SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________________



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2020~~2021

Commission File Number 001-10315

______________________________

9001 Liberty Parkway

Birmingham,, Alabama35242

(~~205~~) (205) 967-7116

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ý☒

The registrant had ~~99,405,112~~99,542,410 shares of common stock outstanding, net of treasury shares, as of ~~May 4, 2020.~~April 22, 2021.

TABLE OF CONTENTS

NOTE TO READERS

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to, among other things, future events, the spread and impact of the COVID-19 pandemic, changes to Medicare reimbursement and other healthcare laws and regulations from time to time, our business strategy, our dividend and stock repurchase strategies, our financial plans, our growth plans, our future financial performance, our projected business results, or our projected capital expenditures. In some cases, the reader can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties, many of which are beyond our control. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, the factors ~~that~~described below could cause, and in the case of the COVID-19 pandemic has already caused, actual results to differ ~~such as decreases in revenues or increases in costs or charges,~~ materially from those estimated by us.

•Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, as well as uncertainties and factors, if any, discussed elsewhere in this Form 10-Q, including in the “Executive Overview—Key Challenges” section of Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our other filings from time to time with the SEC, or in materials incorporated therein by reference;

•Our ongoing strategic review exposes us ~~include, but are not limited~~to a number of risks and uncertainties, including diversion of management’s time to the ~~following:~~process; the incurrence of significant expenses associated with the review and pursuit of any transaction; increased difficulties in attracting, retaining or motivating key management personnel; exposure to potential litigation; and inability to realize anticipated benefits from a potential transaction or other strategic alternative involving our home health and hospice business, any of which could adversely affect our business, financial results or condition, or stock price.

•

~~each of the factors discussed in Item 1A,~~ ~~Risk Factors, of our Annual Report on Form 10-K for the year ended~~ ~~December 31, 2019, as well as uncertainties and factors, if any, discussed elsewhere in this Form 10-Q, including in the “Executive Overview—Key Challenges” section of Part I, Item 2,~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our other filings from time to time with the SEC, or in materials incorporated therein by reference;~~

a•A pandemic, epidemic, or other widespread outbreak of an infectious disease or other public health crisis ~~such as the COVID-19 pandemic, which~~ could decrease our patient volumes, pricing, and revenues, lead to staffing and supply shortages and associated cost increases, or otherwise interrupt ~~operations;~~operations, or lead to increased litigation risk and, in the case of the COVID-19 pandemic, has already done so in many instances.

~~state and local executive~~•Governmental actions in response to the COVID-19 pandemic, such as shelter-in-place orders, new workplace regulations, facility closures and quarantines, ~~which~~ could reduce volumes and otherwise impair our ability to operate and provide ~~care;~~care and in many instances already have done so.


•	~~our ability to maintain~~ ~~infectious disease prevention and control efforts that are required and effectively minimize the spread of COVID-19 among patients and employees;~~

~~changes~~•Our inability to maintain infectious disease prevention and control efforts that are required and effectively minimize the spread of COVID-19 among patients and employees could decrease our patient volumes and revenues, lead to staffing shortages or otherwise interrupt operations, or lead to increased litigation risk.

•Reductions or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our inability to obtain and retain favorable arrangements with third-party payors, could decrease our revenues and adversely affect other operating results.

•Restrictive interpretations of the regulations governing the claims that are reimbursable by Medicare could decrease our revenues and adversely affect other operating results.

•New or changing Medicare quality reporting requirements could adversely affect our operating costs or Medicare reimbursement.

•Reimbursement claims are subject to various audits from time to time and such audits may lead to assertions that we have been overpaid or have submitted improper claims, and such assertions may require us to incur additional costs to respond to requests for records and defend the validity of payments and claims and may ultimately require us to refund any amounts determined to have been overpaid.

•The use by governmental agencies and contractors of statistical sampling and extrapolation may substantially expand claims of overpayment or noncompliance.

•Delays and other substantive and procedural deficiencies in the administrative appeals process associated with denied Medicare reimbursement claims, including from various Medicare audit programs, could delay or reduce our reimbursement for services previously provided, including through recoupment from other claims due to us from Medicare.

•Efforts to reduce payments to healthcare providers undertaken by third-party payors, conveners, and referral sources could adversely affect our revenues or profitability.

•Changes in our payor mix or the acuity of our patients could reduce our revenues or profitability.

•Changes in the rules and regulations of the healthcare industry at either or both of the federal and state levels, including those contemplated now and in the future as part of national healthcare reform and deficit reduction (such as the re-basing of payment systems, the introduction of site neutral payments or case-mix weightings across post-acute settings, and other payment system reforms, including the Patient-Driven Groupings Model for home ~~health, the new patient assessment measures, which we refer to as “Section GG functional measures,” for inpatient rehabilitation, and other payment system reforms), which may~~health) could decrease revenues and increase the costs of complying with the rules and ~~regulations;~~regulations.

~~reductions or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our ability to obtain and retain favorable arrangements with third-party payors;~~

~~restrictive interpretations of the regulations governing the claims that are reimbursable by Medicare;~~

our ability to comply with extensive and changing healthcare regulations as well as the increased costs of regulatory compliance and compliance monitoring in the healthcare industry, including the costs of investigating and defending asserted claims, whether meritorious or not;


•	~~any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings, including disclosed and undisclosed~~ ~~qui tam~~ ~~suits;~~

~~the use by governmental agencies and contractors of statistical sampling and extrapolation to expand claims of overpayment or noncompliance;~~

delays in the administrative appeals process associated with denied Medicare reimbursement claims, including from various Medicare audit programs, and our exposure to the related delay or reduction in the receipt of the reimbursement amounts for services previously provided, including through recoupment of ongoing claims reimbursement by CMS;

~~the~~•The ongoing evolution of the healthcare delivery system, including alternative payment models and value-based purchasing initiatives, ~~which may~~could decrease our reimbursement rate or increase costs associated with our ~~operations;~~operations.

•Compliance with the extensive and frequently changing laws and regulations applicable to healthcare providers requires substantial time, effort and expense, and if we fail to comply, we could incur penalties and significant costs of investigating and defending asserted claims, whether meritorious or not, or be required to make significant changes to our operations.

•Our inability to maintain proper local, state and federal licensing, including compliance with the Medicare conditions of participation and provider enrollment requirements, could decrease our revenues.

•Incidents affecting the proper operation, availability, or security of our or our vendors’ or partners’ information systems, including the patient information stored there, could cause substantial losses and adversely affect our operations and governmental mandates to increase use of electronic records and interoperability exacerbate that risk.

•Any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings, including disclosed and undisclosed qui tam suits could be difficult to predict and could adversely affect our ~~ability to attract~~financial results or condition or our operations, and ~~retain nurses, therapists,~~we could experience increased costs of defending and insuring against alleged professional liability and other healthcare professionals in a highly competitive environment with often severe staffing shortages, including as a result of the COVID-19 pandemic, and the impact on our labor expenses from potential union activity and staffing recruitment and retention;claims.

competitive pressures in the healthcare industry, including from other providers that may be participating in integrated delivery payment arrangements in which we do not participate, and our response to those pressures;

~~our ability~~•Our inability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with our growth strategy, including realization of anticipated revenues, cost savings, productivity improvements arising from the related operations and avoidance of unanticipated difficulties, costs or liabilities that could arise from acquisitions or ~~integrations;~~integrations could adversely affect our financial results or condition.

~~increased costs of defending~~•Our inability to attract and ~~insuring against alleged professional liability~~retain nurses, therapists, and other ~~claims~~healthcare professionals in a highly competitive environment with often severe staffing shortages and potential union activity could increase labor expenses and adversely affect other financial and operating results.

•Competitive pressures in the healthcare industry, including from other providers that may be participating in integrated delivery payment arrangements in which we do not participate, and our response to those pressures could adversely affect our revenues or other financial results.

•Our inability to maintain or develop relationships with patient referral sources could decrease our revenues.

•Our debt and the associated restrictive covenants could have negative consequences for our business and limit our ability to ~~predict the costs related to claims;~~

~~potential incidents affecting the proper operation, availability, or security~~execute aspects of our ~~or our vendors’ or partners’ information systems, including the patient information stored there;~~business plan successfully.

~~new or changing quality reporting requirements impacting operational costs or our Medicare reimbursement;~~

~~the~~•The price of our common stock ~~as it affects~~could adversely affect our willingness and ability to repurchase ~~shares and the financial and accounting effects of any repurchases;~~shares.

