 5.6 % 5.5 % 5.7 % Government, class action, and related settlements — % — % 0.1 % Total operating expenses 85.5 % 83.6 % 85.2 % Additional information regarding our operating results is as follows: For the Year Ended December 31, Percentage Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 (In Millions, Except Percentage Change) Net operating revenues: Inpatient $ 4,251.6 $ 3,918.0 $ 3,496.1 8.5 % 12.1 % Outpatient and other 97.0 96.9 70.2 0.1 % 38.0 % Net operating revenues 4,348.6 4,014.9 3,566.3 8.3 % 12.6 % (Actual Amounts) Discharges 211,116 197,639 181,897 6.8 % 8.7 % Net patient revenue per discharge $ 20,139 $ 19,824 $ 19,220 1.6 % 3.1 % Outpatient visits 138,644 161,070 186,257 (13.9) % (13.5) % Average length of stay (days) 12.7 12.8 12.9 (0.8) % (0.8) % Occupancy % 70.9% 70.0% 67.7% 1.3 % 3.4 % # of licensed beds 10,356 9,924 9,505 4.4 % 4.4 % Full-time equivalents* 24,627 23,193 22,076 6.2 % 5.1 % Employees per occupied bed 3.35 3.34 3.43 0.3 % (2.6) % * Full-time equivalents included in the above table represent our employees who participate in or support the operations of our hospitals and include an estimate of full-time equivalents related to contract labor.
Biggest changeThese other revenues are included in “other income” in the above table. 56 Our Results Our consolidated results of operations were as follows: For the Year Ended December 31, Percentage Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 (In Millions) Net operating revenues $ 4,801.2 $ 4,348.6 $ 4,014.9 10.4 % 8.3 % Operating expenses: Salaries and benefits 2,600.1 2,393.3 2,127.3 8.6 % 12.5 % Other operating expenses 719.1 670.4 595.9 7.3 % 12.5 % Occupancy costs 56.3 54.7 59.0 2.9 % (7.3) % Supplies 218.3 202.1 184.2 8.0 % 9.7 % General and administrative expenses 201.7 154.3 169.5 30.7 % (9.0) % Depreciation and amortization 273.9 243.6 219.6 12.4 % 10.9 % Total operating expenses 4,069.4 3,718.4 3,355.5 9.4 % 10.8 % Loss on early extinguishment of debt — 1.4 1.0 (100.0) % 40.0 % Interest expense and amortization of debt discounts and fees 143.5 175.7 164.3 (18.3) % 6.9 % Other (income) expense (15.7) 5.2 (7.5) (401.9) % (169.3) % Equity in net income of nonconsolidated affiliates (3.2) (2.9) (3.4) 10.3 % (14.7) % Income from continuing operations before income tax expense 607.2 450.8 505.0 34.7 % (10.7) % Provision for income tax expense 132.2 100.1 101.9 32.1 % (1.8) % Income from continuing operations 475.0 350.7 403.1 35.4 % (13.0) % (Loss) income from discontinued operations, net of tax (12.0) 15.2 114.1 (178.9) % (86.7) % Net income 463.0 365.9 517.2 26.5 % (29.3) % Less: Net income attributable to noncontrolling interests included in continuing operations (111.0) (93.6) (103.2) 18.6 % (9.3) % Less: Net income attributable to noncontrolling interests included in discontinued operations — (1.3) (1.8) (100.0) % (27.8) % Less: Net and comprehensive income attributable to noncontrolling interests (111.0) (94.9) (105.0) 17.0 % (9.6) % Net income attributable to Encompass Health $ 352.0 $ 271.0 $ 412.2 29.9 % (34.3) % Operating Expenses as a % of Net Operating Revenues For the Year Ended December 31, 2023 2022 2021 Operating expenses: Salaries and benefits 54.2 % 55.0 % 53.0 % Other operating expenses 15.0 % 15.4 % 14.8 % Occupancy costs 1.2 % 1.3 % 1.5 % Supplies 4.5 % 4.6 % 4.6 % General and administrative expenses 4.2 % 3.5 % 4.2 % Depreciation and amortization 5.7 % 5.6 % 5.5 % Total operating expenses 84.8 % 85.5 % 83.6 % 57 Additional information regarding our operating results is as follows: For the Year Ended December 31, Percentage Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 (In Millions, Except Percentage Change) Net operating revenues: Inpatient $ 4,693.8 $ 4,251.6 $ 3,918.0 10.4 % 8.5 % Outpatient and other 107.4 97.0 96.9 10.7 % 0.1 % Net operating revenues $ 4,801.2 $ 4,348.6 $ 4,014.9 10.4 % 8.3 % (Actual Amounts) Discharges 229,480 211,116 197,639 8.7 % 6.8 % Net patient revenue per discharge $ 20,454 $ 20,139 $ 19,824 1.6 % 1.6 % Outpatient visits 120,835 138,644 161,070 (12.8) % (13.9) % Average length of stay (days) 12.4 12.7 12.8 (2.4) % (0.8) % Occupancy % 72.1% 70.9% 70.0% 1.7 % 1.3 % # of licensed beds 10,778 10,356 9,924 4.1 % 4.4 % Occupied beds 7,771 7,342 6,947 5.8 % 5.7 % Full-time equivalents (FTEs) - internal 25,850 24,080 22,834 7.4 % 5.5 % Contract labor FTEs 425 547 359 (22.3) % 52.4 % Total FTEs* 26,275 24,627 23,193 6.7 % 6.2 % Employees per occupied bed 3.38 3.35 3.34 0.9 % 0.3 % * FTEs included in the above table represent our employees who participate in or support the operations of our hospitals and include FTEs related to contract labor.
It is possible we may be required to increase or decrease our valuation allowance at some future time if our forecast of future earnings varies from actual results on a consolidated basis or in the applicable tax jurisdiction, if the timing of future tax deductions differs from our expectations, or pursuant to changes in state tax laws and rates.
It is possible we may be required to increase or decrease our valuation allowance at some future time if our forecast of future earnings varies from actual results on a consolidated basis or in the applicable tax jurisdiction, if the timing of future tax deductions differs from our expectations, or pursuant to changes in state and foreign tax laws and rates.
For example, the Patient Protection and Affordable Care Act (the “ACA”) enacted in 2010 provides for specific reductions to healthcare providers’ annual reimbursement rate updates and other payment policy changes. The Budget Control Act of 2011 provides for an automatic 2% reduction, or “sequestration,” of Medicare program payments for all healthcare providers.
For example, the Patient Protection and Affordable Care Act (the “ACA”) enacted in 2010 provided for specific reductions to healthcare providers’ annual reimbursement rate updates and other payment policy changes. The Budget Control Act of 2011 provides for an automatic 2% reduction, or “sequestration,” of Medicare program payments for all healthcare providers.
See Note 1, Summary of Significant Accounting Policies , “Goodwill and Other Intangibles,” and Note 9, Goodwill and Other Intangible Assets , to the accompanying consolidated financial statements for additional information. 66 Table of Contents The following events and circumstances are certain of the qualitative factors we consider in evaluating whether it is more likely than not the fair value of a reporting unit is less than its carrying amount: • macroeconomic conditions, such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets; • industry and market considerations and changes in healthcare regulations, including reimbursement and compliance requirements under the Medicare and Medicaid programs; • cost factors, such as an increase in labor, supply, or other costs; • overall financial performance, such as negative or declining cash flows or a decline in actual or forecasted revenue or earnings; • other relevant company-specific events, such as material changes in management or key personnel or outstanding litigation; • material events, such as a change in the composition or carrying amount of each reporting unit’s net assets, including acquisitions and dispositions; • consideration of the relationship of our market capitalization to our book value, as well as a sustained decrease in our share price; and • length of time since most recent quantitative analysis.