~~our ability and willingness~~•We may be unable or unwilling to continue to declare and pay dividends on our common ~~stock, which could be affected by reduced cash flow resulting from the COVID-19 pandemic;~~stock.

our ability to maintain proper local, state and federal licensing, including compliance with the Medicare conditions of participation and provider enrollment requirements, which is required to participate in the Medicare program;

~~our ability to attract and retain key management personnel;~~

~~changes in our payor mix or the acuity of our patients affecting reimbursement rates; and~~

~~general~~•General conditions in the economy and capital markets, including any disruption, instability, or uncertainty related to armed conflict or an act of terrorism, a governmental impasse over approval of the United States federal budget, an increase to the debt ceiling, an international trade war, or a sovereign debt crisis could adversely affect our financial results or ~~a widespread outbreak of an infectious disease such as COVID-19.~~condition, including access to the capital markets.

iii

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

~~iii~~

PART I. FINANCIAL INFORMATION


~~Item 1.~~	~~Financial Statements (Unaudited)~~

Item 1.Financial Statements (Unaudited)

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended March 31,							Three Months Ended March 31,
	2020			2019				2021		2020
	(In Millions, Except Per Share Data)							(In Millions, Except Per Share Data)
Net operating revenues	$	1,182.0		$	1,124.0		Net operating revenues	$	1,230.4	$	1,182.0
Operating expenses:							Operating expenses:
Salaries and benefits	679.1			620.8			Salaries and benefits	687.2		679.1
Other operating expenses	159.6			150.1			Other operating expenses	162.3		159.6
Occupancy costs	20.2			19.6			Occupancy costs	20.2		20.2
Supplies	45.7			40.1			Supplies	51.9		45.7
General and administrative expenses	35.6			53.4			General and administrative expenses	38.6		35.6
Depreciation and amortization	58.8			52.5			Depreciation and amortization	62.5		58.8
Government, class action, and related settlements	2.8			—			Government, class action, and related settlements	0		2.8

Total operating expenses	1,001.8			936.5			Total operating expenses	1,022.7		1,001.8

Interest expense and amortization of debt discounts and fees	43.2			37.2			Interest expense and amortization of debt discounts and fees	42.8		43.2
Other expense (income)	1.9			(3.7		)
Other (income) expense							Other (income) expense	(1.4)		1.9
Equity in net income of nonconsolidated affiliates	(0.8		)	(2.5		)	Equity in net income of nonconsolidated affiliates	(1.0)		(0.8)
Income from continuing operations before income tax expense	135.9			156.5			Income from continuing operations before income tax expense	167.3		135.9
Provision for income tax expense	27.1			30.8			Provision for income tax expense	34.5		27.1
Income from continuing operations	108.8			125.7			Income from continuing operations	132.8		108.8
Loss from discontinued operations, net of tax	(0.1		)	(0.5		)	Loss from discontinued operations, net of tax	0		(0.1)
Net and comprehensive income	108.7			125.2			Net and comprehensive income	132.8		108.7
Less: Net and comprehensive income attributable to noncontrolling interests	(21.7		)	(22.9		)	Less: Net and comprehensive income attributable to noncontrolling interests	(25.5)		(21.7)
Net and comprehensive income attributable to Encompass Health	$	87.0		$	102.3		Net and comprehensive income attributable to Encompass Health	$	107.3	$	87.0


Weighted average common shares outstanding:							Weighted average common shares outstanding:
Basic	98.2			98.4			Basic	99.0		98.2
Diluted	99.6			99.7			Diluted	100.2		99.6
Earnings per common share:							Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:							Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	0.88		$	1.05		Continuing operations	$	1.08	$	0.88
Discontinued operations	—			(0.01		)	Discontinued operations	0		0
Net income	$	0.88		$	1.04		Net income	$	1.08	$	0.88
Diluted earnings per share attributable to Encompass Health common shareholders:							Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	0.87		$	1.04		Continuing operations	$	1.07	$	0.87
Discontinued operations	—			(0.01		)	Discontinued operations	0		0
Net income	$	0.87		$	1.03		Net income	$	1.07	$	0.87

Amounts attributable to Encompass Health common shareholders:							Amounts attributable to Encompass Health common shareholders:
Income from continuing operations	$	87.1		$	102.8		Income from continuing operations	$	107.3	$	87.1
Loss from discontinued operations, net of tax	(0.1		)	(0.5		)	Loss from discontinued operations, net of tax	0		(0.1)
Net income attributable to Encompass Health	$	87.0		$	102.3		Net income attributable to Encompass Health	$	107.3	$	87.0

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


	March 31, 2021		December 31, 2020
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	223.9	$	224.0
Restricted cash	62.2		65.4
Accounts receivable	633.6		572.8
Other current assets	81.4		86.4
Total current assets	1,001.1		948.6
Property and equipment, net	2,280.5		2,206.6
Operating lease right-of-use assets	248.3		245.7
Goodwill	2,318.7		2,318.7
Intangible assets, net	419.2		431.3

Other long-term assets	274.4		295.0
Total assets(1)	$	6,542.2	$	6,445.9
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	137.2	$	38.3
Current operating lease liabilities	44.2		44.8
Accounts payable	122.8		115.0
Accrued expenses and other current liabilities	508.0		519.2
Total current liabilities	812.2		717.3
Long-term debt, net of current portion	3,160.0		3,250.6
Long-term operating lease liabilities	214.2		209.6
Deferred income tax liabilities	60.6		51.8
Other long-term liabilities	220.5		215.0
	4,467.5		4,444.3
Commitments and contingencies	0		0

Redeemable noncontrolling interests	31.7		31.6
Shareholders’ equity:
Encompass Health shareholders’ equity	1,655.1		1,588.0
Noncontrolling interests	387.9		382.0
Total shareholders’ equity	2,043.0		1,970.0
Total liabilities(1) and shareholders’ equity	$	6,542.2	$	6,445.9

(1)Our consolidated assets as of March 31, 2021 and December 31, 2020 include total assets of variable interest entities of $219.2 million and $221.2 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of March 31, 2021 and December 31, 2020 include total liabilities of the variable interest entities of $44.6 million and $46.8 million, respectively. See Note 3, Variable Interest Entities.

March 31,
2020 December 31,
2019
(In Millions)
Assets
Current assets:
Cash and cash equivalents $ 104.9
$ 94.8
Restricted cash 56.7
57.4
Accounts receivable 543.4
506.1
Other current assets 79.5
97.5
Total current assets 784.5
755.8
Property and equipment, net 2,003.3
1,959.3
Operating lease right-of-use assets 267.9
276.5
Goodwill 2,312.1
2,305.2
Intangible assets, net 464.7
476.3
Deferred income tax assets 1.5
2.9
Other long-term assets 303.7
304.7
Total assets⁽¹⁾
$ 6,137.7
$ 6,080.7
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt $ 40.2
$ 39.3
Current operating lease liabilities 40.8
40.4
Accounts payable 98.0
94.6
Accrued expenses and other current liabilities 407.2
546.7
Total current liabilities 586.2
721.0
Long-term debt, net of current portion 3,321.9
3,023.3
Long-term operating lease liabilities 235.1
243.8
Other long-term liabilities 163.3
159.9
4,306.5
4,148.0
Commitments and contingencies

Redeemable noncontrolling interests 34.0
239.6
Shareholders’ equity:

Encompass Health shareholders’ equity 1,443.9
1,352.2
Noncontrolling interests 353.3
340.9
Total shareholders’ equity 1,797.2
1,693.1
Total liabilities⁽¹⁾and shareholders’ equity
$ 6,137.7
$ 6,080.7

Our consolidated assets as of March 31, 2020 and December 31, 2019 include total assets of variable interest entities of $222.2 million and $215.0 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of March 31, 2020 and December 31, 2019 include total liabilities of the variable interest entities of $39.3 million and $41.1 million, respectively. See Note 2, ~~Variable Interest Entities~~.