See Note 1, Summary of Significant Accounting Policies , “Goodwill and Other Intangibles,” and Note 9, Goodwill and Other Intangible Assets , to the accompanying consolidated financial statements for additional information. 68 The following events and circumstances are certain of the qualitative factors we consider in evaluating whether it is more likely than not the fair value of a reporting unit is less than its carrying amount: • macroeconomic conditions, such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets; • industry and market considerations and changes in healthcare regulations, including reimbursement and compliance requirements under the Medicare and Medicaid programs; • cost factors, such as an increase in labor, supply, or other costs; • overall financial performance, such as negative or declining cash flows or a decline in actual or forecasted revenue or earnings; • other relevant company-specific events, such as material changes in management or key personnel or outstanding litigation; • material events, such as a change in the composition or carrying amount of each reporting unit’s net assets, including acquisitions and dispositions; • consideration of the relationship of our market capitalization to our book value, as well as a sustained decrease in our share price; and • length of time since most recent quantitative analysis.
Amounts exclude amortization of debt discounts, amortization of loan fees, or fees for lines of credit that would be included in interest expense in our consolidated statements of comprehensive income. (c) Amounts include interest portion of future minimum finance lease payments.
Amounts exclude amortization of debt discounts, amortization of loan fees, or fees for lines of credit that would be included in interest expense in our consolidated statements of comprehensive income. 62 (c) Amounts include interest portion of future minimum finance lease payments.
Consequently, Adjusted EBITDA is critical to our assessment of our liquidity. 62 Table of Contents In general terms, the credit agreement definition of Adjusted EBITDA, therein referred to as “Adjusted Consolidated EBITDA,” allows us to add back to consolidated Net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated Net income (1) all unusual or nonrecurring items reducing consolidated Net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations, (3) non-ordinary course fees, costs and expenses incurred with respect to any litigation or settlement, (4) share-based compensation expense, (5) costs and expenses associated with changes in the fair value of marketable securities, (6) costs and expenses associated with the issuance or prepayment debt and acquisitions, and (7) any restructuring charges and certain pro forma cost savings and synergies related to transactions and initiatives, which in the aggregate are not in excess of 25% of Adjusted Consolidated EBITDA.
Consequently, Adjusted EBITDA is critical to our assessment of our liquidity. 64 In general terms, the credit agreement definition of Adjusted EBITDA, therein referred to as “Adjusted Consolidated EBITDA,” allows us to add back to consolidated Net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated Net income (1) all unusual or nonrecurring items reducing consolidated Net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations, (3) non-ordinary course fees, costs and expenses incurred with respect to any litigation or settlement, (4) share-based compensation expense, (5) costs and expenses associated with changes in the fair value of marketable securities, (6) costs and expenses associated with the issuance or prepayment of debt, and acquisitions, and (7) any restructuring charges and certain pro forma cost savings and synergies related to transactions and initiatives, which in the aggregate are not in excess of 25% of Adjusted Consolidated EBITDA.
We believe these factors align with our strengths in, and focus on, inpatient rehabilitation services. We are committed to delivering high-quality, cost-effective, integrated patient care.
We believe these factors align with our strengths in, and focus on, inpatient rehabilitation services. We are committed to delivering high-quality, cost-effective patient care.
Based on Adjusted EBITDA for 2022 and the interest rate in effect under our credit agreement during the three-month period ended December 31, 2022, if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for the entire year, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements.
Based on Adjusted EBITDA for 2023 and the interest rate in effect under our credit agreement during the three-month period ended December 31, 2023, if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for the entire year, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements.
See also Item 1, Business , “Competitive Strengths” and “Strategy and 2023 Strategic Priorities.” Key Challenges Healthcare is a highly-regulated industry facing many well-publicized regulatory and reimbursement challenges. Medicare reimbursement for inpatient rehabilitation facilities (“IRFs”) has recently undergone significant changes. The future of many aspects of healthcare regulation generally and Medicare reimbursement specifically remains uncertain.
See also Item 1, Business , “Competitive Strengths” and “Strategy and 2024 Strategic Priorities.” Key Challenges Healthcare is a highly regulated industry facing many well-publicized regulatory and reimbursement challenges. Medicare reimbursement for inpatient rehabilitation facilities (“IRFs”) has recently undergone significant changes. The future of many aspects of healthcare regulation generally and Medicare reimbursement specifically remains uncertain.
The terms of our Notes indenture allow us to declare and pay cash dividends on our common stock so long as (1) we are not in default, (2) the consolidated coverage ratio (as defined in the indenture) exceeds 2x or we are otherwise allowed under the indenture to incur debt, and (3) we have capacity under the indenture’s restricted payments covenant to declare and pay dividends.
The terms of our Senior Notes (defined below) indenture allow us to declare and pay cash dividends on our common stock so long as (1) we are not in default, (2) the consolidated coverage ratio (as defined in the indenture) exceeds 2x or we are otherwise allowed under the indenture to incur debt, and (3) we have capacity under the indenture’s restricted payments covenant to declare and pay dividends.
Our supply chain efforts and our continual focus on monitoring and actively managing medical supplies and pharmaceutical costs has enabled us to accommodate increased pricing related to supplies and other operating expenses over the past few years. However, we cannot predict our ability to cover future cost increases including increase in the cost of PPE.
Our supply chain efforts and our continual focus on monitoring and actively managing medical supplies and pharmaceutical costs have enabled us to accommodate increased pricing related to supplies and other operating expenses over the past few years. However, we cannot predict our ability to cover future cost increases including increase in the cost of PPE.
These audits as well as the ordinary course claim reviews of our billings result in payment denials, including recoupment of previously paid claims from current accounts receivable. Healthcare providers can challenge any denials through an administrative appeals process that can be extremely lengthy, taking several years.
These audits as well as the ordinary course claim reviews of our billings result in payment denials, including recoupment of previously paid claims from current accounts receivable. Healthcare providers can challenge any denials through an administrative appeals process that can be extremely lengthy, taking up to several years.
For additional details of these claim reviews, See Item 1, Business , “Sources of Revenues,” Item 1A, Risk Factors, “Reimbursement Risks,” and Note 1, Summary of Significant Accounting Policies , “Net Operating Revenues” and “Accounts Receivable,” to the accompanying consolidated financial statements. • Changes in Medicare Reimbursement and Regulatory Requirements for Operating IRFs .
For additional details of our claim reviews, see Item 1, Business , “Sources of Revenues,” Item 1A, Risk Factors, “Reimbursement Risks,” and Note 1, Summary of Significant Accounting Policies , “Net Operating Revenues” and “Accounts Receivable,” to the accompanying consolidated financial statements. • Changes in Medicare Reimbursement and Regulatory Requirements for Operating IRFs .
See Item 1, Business , “Regulation” and Item 1A, Risk Factors , “Reimbursement Risks” and “Other Regulatory Risks” for detailed discussions of the most important regulations we face and our programs intended to ensure we comply with those regulations. 49 Table of Contents Reimbursement claims made by healthcare providers, including inpatient rehabilitation hospitals, are subject to audit from time to time by governmental payors, such as Centers for Medicare & Medicaid Services (“CMS”) and state Medicaid programs, their agents, such as the Medicare Administrative Contractors (“MACs”) that act as fiscal intermediaries for all Medicare billings, other auditors contracted by CMS, and private insurance carriers, as well as the United States Department of Health and Human Services Office of Inspector General.
See Item 1, Business , “Regulation” and Item 1A, Risk Factors , “Reimbursement Risks” and “Other Regulatory Risks” for detailed discussions of the most important regulations we face and our programs intended to ensure we comply with those regulations. 53 Reimbursement claims made by healthcare providers, including inpatient rehabilitation hospitals, are subject to audit from time to time by governmental payors, such as Centers for Medicare & Medicaid Services (“CMS”) and state Medicaid programs, their agents, such as the Medicare Administrative Contractors (“MACs”) that act as fiscal intermediaries for all Medicare billings, other auditors contracted by CMS, and private insurance carriers, as well as the United States Department of Health and Human Services Office of Inspector General.
We actively manage the productive portion of our Salaries and benefits utilizing certain metrics, including employees per occupied bed, or “EPOB.” This metric is determined by dividing the number of full-time equivalents, including an estimate of full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period.
We actively manage the productive portion of our Salaries and benefits utilizing certain metrics, including employees per occupied bed, or “EPOB.” This metric is determined by dividing the number of full-time equivalents, including full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period.
(d) We lease approximately 10% of our hospitals as well as other property and equipment under operating leases in the normal course of business. Amounts include interest portion of future minimum operating lease payments. For more information, see Note 8, Leases, to the accompanying consolidated financial statements.
(d) We lease approximately 9% of our hospitals as well as other property and equipment under operating leases in the normal course of business. Amounts include interest portion of future minimum operating lease payments. For more information, see Note 8, Leases, to the accompanying consolidated financial statements.
Our purchase obligations primarily relate to software licensing and support and medical equipment. Purchase obligations are not recognized in our consolidated balance sheet. Our capital expenditures include costs associated with our hospital refresh program, de novo projects, capacity expansions, technology initiatives, and building and equipment upgrades and purchases.
Our purchase obligations primarily relate to software licensing and support and medical equipment. Purchase obligations are not recognized in our consolidated balance sheet. Our capital expenditures include costs associated with our hospital renovation program, de novo projects, capacity expansions, technology initiatives, and building and equipment upgrades and purchases.
Our primary collection risks relate to patient responsibility amounts and claims reviews conducted by MACs or other contractors. The table below shows a summary of our net accounts receivable balances as of December 31, 2022 and 2021.
Our primary collection risks relate to patient responsibility amounts and claims reviews conducted by MACs or other contractors. The table below shows a summary of our net accounts receivable balances as of December 31, 2023 and 2022.
In the fourth quarter of 2022, we performed our annual evaluation of goodwill and determined no adjustment to impair goodwill was necessary. If actual results are not consistent with our assumptions and estimates, we may be exposed to goodwill impairment charges.
In the fourth quarter of 2023, we performed our annual evaluation of goodwill and determined no adjustment to impair goodwill was necessary. If actual results are not consistent with our assumptions and estimates, we may be exposed to goodwill impairment charges.
As of December 31, 2022, the maximum leverage ratio requirement per our credit agreement was 4.75x and the minimum interest coverage ratio requirement was 3.0x, and we were in compliance with these covenants.
As of December 31, 2023, the maximum leverage ratio requirement per our credit agreement was 4.75x and the minimum interest coverage ratio requirement was 3.0x, and we were in compliance with these covenants.
Relationships and Transactions with Related Parties Related party transactions were not material to our operations in 2022, 2021, or 2020, and therefore, are not presented as a separate discussion within this Item. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility.
Relationships and Transactions with Related Parties Related party transactions were not material to our operations in 2023, 2022, or 2021, and therefore, are not presented as a separate discussion within this Item. 60 Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility.
Sequestration took effect April 1, 2013 and, as a result of subsequent legislation, will continue through mid-year 2032 unless Congress and the President take further action. In response to the public health emergency associated with the pandemic, Congress and the President suspended sequestration through March 31, 2022.
Sequestration took effect April 1, 2013 and, as a result of subsequent legislation, will continue through mid-fiscal year 2032 unless Congress and the President take further action. In response to the public health emergency associated with the COVID-19 pandemic, Congress and the President suspended sequestration through March 31, 2022.
As part of its annual rulemaking process for various healthcare provider categories, CMS adopts IRF reimbursement rate changes effective from October through the following September. On July 27, 2022, CMS released its notice of final rulemaking for fiscal year 2023 for IRFs (the “2023 IRF Rule”) under the inpatient rehabilitation facility prospective payment system (the “IRF-PPS”).
As part of its annual rulemaking process for various healthcare provider categories, CMS adopts IRF reimbursement rate changes effective from October through the following September. On July 27, 2023, CMS released its notice of final rulemaking for fiscal year 2024 for IRFs (the “2024 IRF Rule”) under the inpatient rehabilitation facility prospective payment system (the “IRF-PPS”).
If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material. 64 Table of Contents Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payors, which are often subject to interpretation and review, we may receive reimbursement for healthcare services authorized and provided that is different from our estimates, and such differences could be material.
If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material. 66 Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payors, which are often subject to interpretation and review, we may receive reimbursement for healthcare services authorized and provided that is different from our estimates, and such differences could be material.
Based on our analysis that utilizes, among other things, the acuity of our patients annualized over a twelve-month period ended June 30, 2022, our experience with outlier payments over this same time frame, and other factors, we believe the 2023 IRF Rule will result in a net increase to our Medicare payment rates of approximately 4.0% effective October 1, 2022.
Based on our analysis that utilizes, among other things, the acuity of our patients annualized over a twelve-month period ended June 30, 2023, our experience with outlier payments over this same time frame, and other factors, we believe the 2024 IRF Rule will result in a net increase to our Medicare payment rates of approximately 3.3% effective October 1, 2023.
For additional information, see the “Liquidity and Capital Resources” section of this Item. 48 Table of Contents Business Outlook We remain optimistic regarding the intermediate and long-term prospects of our business. Demographic trends, such as population aging, should continue to increase long-term demand for the services we provide.
For additional information, see the “Liquidity and Capital Resources” section of this Item. 52 Business Outlook We remain optimistic regarding the intermediate and long-term prospects of our business. Demographic trends, such as population aging, should continue to increase long-term demand for the services we provide.
Our reserves and provisions for professional liability, general liability, and workers’ compensation risks are based largely upon semi-annual actuarial calculations prepared by third-party actuaries. 65 Table of Contents Periodically, we review our assumptions and the valuations provided by third-party actuaries to determine the adequacy of our self-insurance reserves.
Our reserves and provisions for professional liability, general liability, and workers’ compensation risks are based largely upon semi-annual actuarial calculations prepared by third-party actuaries. 67 Periodically, we review our assumptions and the valuations provided by third-party actuaries to determine the adequacy of our self-insurance reserves.
The repurchase authorization does not require the repurchase of a specific number of shares, 60 Table of Contents has an indefinite term, and is subject to termination at any time by our board of directors.
The repurchase authorization does not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our board of directors.
In certain jurisdictions, we do not expect to generate sufficient income to use all of the available state net operating losses and other credits prior to their expiration.
In certain jurisdictions, we do not expect to generate sufficient income to use all of the available state net operating losses and foreign tax credits prior to their expiration.
These comparisons include the financial results of market consolidation transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on our results of operations. 53 Table of Contents 2022 Compared to 2021 Net Operating Revenues Our consolidated Net operating revenues increased during 2022 compared to 2021 primarily due to increased volumes and favorable pricing.
These comparisons include the financial results of market consolidation transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on our results of operations. 2023 Compared to 2022 Net Operating Revenues Our consolidated Net operating revenues increased during 2023 compared to 2022 primarily due to increased volumes and favorable pricing.
The CARES Act did not materially impact our effective tax rate for the year ended December 31, 2022 and 2021, although it has impacted the timing of cash payments for taxes. Our cash payments for income taxes approximated $50 and $130 million, net of refunds, in 2022 and 2021, respectively. These payments were based on estimates of taxable income.