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)


	Three Months Ended March 31, 2021
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Deficit		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	99.4	$	1.1	$	2,326.6	$	(242.3)	$	(497.4)	$	382.0	$	1,970.0
Net income	—	—		—		107.3		—		23.1		130.4

Receipt of treasury stock	(0.2)	—		—		—		(15.6)		—		(15.6)
Dividends declared ($0.28 per share)	—	—		(27.8)		—		—		—		(27.8)

Stock-based compensation	—	—		2.8		—		—		—		2.8


Distributions declared	—	—		—		—		—		(22.4)		(22.4)
Capital contributions from consolidated affiliates	—	—		—		—		—		5.8		5.8




Other	0.4	—		1.1		—		(0.7)		(0.6)		(0.2)
Balance at end of period	99.6	$	1.1	$	2,302.7	$	(135.0)	$	(513.7)	$	387.9	$	2,043.0


	Three Months Ended March 31, 2020
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Deficit		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	98.6	$	1.1	$	2,369.9	$	(526.5)	$	(492.3)	$	340.9	$	1,693.1
Net income	—	—		—		87.0		—		19.7		106.7

Receipt of treasury stock	(0.2)	—		—		—		(15.6)		—		(15.6)
Dividends declared ($0.28 per share)	—	—		(27.9)		—		—		—		(27.9)
Exchange of Holdings shares	0.6	—		27.1		—		19.2		—		46.3

Stock-based compensation	—	—		7.1		—		—		—		7.1


Distributions declared	—	—		—		—		—		(15.5)		(15.5)
Capital contributions from consolidated affiliates	—	—		—		—		—		5.8		5.8


Repurchases of common stock in open market	(0.1)	—		—		—		(4.9)		—		(4.9)

Other	0.5	—		0		—		(0.3)		2.4		2.1
Balance at end of period	99.4	$	1.1	$	2,376.2	$	(439.5)	$	(493.9)	$	353.3	$	1,797.2

Three Months Ended March 31, 2020
(In Millions)
Encompass Health Common Shareholders

Number of Common
Shares Outstanding
Common Stock
Capital in Excess of
Par Value

Accumulated
Deficit
Treasury Stock
Noncontrolling
Interests
Total
Balance at beginning of period 98.6
$ 1.1
$ 2,369.9
$ (526.5 ) $ (492.3 ) $ 340.9
$ 1,693.1
Net income —
—
—
87.0
—
19.7
106.7
Receipt of treasury stock (0.2 ) —
—
—
(15.6 ) —
(15.6 )
Dividends declared ($0.28 per share) —
—
(27.9 ) —
—
—
(27.9 )
Exchange of Holdings shares 0.6
—
27.1
—
19.2
—
46.3
Stock-based compensation —
—
7.1
—
—
—
7.1
Distributions declared —
—
—
—
—
(15.5 ) (15.5 )
Capital contributions from consolidated affiliates —
—
—
—
—
5.8
5.8
Repurchases of common stock in open market (0.1 ) —
—
—
(4.9 ) —
(4.9 )
Other 0.5
—
—
—
(0.3 ) 2.4
2.1
Balance at end of period 99.4
$ 1.1
$ 2,376.2
$ (439.5 ) $ (493.9 ) $ 353.3
$ 1,797.2

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March 31,
	2021		2020
	(In Millions)
Cash flows from operating activities:
Net income	$	132.8	$	108.7
Loss from discontinued operations, net of tax	0		0.1
Adjustments to reconcile net income to net cash provided by operating activities—

Depreciation and amortization	62.5		58.8



Stock-based compensation	2.8		7.1
Deferred tax expense	8.7		1.4

Other, net	2.0		7.7
Change in assets and liabilities, net of acquisitions—
Accounts receivable	(55.1)		(36.6)
Other assets	1.3		15.8

Accrued payroll	5.7		(24.0)

Other liabilities	(2.2)		(109.6)
Net cash used in operating activities of discontinued operations	0		(0.1)
Total adjustments	25.7		(79.5)
Net cash provided by operating activities	158.5		29.3
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired	0		(1.1)
Purchases of property and equipment	(98.8)		(83.5)



Other, net	3.2		1.6
Net cash used in investing activities	(95.6)		(83.0)




Cash flows from financing activities:



Borrowings on revolving credit facility	0		330.0
Payments on revolving credit facility	0		(25.0)


Taxes paid on behalf of employees for shares withheld	(15.6)		(15.6)
Dividends paid on common stock	(29.1)		(29.0)
Distributions paid to noncontrolling interests of consolidated affiliates	(27.8)		(19.1)

Purchase of equity interests in consolidated affiliates	0		(162.3)

Other, net	(5.0)		(7.9)
Net cash (used in) provided by financing activities	(77.5)		71.1
(Decrease) increase in cash, cash equivalents, and restricted cash	(14.6)		17.4
Cash, cash equivalents, and restricted cash at beginning of period	310.9		159.6
Cash, cash equivalents, and restricted cash at end of period	$	296.3	$	177.0

Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period	$	224.0	$	94.8
Restricted cash at beginning of period	65.4		57.4
Restricted cash included in other long-term assets at beginning of period	21.5		7.4
Cash, cash equivalents, and restricted cash at beginning of period	$	310.9	$	159.6

Cash and cash equivalents at end of period	$	223.9	$	104.9
Restricted cash at end of period	62.2		56.7
Restricted cash included in other long-term assets at end of period	10.2		15.4
Cash, cash equivalents, and restricted cash at end of period	$	296.3	$	177.0

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1.Basis of Presentation

Encompass Health Corporation, incorporated in Delaware in 1984, including its subsidiaries, is ~~one of the nation’s largest providers~~a leading provider of post-acute healthcare services, offering both facility-based and home-based patient services in 3739 states and Puerto Rico through its network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. We manage our operations and disclose financial information using 2 reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. See also Note 10,11, Segment Reporting.

The accompanying unaudited condensed consolidated financial statements of Encompass Health Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes contained in Encompass Health’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February ~~27, 2020~~26, 2021 (the ~~“2019~~“2020 Form 10‑K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in these interim statements, as allowed by such SEC rules and regulations. The condensed consolidated balance sheet as of December 31, ~~2019~~2020 has been derived from audited financial statements, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading.

The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. In our opinion, the accompanying condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state the financial position, results of operations, and cash flows for each interim period presented.

Net Operating Revenues—

Our Net operating revenues disaggregated by payor source and segment are as follows (in millions):

Inpatient Rehabilitation Home Health and Hospice Consolidated
Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31,
2020 2019 2020 2019 2020 2019
Medicare $ 641.9
$ 638.9
$ 226.2
$ 214.8
$ 868.1
$ 853.7
Medicare Advantage 111.5
85.2
29.4
25.5
140.9
110.7
Managed care 90.2
83.5
12.1
8.4
102.3
91.9
Medicaid 30.7
26.2
4.2
4.3
34.9
30.5
Other third-party payors 11.0
10.0
—
—
11.0
10.0
Workers’ compensation 6.9
8.2
0.3
0.2
7.2
8.4
Patients 5.5
6.1
0.4
0.4
5.9
6.5
Other income 11.5
12.0
0.2
0.3
11.7
12.3
Total $ 909.2
$ 870.1
$ 272.8
$ 253.9
$ 1,182.0
$ 1,124.0


	Inpatient Rehabilitation				Home Health and Hospice				Consolidated
	Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended March 31,
	2021		2020		2021		2020		2021		2020
Medicare	$	614.5	$	641.9	$	223.9	$	226.2	$	838.4	$	868.1
Medicare Advantage	158.4		111.5		28.0		29.4		186.4		140.9
Managed care	112.2		90.2		14.3		12.1		126.5		102.3
Medicaid	39.0		30.7		3.8		4.2		42.8		34.9
Other third-party payors	12.1		11.0		0		0		12.1		11.0
Workers’ compensation	5.7		6.9		0.1		0.3		5.8		7.2
Patients	4.9		5.5		0.2		0.4		5.1		5.9
Other income	13.1		11.5		0.2		0.2		13.3		11.7
Total	$	959.9	$	909.2	$	270.5	$	272.8	$	1,230.4	$	1,182.0

See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the

~~2019~~2020 Form 10-K for our policy related to Net operating revenues.

~~Risks and Uncertainties~~—

~~The~~ ~~novel coronavirus disease 2019 (“COVID-19”) pandemic~~ has caused a disruption to our nation’s healthcare system. Such disruption includes reductions in the availability of personal protective equipment (“PPE”) to prevent spread of the disease during patient treatment and increases in the cost of PPE. Generally, elective procedures were postponed by physicians and acute-care hospitals in order to prepare for the expected volume of COVID-19 patients and reduce the risk of

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~exposure to COVID-19. I~~n March, we experienced decreased volumes in both segments which we believe resulted from a number of conditions related to the COVID-19 pandemic including: lower acute-care hospital censuses due to the deferral of elective surgeries and shelter-in-place orders, restrictive visitation policies in place at acute-care hospitals that have served to severely limit access to patients and caregivers by our clinical rehabilitation liaisons and care transition coordinators, lock down of assisted living facilities, and heightened anxiety among patients and their family members regarding the risk of exposure to COVID-19 during acute-care and post-acute care treatment.