The CARES Act did not materially impact our effective tax rate for the year ended December 31, 2023 and 2022, although it impacted the timing of cash payments for taxes. Our cash payments for income taxes approximated $107 million and $50 million, net of refunds, in 2023 and 2022, respectively. These payments were based on estimates of taxable income.
See Note 5, Cash and Marketable Securities , to the accompanying consolidated financial statements. In addition to Cash and cash equivalents , as of December 31, 2022, we had approximately $912 million available to us under our revolving credit facility.
See Note 5, Cash and Marketable Securities , to the accompanying consolidated financial statements. In addition to Cash and cash equivalents , as of December 31, 2023, we had approximately $968 million available to us under our revolving credit facility.
Approximately $230 million to $240 million of this budgeted amount is considered nondiscretionary expenditures, which we may refer to in other filings as “maintenance” expenditures. Actual amounts spent will be dependent upon the timing of development projects.
Approximately $185 million to $195 million of this budgeted amount is considered nondiscretionary expenditures, which we may refer to in other filings as “maintenance” expenditures. Actual amounts spent will be dependent upon the timing of development projects.
In addition, our effective income tax rate is affected by changes in tax law, the tax jurisdictions in which we operate, and the results of income tax audits. During the year ended December 31, 2022, we decreased our valuation allowance by $7.3 million.
In addition, our effective income tax rate is affected by changes in tax law, the tax jurisdictions in which we operate, and the results of income tax audits. During the year ended December 31, 2023, we decreased our valuation allowance by $7.4 million.
See also Note 2, Spin Off of Home Health and Hospice Business , to the consolidated financial statements. 2022 Overview During 2022, Net operating revenues increased 8.3% over 2021 due primarily to volume growth and increased pricing. See the “Results of Operations” section of this Item for additional financial information. We continued our development and expansion efforts in 2022.
See also Note 2, Spin Off of Home Health and Hospice Business , to the consolidated financial statements. 2023 Overview During 2023, Net operating revenues increased 10.4% over 2022 due primarily to volume growth and increased pricing. See the “Results of Operations” section of this Item for additional information. We continued our development and expansion efforts in 2023.
As of December 31, 2022 and 2021, $73.6 million and $77.8 million, respectively, of our patient accounts receivable represented denials that were under review or audit. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.
As of December 31, 2023 and 2022, $21.0 million and $73.6 million, respectively, of our patient accounts receivable represented denials that were under review or audit. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.
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 36 states and Puerto Rico, with concentrations in the eastern half of the United States and Texas.
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 Florida and Texas.
The following table shows the sensitivity of our recorded self-insurance reserves to the statistical confidence level (in millions): Net self-insurance reserves as of December 31, 2022: As reported, with 50% statistical confidence level 142.8 With 70% statistical confidence level 153.9 We believe our efforts to improve patient safety and overall quality of care, as well as our efforts to reduce workplace injuries, have helped contain our ultimate claim costs.
The following table shows the sensitivity of our recorded self-insurance reserves to the statistical confidence level (in millions): Net self-insurance reserves as of December 31, 2023: As reported, with 50% statistical confidence level 148.1 With 70% statistical confidence level 157.9 We believe our efforts to improve patient safety and overall quality of care, as well as our efforts to reduce workplace injuries, have helped contain our ultimate claim costs.
We estimate we will pay approximately $85 million to $100 million of cash income taxes, net of refunds, in 2023. These payments are expected to primarily result from federal and state income tax expenses based on estimates of taxable income for 2023. In 2022 and 2021, current income tax expense was $72.2 million and $84.5 million, respectively.
We estimate we will pay approximately $145 million to $165 million of cash income taxes, net of refunds, in 2024. These payments are expected to primarily result from federal and state income tax expenses based on estimates of taxable income for 2024. In 2023 and 2022, current income tax expense was $128.3 million and $72.2 million, respectively.
Further, we have engaged, and will continue to engage, actively in discussions with key legislators and regulators to attempt to ensure any healthcare laws or regulations adopted or amended promote our goal of high-quality, cost-effective care. • Maintaining Strong Volume Growth .
Based on our track record, we believe we can adapt to regulatory and industry changes. Further, we have engaged, and will continue to engage, actively in discussions with key legislators and regulators to attempt to ensure any healthcare laws or regulations adopted or amended promote our goal of high-quality, cost-effective care. • Maintaining Strong Volume Growth .
This amount excludes $31.6 million in Restricted cash and $110.0 million of restricted marketable securities ($30.9 million included in Other current assets and $79.1 million included in Other long-term assets in our consolidated balance sheet). Our restricted assets pertain primarily to obligations associated with our captive insurance company, as well as obligations we have under agreements with joint venture partners.
This amount excludes $35.1 million in Restricted cash and $126.2 million of restricted marketable securities ($37.6 million included in Other current assets and $88.6 million included in Other long-term assets in our consolidated balance sheet). Our restricted assets pertain primarily to obligations associated with our captive insurance company, as well as obligations we have under agreements with joint venture partners.
The amount of the valuation allowance has been determined for 67 Table of Contents each tax jurisdiction based on the weight of all available evidence, as described above, including management’s estimates of taxable income for each jurisdiction in which we operate over the periods in which the related deferred tax assets will be recoverable.
The amount of the 69 valuation allowance has been determined based on the weight of all available evidence, as described above, including management’s estimates of taxable income over the periods in which the related deferred tax assets will be recoverable.
The number of occupied beds is determined by multiplying the number of licensed beds by our occupancy percentage. In the discussion that follows, we use “same-store” comparisons to explain the changes in certain performance metrics and line items within our financial statements. We calculate same-store comparisons based on hospitals open throughout both the full current period and prior periods presented.
In the discussion that follows, we use “same-store” comparisons to explain the changes in certain performance metrics and line items within our financial statements. We calculate same-store comparisons based on hospitals open throughout both the full current period and prior periods presented.
Authorizations for Returning Capital to Stakeholders In October 2021, February 2022, and May 2022, our board of directors declared cash dividends of $0.28 per share that were paid in January 2022, April 2022, and July 2022, respectively.
Authorizations for Returning Capital to Stakeholders In October 2022, February 2023, May 2023, July 2023, and October 2023, our board of directors declared cash dividends of $0.15 per share that were paid in January 2023, April 2023, July 2023, October 2023, and January 2024, respectively. We expect quarterly dividends to be paid in January, April, July, and October.
In addition, from time to time, we must get regulatory approval to expand our services and locations in states with certificate of need laws. This approval may be withheld or take longer than expected. In the case of new-store volume growth, the addition of hospitals to our portfolio also may be difficult and take longer than expected.
In addition, from time to time, we must get regulatory approval to expand our services and locations in states with certificate of need laws. This approval may be withheld or take longer than expected.
During the year ended December 31, 2022, we made capital expenditures of approximately $584 million for property and equipment, capitalized software, and other intangible assets. During 2023, we expect to spend approximately $565 million to $605 million for capital expenditures using cash on hand and borrowings under our revolving credit facility.
During the year ended December 31, 2023, we made capital expenditures of approximately $583 million for property, equipment, and intangible assets. During 2024, we expect to spend approximately $580 million to $610 million for capital expenditures using cash on hand and borrowings under our revolving credit facility.
Our Adjusted EBITDA for the years ended December 31, 2022, 2021, and 2020 was as follows (in millions): Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA For the Year Ended December 31, 2022 2021 2020 Net cash provided by operating activities $ 705.8 $ 715.8 $ 704.7 Interest expense and amortization of debt discounts and fees 175.7 164.3 183.7 (Loss) gain on sale of investments, excluding impairments (15.5) 3.8 3.6 Equity in net income of nonconsolidated affiliates 2.9 3.4 2.9 Net income attributable to noncontrolling interests in continuing operations (93.6) (103.2) (83.3) Amortization of debt-related items (9.7) (7.8) (7.2) Distributions from nonconsolidated affiliates (4.0) (2.6) (3.4) Current portion of income tax expense 72.2 84.5 40.2 Change in assets and liabilities 30.4 109.9 (108.0) Cash provided by operating activities of discontinued operations (52.3) (151.1) (35.8) Change in fair market value of equity securities 7.4 (0.6) (0.4) Other — — 0.1 Adjusted EBITDA $ 819.3 $ 816.4 $ 697.1 63 Table of Contents Reconciliation of Net Income to Adjusted EBITDA For the Year Ended December 31, 2022 2021 2020 Net income $ 365.9 $ 517.2 $ 368.8 Income from discontinued operations, net of tax, attributable to Encompass Health (15.2) (114.1) (90.6) Net income attributable to noncontrolling interests included in continuing operations (93.6) (103.2) (83.3) Provision for income tax expense 100.1 101.9 74.7 Interest expense and amortization of debt discounts and fees 175.7 164.3 183.7 Loss on early extinguishment of debt 1.4 1.0 2.3 Government, class action, and related settlements — — 2.8 Loss on disposal or impairment of assets 4.8 1.2 10.5 Depreciation and amortization 243.6 219.6 203.0 Stock-based compensation expense 29.2 29.1 25.6 Change in fair market value of equity securities 7.4 (0.6) (0.4) Adjusted EBITDA $ 819.3 $ 816.4 $ 697.1 For additional information see the “Results of Operations” section of this Item.
Our Adjusted EBITDA was as follows (in millions): Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA For the Year Ended December 31, 2023 2022 2021 Net cash provided by operating activities $ 850.8 $ 705.8 $ 715.8 Interest expense and amortization of debt discounts and fees 143.5 175.7 164.3 Gain (loss) on sale of investments, excluding impairments 4.6 (15.5) 3.8 Equity in net income of nonconsolidated affiliates 3.2 2.9 3.4 Net income attributable to noncontrolling interests in continuing operations (111.0) (93.6) (103.2) Amortization of debt-related items (9.5) (9.7) (7.8) Distributions from nonconsolidated affiliates (1.6) (4.0) (2.6) Current portion of income tax expense 128.3 72.2 84.5 Change in assets and liabilities (50.3) 30.4 109.9 Cash used in (provided by) operating activities of discontinued operations 16.0 (52.3) (151.1) State regulatory change impact on noncontrolling interests (2.2) — — Change in fair market value of equity securities (0.7) 7.4 (0.6) Adjusted EBITDA $ 971.1 $ 819.3 $ 816.4 65 Reconciliation of Net Income to Adjusted EBITDA For the Year Ended December 31, 2023 2022 2021 Net income $ 463.0 $ 365.9 $ 517.2 Loss (income) from discontinued operations, net of tax, attributable to Encompass Health 12.0 (15.2) (114.1) Net income attributable to noncontrolling interests included in continuing operations (111.0) (93.6) (103.2) Provision for income tax expense 132.2 100.1 101.9 Interest expense and amortization of debt discounts and fees 143.5 175.7 164.3 Loss on early extinguishment of debt — 1.4 1.0 Loss on disposal or impairment of assets 9.8 4.8 1.2 Depreciation and amortization 273.9 243.6 219.6 Stock-based compensation 50.6 29.2 29.1 State regulatory change impact on noncontrolling interests (2.2) — — Change in fair market value of equity securities (0.7) 7.4 (0.6) Adjusted EBITDA $ 971.1 $ 819.3 $ 816.4 For additional information see the “Results of Operations” section of this Item.
As of December 31, 2022 2021 (In Millions) Current: 0 - 30 Days $ 381.9 $ 356.4 31 - 60 Days 48.0 47.8 61 - 90 Days 22.0 27.4 91 - 120 Days 16.3 16.5 120 + Days 56.6 54.0 Patient accounts receivable 524.8 502.1 Other accounts receivable 12.0 13.7 536.8 515.8 Noncurrent patient accounts receivable 73.3 77.4 Accounts receivable $ 610.1 $ 593.2 Changes in general economic conditions (such as increased unemployment rates or periods of recession), business office operations, payor mix, or trends in federal or state governmental and private employer healthcare coverage could affect our collection of accounts receivable.
As of December 31, 2023 2022 (In Millions) Current: 0 - 30 Days $ 444.5 $ 381.9 31 - 60 Days 66.5 48.0 61 - 90 Days 23.9 22.0 91 - 120 Days 14.1 16.3 120 + Days 50.8 56.6 Patient accounts receivable 599.8 524.8 Other accounts receivable 11.8 12.0 611.6 536.8 Noncurrent patient accounts receivable 20.9 73.3 Accounts receivable $ 632.5 $ 610.1 Changes in general economic conditions (such as increased unemployment rates or periods of recession), business office operations, payor mix, or trends in federal or state governmental and private employer healthcare coverage could affect our collection of accounts receivable.
Suppliers pass along rising costs to us in the form of higher prices. In addition, we have experienced higher prices for our medical supplies (including PPE) and food as a result of the pandemic.
Suppliers pass along rising costs to us in the form of higher prices. For example, we experienced higher prices for our medical supplies (including PPE) and food as a result of the COVID-19 pandemic, and we continue to experience higher costs in the recent inflationary environment.
Cash paid for interest approximated $168 million in 2021 and 2020, respectively. For additional information, see Note 10, Long-term Debt , to the accompanying consolidated financial statements. Income from Continuing Operations Before Income Tax Expense Our pre-tax income from continuing operations in 2021 increased compared to 2020 primarily due to the increase in earnings.
Cash paid for interest approximated $148 million and $178 million in 2023 and 2022, respectively. For additional information, see Note 10, Long-term Debt , to the accompanying consolidated financial statements. 59 Provision for Income Tax Expense Our Provision for income tax expense increased in 2023 compared to 2022 primarily due to higher Income from continuing operations before income tax expense.
Our Net operating revenues consist primarily of revenues derived from patient care services. Net operating revenues also include other revenues generated from management and administrative fees and other non-patient care services. These other revenues are included in “other income” in the above table.
Our Net operating revenues consist primarily of revenues derived from patient care services. Net operating revenues also include other revenues generated from management and administrative fees and other non-patient care services.
Interest pertaining to our credit agreement and bonds is included to their respective ultimate maturity dates. Interest related to finance lease obligations is excluded from this line (see Note 8, Leases , and Note 10, Long-term Debt , to the accompanying consolidated financial statements).
Interest related to finance lease obligations is excluded from this line (see Note 8, Leases , and Note 10, Long-term Debt , to the accompanying consolidated financial statements).
Discharge growth included a 3.1% increase in same-store discharges.
Discharge growth included a 4.8% increase in same-store discharges.
On July 24, 2018, our board approved resetting the aggregate common stock repurchase authorization to $250 million. As of December 31, 2022, approximately $198 million remained under this authorization.
See Note 10, Long-term Debt , to the accompanying consolidated financial statements. On July 24, 2018, our board approved resetting the aggregate common stock repurchase authorization to $250 million. As of December 31, 2023, approximately $198 million remained under this authorization.
See Item 1A, Risk Factors , for a discussion of risks and uncertainties facing us. 58 Table of Contents Sources and Uses of Cash The following table shows the cash flows provided by or used in operating, investing, and financing activities of continuing operations (in millions): For the Year Ended December 31, 2022 2021 2020 Net cash provided by operating activities $ 653.5 $ 564.7 $ 668.9 Net cash used in investing activities (623.5) (547.1) (404.5) Net cash used in financing activities (660.8) (229.9) (134.3) (Decrease) increase in cash, cash equivalents, and restricted cash $ (630.8) $ (212.3) $ 130.1 2022 Compared to 2021 Operating activities.