~~In March and April 2020, the~~ ~~federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to the healthcare industry during the COVID-19 pandemic. A specific initiative impacting us is the~~ ~~Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) which~~ ~~temporarily suspends the automatic 2% reduction of Medicare program payments known as “sequestration”~~ for the period of May 1 through December 31, 2020 and authorizes the cash distribution of relief funds from the United States Department of Health and Human Services (“HHS”) to healthcare providers in response to the COVID-19 pandemic. On ~~April 10, 2020, we~~ began to receive the CARES Act relief fund payments, for which we did not apply, from HHS. To date, our inpatient rehabilitation hospitals and home health and hospice agencies have received in aggregate approximately $238 million. On May 7, 2020, we informed HHS we would not accept any of the CARES Act relief funds. We are currently seeking direction on how to process the repayment of those funds.

Additionally, the CARES Act and a series of waivers and guidance issued by the Centers for Medicare and Medicaid Services (“CMS”) suspend various Medicare patient coverage criteria and documentation and care requirements in an effort to provide regulatory relief. For inpatient rehabilitation, the regulatory relief includes the temporary suspension of the requirement that patients must be able to tolerate a minimum of 3 hours of therapy per day for 5 days per week, waiver of the requirement that at least 60% of a facility’s patients must have a diagnosis from at least 1 of 13 specified medical conditions that typically require intensive therapy and supervision, and waiver of the requirement for a physician to conduct and document a post-admission evaluation. In addition, the requirement of physician face-to-face visits at least 3 days a week may be fulfilled using telehealth. For home health, the relief includes the allowance of nurse practitioners and physician assistants under certain conditions to certify, establish and periodically review the plan of care, as well as supervise the provision of items and services for beneficiaries under the Medicare home health benefit and expands the use of telehealth. For hospice, the relief includes the temporary waiver of the requirement to use volunteers and to conduct a nurse visit every two weeks to evaluate aides, as well as the expanded use of telehealth for routine services and patient recertification.

~~As discussed in Note 3,~~ ~~Long-term Debt~~, in April 2020, we amended our credit agreement primarily to provide covenant relief due to business disruptions from the COVID-19 pandemic. The amendment included, among other things, the carve-out of the COVID-19 pandemic from the definition of material adverse effect for 364 days and modifications to the interest coverage and leverage ratios under the agreement.

The foregoing and other disruptions to our business as a result of the COVID-19 pandemic have had and are likely to continue to have an adverse effect on our business and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Recently Adopted Accounting Pronouncements—

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326),” which provides guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance was effective for us beginning January 1, 2020. The adoption of this guidance resulted in an immaterial change to our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance in determining when the arrangement includes a software license. It requires entities to account for such costs consistent with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The new guidance was effective for us beginning January 1, 2020. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements.

~~Recent Accounting Pronouncements Not Yet Adopted~~—

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The standard removes certain exceptions to the general principles of ASC 740 and simplifies other areas such as accounting for outside basis differences of equity method investments. Either prospective or retrospective transition of this

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

standard is dependent upon the specific amendments. The new guidance iswas effective for us beginning January 1, ~~2021, including interim periods within that reporting period. Early~~2021. The adoption ~~is permitted. We continue to review the requirements~~ of this ~~standard and any potential~~guidance did not have a material impact ~~it may have on~~to our condensed consolidated financial statements.

We do not believe any other recently issued, but not yet effective, accounting standards will have a material effect on our condensed consolidated financial position, results of operations, or cash flows.


2.	~~Variable Interest Entities~~

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

2.Business Combinations

Home Health and Hospice

In April 2021, we announced we entered into a definitive agreement to purchase the home health and hospice assets of Frontier Home Health and Hospice in Alaska, Colorado, Montana, Washington, and Wyoming for a cash purchase price of $95 million. At closing, 9 home health and 11 hospice locations will become part of our national network of home health and hospice locations. This transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close in the second quarter of 2021. We expect to fund this transaction with cash on hand and borrowings under our revolving credit facility.

3.Variable Interest Entities

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we consolidated 9 ~~and 8, respectively,~~ limited partnership-like entities that are variable interest entities (“VIEs”) and of which we are the primary beneficiary. Our ownership percentages in these entities range from 50.0% to 75.0% as of March 31, ~~2020.~~2021. Through partnership and management agreements with or governing each of these entities, we manage all of these entities and handle all day-to-day operating decisions. Accordingly, we have the decision making power over the activities that most significantly impact the economic performance of our VIEs and an obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. These decisions and significant activities include, but are not limited to, marketing efforts, oversight of patient admissions, medical training, nurse and therapist scheduling, provision of healthcare services, billing, collections, and creation and maintenance of medical records. The terms of the agreements governing each of our VIEs prohibit us from using the assets of each VIE to satisfy the obligations of other entities.

The carrying amounts and classifications of the consolidated VIEs’ assets and liabilities, which are included in our condensed consolidated balance sheet, are as follows (in millions):


	March 31, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	0.5	$	0.1
Accounts receivable	33.7		33.1
Other current assets	8.5		8.6
Total current assets	42.7		41.8
Property and equipment, net	118.7		121.1
Operating lease right-of-use assets	4.4		4.7
Goodwill	19.2		19.2
Intangible assets, net	3.1		3.3
Other long-term assets	31.1		31.1
Total assets	$	219.2	$	221.2
Liabilities
Current liabilities:
Current portion of long-term debt	$	0.9	$	0.9
Current operating lease liabilities	1.5		1.5
Accounts payable	5.9		6.1
Accrued expenses and other current liabilities	21.7		23.0
Total current liabilities	30.0		31.5
Long-term debt, net of current portion	9.4		9.6
Long-term operating lease liabilities	2.9		3.3
Other long-term liabilities	2.3		2.4
Total liabilities	$	44.6	$	46.8

March 31, 2020 December 31, 2019
Assets
Current assets:
Cash and cash equivalents $ 1.1
$ 0.2
Accounts receivable 31.3
29.3
Other current assets 7.7
6.4
Total current assets 40.1
35.9
Property and equipment, net 120.9
122.6
Operating lease right-of-use assets 5.8
6.0
Goodwill 19.2
15.9
Intangible assets, net 4.8
3.3
Other long-term assets 31.4
31.3
Total assets $ 222.2
$ 215.0
Liabilities
Current liabilities:
Current portion of long-term debt $ 0.9
$ 0.8
Current operating lease liabilities 1.5
1.4
Accounts payable 5.6
6.7
Accrued expenses and other current liabilities 16.6
17.0
Total current liabilities 24.6
25.9
Long-term debt, net of current portion 10.3
10.5
Long-term operating lease liabilities 4.4
4.7
Total liabilities $ 39.3
$ 41.1

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~


3.	~~Long-term Debt~~

~~Our long-term debt outstanding consists of the following (in millions):~~

March 31, 2020 December 31, 2019
Credit Agreement—
Advances under revolving credit facility $ 350.0
$ 45.0
Term loan facilities 261.9
265.2
Bonds payable—
5.125% Senior Notes due 2023 297.5
297.3
5.75% Senior Notes due 2024 697.5
697.3
5.75% Senior Notes due 2025 345.8
345.6
4.50% Senior Notes due 2028 491.9
491.7
4.75% Senior Notes due 2030 491.8
491.7
Other notes payable 44.5
44.7
Finance lease obligations 381.2
384.1
3,362.1
3,062.6
Less: Current portion (40.2 ) (39.3 )
Long-term debt, net of current portion $ 3,321.9
$ 3,023.3

Borrowings under our revolving credit facility as of March 31, 2020 were primarily used for the purchase of equity and vested stock appreciation rights from management investors of our home health and hospice segment. For additional information see Note 4, ~~Redeemable Noncontrolling Interests,~~ ~~and Note 6,~~ ~~Share-Based Payments~~.