Sources and Uses of Cash The following table shows the cash flows provided by or used in operating, investing, and financing activities of continuing operations (in millions): For the Year Ended December 31, 2023 2022 2021 Net cash provided by operating activities $ 866.8 $ 653.5 $ 564.7 Net cash used in investing activities (602.8) (623.5) (547.1) Net cash used in financing activities (197.2) (660.8) (229.9) Increase (decrease) in cash, cash equivalents, and restricted cash $ 66.8 $ (630.8) $ (212.3) 2023 Compared to 2022 Operating activities.
For the Year Ended December 31, 2022 (In Millions) Net operating revenues $ 2,819.4 Intercompany revenues generated from non-guarantor subsidiaries 78.7 Total net operating revenues $ 2,898.1 Operating expenses $ 2,496.0 Intercompany expenses incurred in transactions with non-guarantor subsidiaries 31.9 Total operating expenses $ 2,527.9 Income from continuing operations $ 135.7 Net income $ 98.0 Net income attributable to Encompass Health $ 96.8 As of December 31, 2022 (In Millions) Total current assets $ 469.2 Property and equipment, net $ 2,004.5 Goodwill 902.6 Intercompany receivable due from non-guarantor subsidiaries 255.0 Other noncurrent assets 509.1 Total noncurrent assets $ 3,671.2 Total current liabilities $ 438.4 Long-term debt, net of current portion $ 2,670.6 Other noncurrent liabilities 349.7 Total noncurrent liabilities $ 3,020.3 Adjusted EBITDA Management believes Adjusted EBITDA as defined in our credit agreement is a measure of our ability to service our debt and our ability to make capital expenditures.
For the Year Ended December 31, 2023 (In Millions) Net operating revenues $ 3,034.3 Intercompany revenues generated from non-guarantor subsidiaries 91.3 Total net operating revenues $ 3,125.6 Operating expenses $ 2,660.7 Intercompany expenses incurred in transactions with non-guarantor subsidiaries 33.6 Total operating expenses $ 2,694.3 Income from continuing operations $ 219.7 Net income $ 207.7 Net income attributable to Encompass Health $ 207.7 As of December 31, 2023 (In Millions) Total current assets $ 562.2 Property and equipment, net $ 2,219.0 Goodwill 902.6 Intercompany receivable due from non-guarantor subsidiaries 193.8 Other noncurrent assets 468.7 Total noncurrent assets $ 3,784.1 Total current liabilities $ 496.1 Long-term debt, net of current portion $ 2,604.7 Other noncurrent liabilities 339.5 Total noncurrent liabilities $ 2,944.2 Adjusted EBITDA Management believes Adjusted EBITDA as defined in our credit agreement is a measure of our ability to service our debt and our ability to make capital expenditures.
Results of Operations Payor Mix We derived consolidated Net operating revenues from the following payor sources: For the Year Ended December 31, 2022 2021 2020 Medicare 65.3 % 64.4 % 66.7 % Medicare Advantage 15.1 % 15.2 % 15.3 % Managed care 11.6 % 12.1 % 10.4 % Medicaid 4.2 % 4.1 % 3.9 % Other third-party payors 0.9 % 1.1 % 1.2 % Workers' compensation 0.6 % 0.6 % 0.6 % Patients 0.4 % 0.5 % 0.5 % Other income 1.9 % 2.0 % 1.4 % Total 100.0 % 100.0 % 100.0 % 51 Table of Contents Our payor mix is weighted heavily towards Medicare.
We have a proven track record of working through difficult situations, and we believe in our ability to overcome current and future challenges. 55 Results of Operations Payor Mix We derived consolidated Net operating revenues from the following payor sources: For the Year Ended December 31, 2023 2022 2021 Medicare 65.0 % 65.3 % 64.4 % Medicare Advantage 16.2 % 15.1 % 15.2 % Managed care 11.1 % 11.6 % 12.1 % Medicaid 4.0 % 4.2 % 4.1 % Other third-party payors 0.9 % 0.9 % 1.1 % Workers' compensation 0.5 % 0.6 % 0.6 % Patients 0.3 % 0.4 % 0.5 % Other income 2.0 % 1.9 % 2.0 % Total 100.0 % 100.0 % 100.0 % Our payor mix is weighted heavily towards Medicare.
Impact of Inflation The impact of inflation on the Company will be primarily in the area of labor costs. The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace.
See the “Executive Overview” section of this Item for additional information on our joint venture de novo locations. Impact of Inflation The impact of inflation on the Company will be primarily in the area of labor costs. The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace.
We anticipate we will continue to generate strong cash flows from operations that, together with availability under our revolving credit facility, will allow us to invest in growth opportunities and continue to improve our existing business.
See the “Contractual Obligations” section below for information related to our contractual obligations as of December 31, 2023. 61 We anticipate we will continue to generate strong cash flows from operations that, together with availability under our revolving credit facility, will allow us to invest in growth opportunities and continue to improve our existing business.
We attempt to maintain a comprehensive compensation and benefits package that allows us to remain competitive in this challenging staffing environment while remaining consistent with our goal of being a high-quality, cost-effective provider of post-acute services.
We attempt to maintain a comprehensive compensation and benefits package that allows us to remain competitive in this challenging staffing environment while remaining consistent with our goal of providing high-quality, cost-effective care. Additionally, our operations have been affected and may in the future be affected by staffing shortages.
Investing activities . The increase in Net cash used in investing activities of continuing operations during 2022 compared to 2021 primarily resulted from increased purchases of property and equipment and restricted investments. Financing activities . The increase in Net cash used in financing activities of continuing operations during 2022 compared to 2021 primarily resulted from increased net debt payments.
The decrease in Net cash used in investing activities of continuing operations during 2023 compared to 2022 primarily resulted from decreased purchases of restricted investments. Financing activities . The decrease in Net cash used in financing activities of continuing operations during 2023 compared to 2022 primarily resulted from a decrease in net debt payments and dividends paid on common stock.
Salaries and Benefits Salaries and benefits are the most significant cost to us and represent an investment in our most important asset: our employees. Salaries and benefits include all amounts paid to full- and part-time employees who directly participate in or support the operations of our hospitals, including all related costs of benefits provided to employees.
Salaries and benefits include all amounts paid to full- and part-time employees who directly participate in or support the operations of our hospitals, including all related costs of benefits provided to employees. It also includes amounts paid for contract labor.
We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2027, and our bonds all mature in 2025 and beyond. See the “Contractual Obligations” section below for information related to our contractual obligations as of December 31, 2022.
We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2027, and our bonds all mature in 2025 and beyond.
These borrowings are further explained in Note 10, Long-term Debt, to the accompanying consolidated financial statements. (b) Interest on our fixed rate debt is presented using the stated interest rate. Interest expense on our variable rate debt is estimated using the rate in effect as of December 31, 2022.
These borrowings are further explained in Note 10, Long-term Debt, to the accompanying consolidated financial statements. (b) Interest on our fixed rate debt is presented using the stated interest rate. Interest pertaining to our bonds is included to their respective ultimate maturity dates.
See Note 10, Long-term Debt , to the accompanying consolidated financial statements. 61 Table of Contents Summarized financial information is presented below for Encompass Health, the parent company, and the subsidiary guarantors on a combined basis after elimination of intercompany transactions and balances among Encompass Health and the subsidiary guarantors and does not include investments in and equity in the earnings of non-guarantor subsidiaries.
The other subsidiaries of Encompass Health do not guarantee the Senior Notes (such subsidiaries are referred to as the “non-guarantor subsidiaries”). 63 Summarized financial information is presented below for Encompass Health, the parent company, and the subsidiary guarantors on a combined basis after elimination of intercompany transactions and balances among Encompass Health and the subsidiary guarantors and does not include investments in and equity in the earnings of non-guarantor subsidiaries.