~~In April 2020, we amended our existing credit agreement. The following are the changes made to the material~~

~~provisions of the credit agreement:~~


1.	~~Amendment of the financial covenants to update the applicable interest coverage ratio and leverage ratio included in that covenant. The revised applicable ratios are set forth below.~~



~~Fiscal Quarters Ending~~	~~Interest Coverage Ratio~~
~~December 31, 2019 and March 31, 2020~~	~~3.00 to 1.00~~
~~June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021 and December 31, 2021~~	~~2.00 to 1.00~~
~~March 31, 2022 and thereafter~~	~~3.00 to 1.00~~



~~Fiscal Quarters Ending~~	~~Leverage Ratio~~
~~December 31, 2019 and March 31, 2020~~	~~4.50 to 1.00~~
~~June 30, 2020~~	~~4.75 to 1.00~~
~~September 30, 2020~~	~~5.50 to 1.00~~
~~December 31, 2020~~	~~6.50 to 1.00~~
~~March 31, 2021~~	~~6.50 to 1.00~~
~~June 30, 2021~~	~~6.00 to 1.00~~
~~September 30, 2021~~	~~5.50 to 1.00~~
~~December 31, 2021~~	~~5.00 to 1.00~~
~~March 31, 2022 and thereafter~~	~~4.25 to 1.00~~

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

4.Long-term Debt


2.	Amendment of the definition of “Material Adverse Effect” to carve out the direct and indirect impacts of COVID-19 and the related legislative, regulatory and executive actions on us from that definition for a period of 364 days; and

~~Amendment of the investment limitation covenant and the restricted payment limitation covenant, to add to each a leverage ratio condition (not in excess of 4.50x)~~

Our long-term debt outstanding consists of the following (in millions):


	March 31, 2021		December 31, 2020
Credit Agreement—

Term loan facilities	$	248.3	$	251.6
Bonds payable—
5.125% Senior Notes due 2023	298.3		298.1
5.75% Senior Notes due 2025	346.5		346.3
4.50% Senior Notes due 2028	785.5		785.0
4.75% Senior Notes due 2030	783.5		783.2
4.625% Senior Notes due 2031	393.3		393.2
Other notes payable	39.7		39.8
Finance lease obligations	402.1		391.7
	3,297.2		3,288.9
Less: Current portion	(137.2)		(38.3)
Long-term debt, net of current portion	$	3,160.0	$	3,250.6

In March 2021, we issued notice for redemption of $100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the “2023 Notes”). We completed this redemption on April 5, 2021 using cash on hand and capacity under our revolving credit facility. Pursuant to the provisions allowing unlimited investments and restricted payments in the event certain conditions are met including a senior secured leverage ratio (not in excess of 2:00x) and the existence of no events of default in addition to the new leverage ratio condition.

~~All other material~~ terms of the ~~existing credit agreement remain~~2023 Notes, this optional redemption was made at a price of par. As a result of this redemption, we have classified approximately $100 million of the ~~same~~2023 Notes as current in our accompanying March 31, 2021 condensed consolidated balance sheet, and ~~are described~~we expect to record an approximate $0.6 million loss on early extinguishment of debt in ~~Note 10,~~ the second quarter of 2021.

5.~~Long-term Debt~~, ~~to the consolidated financial statements accompanying the 2019 Form 10‑K.~~Redeemable Noncontrolling Interests


4.	~~Redeemable Noncontrolling Interests~~

The following is a summary of the activity related to our Redeemable noncontrolling interests ~~during the three months ended~~ ~~March 31, 2020~~ ~~and 2019~~ (in millions):

Three Months Ended March 31,
2020 2019
Balance at beginning of period $ 239.6
$ 261.7
Net income attributable to noncontrolling interests 2.0
4.0
Distributions declared (2.1 ) (1.8 )
Contribution to joint venture 3.1
—
Reclassification to noncontrolling interests —
(11.2 )
Purchase of redeemable noncontrolling interests (162.3 ) —
Exchange transaction (46.3 ) —
Change in fair value —
20.3
Balance at end of period $ 34.0
$ 273.0


	Three Months Ended March 31,
	2021		2020
Balance at beginning of period	$	31.6	$	239.6
Net income attributable to noncontrolling interests	2.4		2.0
Distributions declared	(2.3)		(2.1)
Contribution to joint venture	0		3.1

Purchase of redeemable noncontrolling interests	0		(162.3)
Exchange transaction	0		(46.3)


Balance at end of period	$	31.7	$	34.0

The following table reconciles the net income attributable to nonredeemable Noncontrolling interests, as recorded in the shareholders’ equity section of the condensed consolidated balance sheets, and the net income attributable to Redeemable noncontrolling interests, as recorded in the mezzanine section of the condensed consolidated balance sheets, to the Net and comprehensive income attributable to noncontrolling interests presented in the condensed consolidated statements of comprehensive income ~~for the three months ended March 31, 2020 and 2019~~ (in millions):


	Three Months Ended March 31,
	2021		2020
Net income attributable to nonredeemable noncontrolling interests	$	23.1	$	19.7
Net income attributable to redeemable noncontrolling interests	2.4		2.0
Net income attributable to noncontrolling interests	$	25.5	$	21.7

Three Months Ended March 31,
2020 2019
Net income attributable to nonredeemable noncontrolling interests $ 19.7
$ 18.9
Net income attributable to redeemable noncontrolling interests 2.0
4.0
Net income attributable to noncontrolling interests $ 21.7
$ 22.9

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

On December 31, 2014, we acquired 83.3% of our home health and hospice business when we purchased EHHI Holdings, Inc. (“EHHI”). In the acquisition, we acquired all of the issued and outstanding equity interests of EHHI, other than equity interests contributed to Encompass Health Home Health Holdings, Inc. (“Holdings”), a subsidiary of Encompass Health and an indirect parent of EHHI, by certain sellers in exchange for shares of common stock of Holdings. Those sellers were members of EHHI management, and they contributed a portion of their shares of common stock of EHHI, valued at approximately $64 million on the acquisition date, in exchange for approximately 16.7% of the outstanding shares of common stock of Holdings. At any time after December 31, 2017, each management investor had the right (but not the obligation) to have his or her shares of Holdings stock repurchased by Encompass Health for a cash purchase price per share equal to the fair

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

value. In February 2018, each management investor exercised the right to sell one-third of his or her shares of Holdings stock to Encompass Health, representing approximately 5.6% of the outstanding shares of the common stock of Holdings. On February 21, 2018, Encompass Health settled the acquisition of those shares upon payment of approximately $65 million in cash. In July 2019, we received additional exercise notices, representing approximately 5.6% of the outstanding shares of the common stock of Holdings. In September 2019, Encompass Health settled the acquisition of those shares upon payment of approximately $163 million in cash. In January 2020, we received ~~additional~~ exercise notices, representing approximately 4.3% of the outstanding shares of the common stock of Holdings. On February 18, 2020, Encompass Health settled the acquisition of those shares upon payment of approximately $162 million in cash. Upon settlement of these exercises, approximately $46 million of the shares of Holdings held by two management investors remained outstanding.

On February 20, 2020, Encompass Health entered into exchange agreements (each, an “Exchange Agreement”) with these two management investors, pursuant to which they had the right to exchange all of the remaining shares of Holdings held by them for shares of common stock of Encompass Health (the “EHC Shares”). Each of the Exchange Agreements provided that the management investor must deliver a written exchange notice (an “Exchange Notice”) to Encompass Health in order to exchange his or her remaining shares of Holdings for EHC Shares. Each Exchange Agreement further provided that the number of EHC Shares to be delivered to the management investor was to be determined by dividing the fair value of the shares of Holdings held by the management investor on the date of the Exchange Agreement by the last reported sales price of Encompass Health’s common stock on the New York Stock Exchange (the “NYSE”) on the date of delivery of the Exchange Notice.

On February 20, 2020, Encompass Health received an Exchange Notice from each of the management investors. Based on the last sales price of Encompass Health’s common stock on the NYSE on February 20, 2020, Encompass Health delivered an aggregate 560,957 EHC Shares to the management investors. The total number of EHC Shares issued pursuant to the exchange agreements on March 6, 2020 represented less than 0.6% of the outstanding shares of Encompass Health common stock. Encompass Health issued the EHC Shares from its treasury shares. Encompass Health now owns 100% of Holdings and EHHI.

See also Note 5,6, Fair Value Measurements.

6.Fair Value Measurements

Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Valuation Technique ⁽¹⁾

Valuation Technique (1)

⁽¹⁾ The three valuation techniques are: market approach (M), cost approach (C), and income approach (I).

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~The decrease in~~ ~~Redeemable noncontrolling interests~~ ~~from December 31, 2019 to March, 31, 2020 primarily resulted from the final purchase of equity interests in Holdings from management investors discussed in Note~~ 4, ~~Redeemable Noncontrolling Interests~~.

~~The fair values of our financial assets and liabilities are determined as follows:~~

~~Equity and Debt securities~~ - The fair values of our equity and debt securities are determined based on quoted market prices in active markets or quoted prices, dealer quotations, or alternative pricing sources supported by observable inputs in markets that are not considered to be active.

~~Redeemable noncontrolling interests~~ ~~- The fair value of the~~ ~~Redeemable noncontrolling interests~~ related to our home health segment was determined using the product of a twelve-month adjusted EBITDA measure and a specified median market price multiple based on a basket of public home health companies and transactions, after adding cash and deducting indebtedness that included the outstanding principal balance under any intercompany notes. To determine the fair value of the ~~Redeemable noncontrolling interests~~ in our joint venture hospitals, we use the applicable hospitals’ projected operating results and cash flows discounted using a rate that reflects market participant assumptions for the applicable facilities. The projected operating results use management’s best estimates of economic and market conditions over the forecasted periods including assumptions for pricing and volume, operating expenses, and capital expenditures.

~~In addition, there~~There are assets and liabilities that are not required to be measured at fair value on a recurring basis. However, these assets may be recorded at fair value as a result of impairment charges or other adjustments made to the carrying value of the applicable assets. During the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, we did not record any material gains or losses related to these assets.

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As discussed in Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K, the carrying value equals fair value for our financial instruments that are not included in the table below and are classified as current in our condensed consolidated balance sheets. The carrying amounts and estimated fair values for all of our other financial instruments are presented in the following table (in millions):

As of March 31, 2020 As of December 31, 2019
Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
Long-term debt:

Advances under revolving credit facility $ 350.0
$ 350.0
$ 45.0
$ 45.0
Term loan facilities 261.9
263.3
265.2
266.6
5.125% Senior Notes due 2023 297.5
298.5
297.3
306.6
5.75% Senior Notes due 2024 697.5
703.5
697.3
708.8
5.75% Senior Notes due 2025 345.8
344.3
345.6
369.7
4.50% Senior Notes due 2028 491.9
491.3
491.7
519.4
4.75% Senior Notes due 2030 491.8
496.1
491.7
520.0
Other notes payable 44.5
44.5
44.7
44.7
Financial commitments:
Letters of credit —
36.7
—
38.9


	As of March 31, 2021				As of December 31, 2020
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Long-term debt:

Term loan facilities	$	248.3	$	249.8	$	251.6	$	253.1
5.125% Senior Notes due 2023	298.3		300.8		298.1		302.6
5.75% Senior Notes due 2025	346.5		361.6		346.3		361.4
4.50% Senior Notes due 2028	785.5		820.2		785.0		840.0
4.75% Senior Notes due 2030	783.5		824.0		783.2		856.0
4.625% Senior Notes due 2031	393.3		415.0		393.2		424.9
Other notes payable	39.7		39.7		39.8		39.8
Financial commitments:
Letters of credit	0		37.7		0		36.7

Fair values for our long-term debt and financial commitments are determined using inputs, including quoted prices in nonactive markets, that are observable either directly or indirectly, or Level 2 inputs within the fair value hierarchy. See Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K.

7.Share-Based Payments

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

InDuring the ~~first quarter of 2020,~~three months ended March 31, 2021, we issued a total of ~~0.4~~0.5 million restricted stock awards to members of our management team and our board of directors. Approximately 0.2 million of these awards contain only a service condition, while the remainder contain both a service and a performance condition. For the awards that include a performance condition, the number of shares that will ultimately be granted to employees may vary based on the Company’s performance during the applicable two year performance measurement period. Additionally, we granted 0.1 million stock options to members of our management team. The fair value of these awards and options was determined using the policies described in Note 1, Summary of Significant Accounting Policies, and Note 14, Share-Based Payments, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K.

In conjunction with the EHHI acquisition discussed in Note 4,5, Redeemable Noncontrolling Interests, we granted stock appreciation rights (“SARs”) based on Holdings common stock to certain members of EHHI management at closing. Half of the SARs vested on December 31, 2018 and the remainder vested on December 31, 2019. Upon exercise, each SAR must be settled for cash in the amount by which the per share fair value of Holdings’ common stock on the exercise date exceeds the per share fair value on the grant date. As of December 31, 2019, the fair value of the remaining 115,545 SARs was approximately $101 million, all of which was included in ~~Accrued expenses and other current liabilities~~ ~~in the condensed consolidated balance sheet.~~ In January 2020, members of the management team exercised the remaining SARs, and in February 2020, we settled those awards upon payment of approximately $101 million in cash.

For additional information, see Note 14, Share-Based Payments, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K.

Our Provision for income tax expense of ~~$27.1~~$34.5 million and ~~$30.8~~$27.1 million for the three months ended March 31, ~~2020~~2021 and ~~March 31, 2019,~~2020, respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rate offset by tax benefits resulting from share-based compensation windfalls.

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

8.9.Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):

Three Months Ended March 31,
2020 2019
Basic:
Numerator:
Income from continuing operations $ 108.8
$ 125.7
Less: Net income attributable to noncontrolling interests included in continuing operations (21.7 ) (22.9 )
Less: Income allocated to participating securities (0.3 ) (0.4 )
Income from continuing operations attributable to Encompass Health common shareholders 86.8
102.4
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders (0.1 ) (0.5 )
Net income attributable to Encompass Health common shareholders $ 86.7
$ 101.9
Denominator:
Basic weighted average common shares outstanding 98.2
98.4
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations $ 0.88
$ 1.05
Discontinued operations —
(0.01 )
Net income $ 0.88
$ 1.04

Diluted:
Numerator:
Income from continuing operations $ 108.8
$ 125.7
Less: Net income attributable to noncontrolling interests included in continuing operations (21.7 ) (22.9 )
Income from continuing operations attributable to Encompass Health common shareholders 87.1
102.8
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders (0.1 ) (0.5 )
Net income attributable to Encompass Health common shareholders $ 87.0
$ 102.3
Denominator:
Diluted weighted average common shares outstanding 99.6
99.7
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations $ 0.87
$ 1.04
Discontinued operations —
(0.01 )
Net income $ 0.87
$ 1.03

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~


	Three Months Ended March 31,
	2021		2020
Basic:
Numerator:
Income from continuing operations	$	132.8	$	108.8
Less: Net income attributable to noncontrolling interests included in continuing operations	(25.5)		(21.7)
Less: Income allocated to participating securities	(0.5)		(0.3)

Income from continuing operations attributable to Encompass Health common shareholders	106.8		86.8
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	0		(0.1)

Net income attributable to Encompass Health common shareholders	$	106.8	$	86.7
Denominator:
Basic weighted average common shares outstanding	99.0		98.2
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.08	$	0.88
Discontinued operations	0		0
Net income	$	1.08	$	0.88

Diluted:
Numerator:
Income from continuing operations	$	132.8	$	108.8
Less: Net income attributable to noncontrolling interests included in continuing operations	(25.5)		(21.7)


Income from continuing operations attributable to Encompass Health common shareholders	107.3		87.1
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	0		(0.1)
Net income attributable to Encompass Health common shareholders	$	107.3	$	87.0
Denominator:
Diluted weighted average common shares outstanding	100.2		99.6
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.07	$	0.87
Discontinued operations	0		0
Net income	$	1.07	$	0.87

The following table sets forth the reconciliation between basic weighted average common shares outstanding and diluted weighted average common shares outstanding (in millions):

Three Months Ended March 31,
2020 2019
Basic weighted average common shares outstanding 98.2
98.4
Restricted stock awards, dilutive stock options, and restricted stock units 1.4
1.3
Diluted weighted average common shares outstanding 99.6
99.7


	Three Months Ended March 31,
	2021	2020
Basic weighted average common shares outstanding	99.0	98.2


Restricted stock awards, dilutive stock options, and restricted stock units	1.2	1.4
Diluted weighted average common shares outstanding	100.2	99.6

See Note 17, Earnings per Common Share, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K for additional information related to our common stock.


9.	~~Contingencies and Other Commitments~~

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

10.Contingencies and Other Commitments

We operate in a highly regulated industry in which healthcare providers are routinely subject to litigation. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims, or legal and regulatory proceedings could materially and adversely affect our financial position, results of operations, and cash flows in a given period.

Nichols Litigation—

We were named as a defendant in a lawsuit filed March 28, 2003 by several individual stockholders in the Circuit Court of Jefferson County, Alabama, captioned Nichols v. HealthSouth Corp. In July 2019, we entered into settlement agreements with all but one plaintiff and paid those settling plaintiffs an aggregate amount of cash less than $0.1 million. The remaining plaintiff alleges that we, some of our former officers, and our former investment bank engaged in a scheme to overstate and misrepresent our earnings and financial position. The plaintiff is seeking compensatory and punitive damages.

This case was stayed in the circuit court on August 8, 2005. However, the complaint has been amended from time to time, including to request certification as a class action. Additionally, one of the former officers named as a defendant has repeatedly attempted to remove the case to federal district court. We filed our latest motion to remand the case back to state court on January 10, 2013. On September 27, 2013, the federal court remanded the case back to state court. On December 10, 2014, we filed a motion to dismiss on the grounds the plaintiffs lacked standing because their claims were derivative in nature, and the claims were time-barred by the statute of limitations. On May 26, 2016, the trial court granted our motion to dismiss. On appeal, the Supreme Court of Alabama reversed the trial court’s dismissal on March 23, 2018. On April 6, 2018, we filed an application for rehearing with the Alabama Supreme Court. On March 22, 2019, the Alabama Supreme Court denied our application for rehearing and remanded the case to the trial court for further proceedings. The court has not yet set a date for the trial to begin. On March 2, 2020, we filed a motion for summary judgment, which the trial court ~~recently vacated~~denied on June 17, 2020. On March 12, 2021 the Alabama Supreme Court directed the trial court to vacate its ~~original scheduling~~ order sothat served as the basis for the denial of our motion for summary judgement. On April 7, 2021, we ~~do not currently know when this trial will begin.~~filed a renewed motion for summary judgment, the hearing for which has been scheduled on May 13, 2021.