General and Administrative Expenses General and administrative expenses primarily include administrative expenses such as information technology services, human resources, corporate accounting, legal services, and internal audit and controls that are managed from our home office in Birmingham, Alabama. These expenses also include stock-based compensation expenses and transaction costs.
S upplies increased during 2023 compared to 2022 primarily due to higher costs for food and medical supplies. General and Administrative Expenses General and administrative expenses primarily include administrative expenses such as information technology services, human resources, corporate accounting, legal services, and internal audit and controls that are managed from our home office in Birmingham, Alabama.
General and administrative expenses decreased in terms of dollars and as a percent of Net operating revenues during 2022 compared to 2021 primarily due to the mark-to-market adjustments on our non-qualified 401k plan, approximately $2 million related to our transition services agreement with Enhabit, and lower incentive compensation costs.
These expenses also include stock-based compensation expenses. General and administrative expenses increased in terms of dollars and as a percent of Net operating revenues during 2023 compared to 2022 primarily due to higher incentive compensation costs and the mark-to-market adjustments on our non-qualified deferred compensation plan.
Augustine, Florida (March 2022), Libertyville, Illinois (March 2022), Lakeland, Florida (May 2022), and Jacksonville, Florida (June 2022). Growth in net patient revenue per discharge during 2022 compared to 2021 primarily attributable to an increase in reimbursement rates partially offset by the resumption of sequestration on April 1, 2022.
Growth in net patient revenue per discharge in 2023 compared to 2022 primarily resulted from an increase in reimbursement rates partially offset by an increase in revenue reserves, the resumption of sequestration on April 1, 2022 and the change in patient mix.
Augustine, Florida in March 2022; • began operating our new 60-bed inpatient rehabilitation hospital in Libertyville, Illinois in March 2022; 47 Table of Contents • began operating our new 50-bed inpatient rehabilitation hospital in Lakeland, Florida in May 2022; • began operating our new 40-bed inpatient rehabilitation hospital in Cape Coral, Florida with our joint venture partner Lee Healthcare Holdings, LLC in June 2022; • began operating our new 50-bed inpatient rehabilitation hospital in Jacksonville, Florida in June 2022; • began operating our new 40-bed inpatient rehabilitation hospital in Grand Forks, North Dakota with our joint venture partner Altru in August 2022; • began operating our new 40-bed inpatient rehabilitation hospital in Moline, Illinois with our joint venture partner UnityPoint Health – Trinity in August 2022; • began operating our new 50-bed inpatient rehabilitation hospital in Naples, Florida in September 2022 (joint venture partnership with NCH Healthcare System began in December 2022); • continued our capacity expansions by adding 87 new beds to existing hospitals; and • announced or continued the development of the following hospitals: Number of New Beds 2023 2024 (2) 2025 (2) Eau Claire, Wisconsin (1) 36 — — Knoxville, Tennessee (1) 73 — — Owasso, Oklahoma (1) 40 — — Clermont, Florida 50 — — Bowie, Maryland 60 — — Prosper, Texas 40 — — Columbus, Georgia (1) 40 — — Fitchburg, Wisconsin 56 — — Atlanta, Georgia (1) — 40 — Kissimmee, Florida — 50 — Fort Mill, South Carolina — 39 — Louisville, Kentucky (1) — 40 — Johnston, Rhode Island — 50 — Houston, Texas — 61 — Lake Worth, Florida — 50 — Fort Myers, Florida (1) — 60 — Palm Beach Gardens, Florida — — 50 Amarillo, Texas — — 40 Strongsville, Ohio — — 40 Norristown, Pennsylvania — — 50 Wildwood, Florida — — 50 Athens, Georgia (1) — — 40 St.
John in March 2023; • began operating our new 50-bed inpatient rehabilitation hospital in Clermont, Florida in April 2023; • began operating our new 60-bed inpatient rehabilitation hospital in Bowie, Maryland in June 2023 (joint venture partnership with University of Maryland Rehabilitation Institute of Southern Maryland, LLC began in July 2023); • began operating our new 40-bed inpatient rehabilitation hospital in Columbus, Georgia with our joint venture partner Piedmont Healthcare, Inc. in September 2023; • began operating our new 40-bed inpatient rehabilitation hospital in Prosper, Texas in November 2023; • began operating our new 56-bed inpatient rehabilitation hospital in Fitchburg, Wisconsin in November 2023; • continued our capacity expansions by adding 46 new beds to existing hospitals; and • announced or continued the development of the following hospitals: Number of New Beds 2024 (2) 2025 (2) 2026 (2) Kissimmee, Florida 50 — — Atlanta, Georgia (1) 40 — — Johnston, Rhode Island 50 — — Fort Mill, South Carolina 39 — — Louisville, Kentucky (1) 40 — — Houston, Texas 61 — — Daytona Beach, Florida — 50 — Fort Myers, Florida (1) — 60 — Lake Worth, Florida — 50 — Concordville, Pennsylvania — 50 — Norristown, Pennsylvania — 50 — Wildwood, Florida — 50 — Athens, Georgia (1) — 40 — St.
Discharge growth from new stores during 2022 compared to 2021 resulted from our joint ventures in San Angelo, Texas (March 2021), Henry County, Georgia (October 2021), Shiloh, Illinois (February 2022), Cape Coral, Florida (June 2022), Moline, Illinois (August 2022), Grand Forks, North Dakota (August 2022), and Naples, Florida (September 2022), as well as wholly owned hospitals in North Tampa, Florida (April 2021), Cumming, Georgia (June 2021), Waco, Texas (August 2021), Shreveport, Louisiana (August 2021), Greenville, South Carolina (August 2021), Pensacola, Florida (September 2021), St.
Discharge growth from new stores during 2023 compared to 2022 resulted from our joint ventures in Shiloh, Illinois (February 2022), Cape Coral, Florida (June 2022), Moline, Illinois (August 2022), Grand Forks, North Dakota (August 2022), Naples, Florida (September 2022), Knoxville, Tennessee (March 2023), Eau Claire, Wisconsin (March 2023), Owasso, Oklahoma (March 2023), Bowie, Maryland (June 2023), and Columbus Georgia (September 2023), as well as wholly owned hospitals in St.
Total contract labor plus sign-on and shift bonuses increased approximately $70 million from $134.2 million in 2021 to $204.3 million in 2022 Other Operating Expenses Other operating expenses include costs associated with managing and maintaining our hospitals. These expenses include such items as contract services, non-income related taxes, professional fees, utilities, insurance, and repairs and maintenance.
Other Operating Expenses Other operating expenses include costs associated with managing and maintaining our hospitals. These expenses include such items as contract services, non-income related taxes, professional fees, utilities, insurance, and repairs and maintenance. Other operating expenses increased during 2023 compared 2022 primarily due to increased provider taxes of approximately $15 million and higher costs resulting from our development activities.
The Notes are guaranteed on a senior, unsecured basis by all of our existing and future subsidiaries that guarantee borrowings under our credit agreement and other capital markets debt. The other subsidiaries of Encompass Health do not guarantee the Notes (such subsidiaries are referred to as the “non-guarantor subsidiaries”).
These guarantees are full and unconditional and joint and several, subject to certain customary conditions for release. The Senior Notes are guaranteed on a senior, unsecured basis by all of our existing and future subsidiaries that guarantee borrowings under our credit agreement and other capital markets debt.
As of December 31, 2022, we operate 153 inpatient rehabilitation hospitals. For additional information about our business, see Item 1, Business and Item 1A, Risk Factors , of this report. The onset of the COVID-19 Pandemic (the “pandemic”) in the United States resulted in significant changes to our operating environment.