We intend to vigorously defend ourselves in this case against the sole remaining plaintiff. Based on the stage of litigation, review of the current facts and circumstances as we understand them, the nature of the underlying claim, the results of the proceedings to date, and the nature and scope of the defense we continue to mount, we do not believe an adverse judgment or settlement is probable in this matter, and it is also not possible to estimate an amount of loss, if any, or range of possible loss that might result from an adverse judgment or settlement of this case.

The False Claims Act allows private citizens, called “relators,” to institute civil proceedings on behalf of the United States alleging violations of the False Claims Act. These lawsuits, also known as “whistleblower” or “qui tam” actions, can involve significant monetary damages, fines, attorneys’ fees and the award of bounties to the relators who successfully prosecute or bring these suits to the government. Qui tam cases are sealed at the time of filing, which means knowledge of the information contained in the complaint typically is limited to the relator, the federal government, and the presiding court. The defendant in a qui tam action may remain unaware of the existence of a sealed complaint for years. While the complaint is under seal, the government reviews the merits of the case and may conduct a broad investigation and seek discovery from the defendant and other parties before deciding whether to intervene in the case and take the lead on litigating the claims. The court

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

lifts the seal when the government makes its decision on whether to intervene. If the government decides not to intervene, the relator may elect to continue to pursue the lawsuit individually on behalf of the government. It is possible that qui tam lawsuits have been filed against us, which suits remain under seal, or that we are unaware of such filings or precluded by existing law or court order from discussing or disclosing the filing of such suits. We may be subject to liability under one or more undisclosed qui tam cases brought pursuant to the False Claims Act.

It is our obligation as a participant in Medicare and other federal healthcare programs to routinely conduct audits and reviews of the accuracy of our billing systems and other regulatory compliance matters. As a result of these reviews, we have made, and will continue to make, disclosures to the United States Department of Health and Human Services Office of Inspector General and ~~CMS~~the Centers for Medicare & Medicaid Services relating to amounts we suspect represent over-payments from these programs, whether due to inaccurate billing or otherwise. Some of these disclosures have resulted in, or may result in, Encompass Health refunding amounts to Medicare or other federal healthcare programs.


~~10.~~	~~Segment Reporting~~

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

11.Segment Reporting

Our internal financial reporting and management structure is focused on the major types of services provided by Encompass Health. We manage our operations using 2 operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. These reportable operating segments are consistent with information used by our chief executive officer, who is our chief operating decision maker, to assess performance and allocate resources. The following is a brief description of our reportable segments:

•Inpatient Rehabilitation - Our national network of inpatient rehabilitation hospitals stretches across 35 states and Puerto Rico, with a concentration of hospitals in the eastern half of the United States and Texas. As of March 31, 2021, we operate 138 inpatient rehabilitation hospitals. We are the sole owner of 86 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 52 jointly owned hospitals. In addition, we manage 4 inpatient rehabilitation units through management contracts. We provide specialized rehabilitative treatment on both an inpatient and outpatient basis. Our inpatient rehabilitation hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, cardiac and pulmonary conditions, brain and spinal cord injuries, complex orthopedic conditions, and amputations.

•Home Health and Hospice - As of March 31, 2021, we provide home health services in 241 locations and hospice services in 82 locations across 31 states with concentrations in the southern half of the United States. In addition, 1 of these home health agencies operates as a joint venture which we account for using the equity method of accounting. We are the sole owner of 317 of these locations. We retain 50.0% to 81.0% ownership in the remaining 6 jointly owned locations. Our home health services include a comprehensive range of Medicare-certified home nursing services to adult patients in need of care. These services include, among others, skilled nursing, physical, occupational, and speech therapy, medical social work, and home health aide services. Our hospice services include in-home services to terminally ill patients and their families to address patients’ physical needs, including pain control and symptom management, and to provide emotional and spiritual support.

- Our national network of inpatient rehabilitation hospitals stretches across 33 states and Puerto Rico, with a concentration of hospitals in the eastern half of the United States and Texas. As of March 31, 2020, we operate 134 inpatient rehabilitation hospitals. We are the sole owner of 87 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 47 jointly owned hospitals. In addition, we manage 3 inpatient rehabilitation units through management contracts. We provide specialized rehabilitative treatment on both an inpatient and outpatient basis. Our inpatient rehabilitation hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, cardiac and pulmonary conditions, brain and spinal cord injuries, complex orthopedic conditions, and amputations.

~~Home Health and Hospice~~ - As of March 31, 2020, we provide home health services in 245 locations and hospice services in 83 locations across 31 states with concentrations in the Southeast and Texas. In addition, 1 of these home health agencies operates as a joint venture which we account for using the equity method of accounting. We are the sole owner of 320 of these locations. We retain 50.0% to 81.0% ownership in the remaining 8 jointly owned locations. Our home health services include a comprehensive range of Medicare-certified home nursing services to adult patients in need of care. These services include, among others, skilled nursing, physical, occupational, and speech therapy, medical social work, and home health aide services. Our hospice services include in-home services to terminally ill patients and their families to address patients’ physical needs, including pain control and symptom management, and to provide emotional and spiritual support.

The accounting policies of our reportable segments are the same as those described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K. All revenues for our services are generated through external customers. See Note 1, Basis of Presentation, “Net Operating Revenues,” for the disaggregation of our revenues. No corporate overhead is allocated to either of our reportable segments. Our chief operating decision maker evaluates the performance of our segments and allocates resources to them based on adjusted earnings before interest, taxes, depreciation, and amortization (“Segment Adjusted EBITDA”).

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Selected financial information for our reportable segments is as follows (in millions):

Inpatient Rehabilitation Home Health and Hospice
Three Months Ended March 31, Three Months Ended March 31,
2020 2019 2020 2019
Net operating revenues $ 909.2
$ 870.1
$ 272.8
$ 253.9
Operating expenses:
Inpatient rehabilitation:
Salaries and benefits 482.3
445.0
—
—
Other operating expenses 134.7
127.6
—
—
Supplies 39.6
35.6
—
—
Occupancy costs 15.3
15.8
—
—
Home health and hospice:
Cost of services sold (excluding depreciation and amortization) —
—
130.9
116.5
Support and overhead costs —
—
100.2
88.8
671.9
624.0
231.1
205.3
Other expense (income) 1.6
(2.8 ) —
—
Equity in net income of nonconsolidated affiliates (0.6 ) (2.1 ) (0.2 ) (0.4 )
Noncontrolling interests 20.8
21.0
0.9
2.7
Segment Adjusted EBITDA $ 215.5
$ 230.0
$ 41.0
$ 46.3

Capital expenditures $ 83.3
$ 70.4
$ 1.5
$ 4.5


	Inpatient Rehabilitation				Home Health and Hospice
	Three Months Ended March 31,					Three Months Ended March 31,
	2021		2020				2021		2020
Net operating revenues	$	959.9	$	909.2			$	270.5	$	272.8
Operating expenses:
Inpatient rehabilitation:
Salaries and benefits	501.9		482.3				0		0
Other operating expenses	140.0		134.7				0		0
Supplies	45.2		39.6				0		0
Occupancy costs	15.1		15.3				0		0
Home health and hospice:
Cost of service (excluding depreciation and amortization)	0		0				118.1		130.9
Support and overhead costs	0		0				101.4		100.2
	702.2		671.9				219.5		231.1
Other (income) expense	(1.5)		1.6				0		0
Equity in net income of nonconsolidated affiliates	(0.8)		(0.6)				(0.2)		(0.2)
Noncontrolling interests	25.1		20.8				0.4		0.9
Segment Adjusted EBITDA	$	234.9	$	215.5			$	50.8	$	41.0

Capital expenditures	$	99.8	$	83.3			$	0.9	$	1.5

Inpatient Rehabilitation Home Health and Hospice Encompass Health Consolidated
As of March 31, 2020
Total assets $ 4,558.8
$ 1,639.2
$ 6,137.7
Investments in and advances to nonconsolidated affiliates 1.8
3.9
5.7
As of December 31, 2019
Total assets $ 4,501.4
$ 1,612.8
$ 6,080.7
Investments in and advances to nonconsolidated affiliates 2.0
5.4
7.4

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

Segment reconciliations (in millions):