As of December 31, 2023, we operate 161 inpatient rehabilitation hospitals. For additional information about our business, see Item 1, Business and Item 1A, Risk Factors , of this report.
See Note 1, Summary of Significant Accounting Policies , “Litigation Reserves,” and Note 18, Contingencies and Other Commitments , to the accompanying consolidated financial statements for additional information. We have provided for losses in situations where we have concluded it is probable a loss has been or will be incurred and the amount of loss is reasonably estimable.
We have provided for losses in situations where we have concluded it is probable a loss has been or will be incurred and the amount of loss is reasonably estimable.
We cannot predict what, if any, changes in Medicare spending or modifications to the healthcare laws and regulations will result from future budget or other legislative or regulatory initiatives. 50 Table of Contents As discussed in Item 1, Business , healthcare will almost certainly be the subject of significant regulatory and legislative changes regardless of party in control of the executive and legislative branches of state and federal governments.
We cannot predict what, if any, changes in Medicare spending or modifications to the healthcare laws and regulations will result from future budget or other legislative or regulatory initiatives.
See Item 1A, Risk Factors , for a discussion of competition for staffing, shortages of qualified personnel, and other factors that may increase our labor costs and constrain our ability to take new patients. Recruiting and retaining qualified personnel, including management, for our inpatient hospitals remain a high priority for us.
In recent years, staffing shortages and competition have resulted in increased labor costs, including significant sign-on and shift bonuses, and increased use of contract labor. See Item 1A, Risk Factors , for further discussion of competition for staffing, shortages of qualified personnel, and other factors that may increase our labor costs and constrain our ability to take new patients.
We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and we have significant availability under our revolving credit facility. We continue to generate strong cash flows from operations, and we have significant flexibility with how we choose to invest our cash and return capital to shareholders.
We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2025. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and we have significant availability under our revolving credit facility.
The decrease in Net cash provided by operating activities of continuing operations during 2021 compared to 2020 primarily resulted f rom the decrease in payroll accruals partially offset by the increase in Net income (see the “Results of Operations” section of this Item).
The increase in Net cash provided by operating activities of continuing operations during 2023 compared to 2022 primarily resulted f rom an increase in Net income which was driven by growth in Net operating revenues , and an increase in payroll accruals. Investing activities .
Other operating expenses increased in terms of dollars and as a percent of Net operating revenues during 2022 compared to 2021 primarily due to increased provider taxes of approximately $8 million and higher costs associated with recruiting, utilities, and travel of approximately $26 million. Supplies Supplies expense includes all costs associated with supplies used while providing patient care.
Other operating expenses decreased as a percent of Net operating revenues during 2023 compared to 2022 primarily due to higher volumes. Supplies Supplies expense includes all costs associated with supplies used while providing patient care. Specifically, these costs include personal protective equipment (“PPE”), pharmaceuticals, food, syringes, bandages, and other similar items.
See Note 16, Income Taxes , to the accompanying consolidated financial statements and the “Critical Accounting Estimates” section of this Item. Net Income Attributable to Noncontrolling Interests The decrease in Net income attributable to noncontrolling interests during 2022 compared to 2021 resulted from the ramp up of new joint venture de novo locations.
See Note 16, Income Taxes , to the accompanying consolidated financial statements and the “Critical Accounting Estimates” section of this Item.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

3 edited+1 added−3 removed2 unchanged
Biggest changeFor additional information, see Note 5, Cash and Marketable Securities, and Note 13, Fair Value Measurements, to the accompanying consolidated financial statements. 68 Table of Contents The fair value of our fixed rate debt is 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, and is summarized as follows (in millions): December 31, 2022 December 31, 2021 Financial Instrument: Book Value Market Value Book Value Market Value 5.125% Senior Notes due 2023 Carrying Value $ — $ — $ 99.6 $ — Unamortized debt discount and fees — — 0.4 — Principal amount — — 100.0 100.2 5.75% Senior Notes due 2025 Carrying Value 347.7 — 347.0 — Unamortized debt discount and fees 2.3 — 3.0 — Principal amount 350.0 347.7 350.0 357.9 4.50% Senior Notes due 2028 Carrying Value 781.8 — 786.8 — Unamortized debt discount and fees 18.2 — 13.2 — Principal amount 800.0 726.7 800.0 823.0 4.75% Senior Notes due 2030 Carrying Value 779.0 — 784.7 — Unamortized debt discount and fees 21.0 — 15.3 — Principal amount 800.0 703.7 800.0 824.0 4.625% Senior Notes due 2031 Carrying Value 390.6 — 393.7 — Unamortized debt discount and fees 9.4 — 6.3 — Principal amount 400.0 342.2 400.0 407.0 Foreign operations, and the related market risks associated with foreign currencies, are currently, and have been, insignificant to our financial position, results of operations, and cash flows.
Biggest changeThe fair value of our fixed rate debt is 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, and is summarized as follows (in millions): December 31, 2023 December 31, 2022 Financial Instrument: Book Value Market Value Book Value Market Value 5.75% Senior Notes due 2025 Carrying Value $ 348.5 $ — $ 347.7 $ — Unamortized debt discount and fees 1.5 — 2.3 — Principal amount 350.0 349.3 350.0 347.7 4.50% Senior Notes due 2028 Carrying Value 785.0 — 781.8 — Unamortized debt discount and fees 15.0 — 18.2 — Principal amount 800.0 763.6 800.0 726.7 4.75% Senior Notes due 2030 Carrying Value 781.5 — 779.0 — Unamortized debt discount and fees 18.5 — 21.0 — Principal amount 800.0 755.0 800.0 703.7 4.625% Senior Notes due 2031 Carrying Value 391.5 — 390.6 — Unamortized debt discount and fees 8.5 — 9.4 — Principal amount 400.0 369.4 400.0 342.2 70 Foreign operations, and the related market risks associated with foreign currencies, are currently, and have been, insignificant to our financial position, results of operations, and cash flows.
HCS, Ltd., our wholly owned insurance captive maintains positions in investment securities for other than trading purposes, which, as of December 31, 2022, had a fair market value of approximately $110 million. Changes in the value of these securities is recorded in the accompanying consolidated statements of comprehensive income.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk HCS, Ltd., our wholly owned insurance captive maintains positions in investment securities for other than trading purposes, which, as of December 31, 2023, had a fair market value of approximately $126 million. Changes in the value of these securities is recorded in the accompanying consolidated statements of comprehensive income.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk Our primary exposure to market risk is to changes in interest rates on our variable rate long-term debt. We use a sensitivity analysis model to evaluate the impact of interest rate changes on our variable rate debt.
We use a sensitivity analysis model to evaluate the impact of interest rate changes on our variable rate debt. As of December 31, 2023, no amount was outstanding on our primary variable rate debt.
Removed
As of December 31, 2022, our primary variable rate debt outstanding related to $55.0 million in advances under our revolving credit facility.
Added
During the year ended December 31, 2023, we recorded an unrealized gain of $1.3 million pertaining to these securities. For additional information, see Note 5, Cash and Marketable Securities, and Note 13, Fair Value Measurements, to the accompanying consolidated financial statements. Our primary exposure to market risk is to changes in interest rates on our variable rate long-term debt.
Removed
Assuming outstanding balances were to remain the same, a 1% increase in interest rates would result in an incremental negative cash flow of approximately $0.6 million over the next 12 months, while a 1% decrease in interest rates, assuming a floor of zero in the variable rate index, would result in an incremental positive cash flow of approximately $0.6 million over the next 12 months.
Removed
During the year ended December 31, 2022, we recorded an unrealized loss of $7.4 million pertaining to these securities.

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