Three Months Ended March 31,
2020 2019
Total Segment Adjusted EBITDA $ 256.5
$ 276.3
General and administrative expenses (35.6 ) (53.4 )
Depreciation and amortization (58.8 ) (52.5 )
Loss on disposal of assets (0.1 ) (1.1 )
Government, class action, and related settlements (2.8 ) —
Interest expense and amortization of debt discounts and fees (43.2 ) (37.2 )
Net income attributable to noncontrolling interests 21.7
22.9
SARs mark-to-market impact on noncontrolling interests —
0.8
Change in fair market value of equity securities (2.5 ) 0.9
Gain on consolidation of Treasure Coast 2.2
—
Payroll taxes on SARs exercise (1.5 ) (0.2 )
Income from continuing operations before income tax expense $ 135.9
$ 156.5

March 31, 2020 December 31, 2019
Total assets for reportable segments $ 6,198.0
$ 6,114.2
Reclassification of deferred income tax liabilities to net deferred income tax assets (60.3 ) (33.5 )
Total consolidated assets $ 6,137.7
$ 6,080.7


	Three Months Ended March 31,
	2021		2020
Total Segment Adjusted EBITDA	$	285.7	$	256.5
General and administrative expenses	(38.6)		(35.6)
Depreciation and amortization	(62.5)		(58.8)
Gain (loss) on disposal or impairment of assets	0.1		(0.1)
Government, class action, and related settlements	0		(2.8)


Interest expense and amortization of debt discounts and fees	(42.8)		(43.2)

Net income attributable to noncontrolling interests	25.5		21.7

Change in fair market value of equity securities	(0.1)		(2.5)
Gain on consolidation of joint venture formerly accounted for under the equity method of accounting	0		2.2
Payroll taxes on SARs exercise	0		(1.5)

Income from continuing operations before income tax expense	$	167.3	$	135.9

Additional detail regarding the revenues of our operating segments by service line follows (in millions):

Three Months Ended March 31,
2020 2019
Inpatient rehabilitation:
Inpatient $ 890.0
$ 847.6
Outpatient and other 19.2
22.5
Total inpatient rehabilitation 909.2
870.1
Home health and hospice:
Home health 224.8
219.5
Hospice 48.0
34.4
Total home health and hospice 272.8
253.9
Total net operating revenues $ 1,182.0
$ 1,124.0

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~


~~11.~~	~~Condensed Consolidating Financial Information~~

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Each of the subsidiary guarantors is ~~100%~~ owned by Encompass Health. Those subsidiary guarantors guarantee the indebtedness under our credit agreement and our senior unsecured notes, and all guarantees are full and unconditional and joint and several, subject to certain customary conditions for release. Encompass Health’s investments in its consolidated subsidiaries, as well as guarantor subsidiaries’ investments in nonguarantor subsidiaries and nonguarantor subsidiaries’ investments in guarantor subsidiaries, are presented under the equity method of accounting with the related investment presented within the line items ~~Intercompany receivable and investments in consolidated affiliates~~ ~~and~~ ~~Intercompany payable~~ ~~in the accompanying condensed consolidating balance sheets.~~

The terms of our credit agreement allow us to declare and pay cash dividends on our common stock so long as: (1) we are not in default under our credit agreement, (2) our senior secured leverage ratio (as defined in our credit agreement) remains less than or equal to 2x, and (3) our leverage ratio (as defined in our credit agreement) remains less than or equal to 4.5x. The terms of our senior note 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. See Note 10, ~~Long-term Debt, to the consolidated financial statements accompanying the 2019 Form 10‑K.~~

Periodically, certain wholly owned subsidiaries of Encompass Health make dividends or distributions of available cash and/or intercompany receivable balances to their parents. In addition, Encompass Health makes contributions to certain wholly owned subsidiaries. When made, these dividends, distributions, and contributions impact the ~~Intercompany receivable and investments in consolidated affiliates~~, ~~Intercompany payable, and~~ ~~Encompass Health shareholders’ equity~~ ~~line items in the accompanying condensed consolidating balance sheet but have no impact on the consolidated financial statements of Encompass Health Corporation.~~

~~The “Holdings” column in the condensed consolidating financial statements below represents Holdings and its wholly-owned subsidiaries. As discussed in Note 4,~~ ~~Redeemable Noncontrolling Interests~~, Holdings had 5.5% noncontrolling interest as of December 31, 2019, and accordingly, Holdings and its wholly-owned subsidiaries were not guarantors of our debt. In February 2020, we acquired for cash all but 1.2% of the remaining noncontrolling interest in Holdings following the most recent exercise of the put option by the management investors. On February 20, 2020, Encompass Health Corporation and each of the two remaining management investors agreed to exchange the remaining shares representing the noncontrolling interest for an equal value of shares of common stock of Encompass Health Corporation. We settled the exchanges on March 6, 2020 and now own 100% of Holdings. Pursuant to the terms of our credit agreement and our senior note indentures, we executed joinders for Holdings and its wholly-owned subsidiaries on April 23, 2020 at which time they became guarantors of the indebtedness under the credit agreement and our senior note indentures.

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~Condensed Consolidating Statement of Comprehensive Income~~

Three Months Ended March 31, 2020
Encompass Health Corporation Guarantor Subsidiaries Non-guarantor Subsidiaries Holdings Eliminating Entries Encompass Health Consolidated
(In Millions)
Net operating revenues $ 4.6
$ 622.5
$ 323.3
$ 266.8
$ (35.2 ) $ 1,182.0
Operating expenses:

Salaries and benefits 16.7
309.8
164.2
193.3
(4.9 ) 679.1
Other operating expenses 9.6
86.9
52.0
24.1
(13.0 ) 159.6
Occupancy costs 0.6
25.4
6.7
4.8
(17.3 ) 20.2
Supplies —
26.5
13.2
6.0
—
45.7
General and administrative expenses 34.7
—
—
0.9
—
35.6
Depreciation and amortization 5.3
28.7
15.0
9.8
—
58.8
Government, class action, and related settlements 2.8
—
—
—
—
2.8
Total operating expenses 69.7
477.3
251.1
238.9
(35.2 ) 1,001.8
Interest expense and amortization of debt discounts and fees 35.8
6.3
1.4
4.9
(5.2 ) 43.2
Other (income) expense (2.3 ) (0.4 ) 1.6
(2.2 ) 5.2
1.9
Equity in net income of nonconsolidated affiliates —
(0.5 ) (0.1 ) (0.2 ) —
(0.8 )
Equity in net income of consolidated affiliates (122.2 ) (17.8 ) —
—
140.0
—
Management fees (42.0 ) 30.2
11.8
—
—
—
Income from continuing operations before income tax (benefit) expense 65.6
127.4
57.5
25.4
(140.0 ) 135.9
Provision for income tax (benefit) expense (21.5 ) 33.0
9.1
6.5
—
27.1
Income from continuing operations 87.1
94.4
48.4
18.9
(140.0 ) 108.8
Loss from discontinued operations, net of tax (0.1 ) —
—
—
—
(0.1 )
Net and comprehensive income 87.0
94.4
48.4
18.9
(140.0 ) 108.7
Less: Net and comprehensive income attributable to noncontrolling interests —
—
(21.2 ) (0.5 ) —
(21.7 )
Net and comprehensive income attributable to Encompass Health $ 87.0
$ 94.4
$ 27.2
$ 18.4
$ (140.0 ) $ 87.0

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

~~Condensed Consolidating Statement of Comprehensive Income~~


	Three Months Ended March 31,
	2021		2020
Inpatient rehabilitation:
Inpatient	$	942.3	$	890.0
Outpatient and other	17.6		19.2
Total inpatient rehabilitation	959.9		909.2
Home health and hospice:
Home health	219.9		224.8
Hospice	50.6		48.0
Total home health and hospice	270.5		272.8
Total net operating revenues	$	1,230.4	$	1,182.0

Three Months Ended March 31, 2019
Encompass Health Corporation Guarantor Subsidiaries Non-guarantor Subsidiaries Holdings Eliminating Entries Encompass Health Consolidated
(In Millions)
Net operating revenues $ 5.1
$ 606.5
$ 296.5
$ 249.5
$ (33.6 ) $ 1,124.0
Operating expenses:

Salaries and benefits 15.9
288.9
148.0
173.1
(5.1 ) 620.8
Other operating expenses 10.3
84.7
46.8
20.8
(12.5 ) 150.1
Occupancy costs 0.5
24.9
6.5
3.7
(16.0 ) 19.6
Supplies —
24.0
11.6
4.5
—
40.1
General and administrative expenses 39.9
—
—
13.5
—
53.4
Depreciation and amortization 5.0
26.3
13.1
8.1
—
52.5
Total operating expenses 71.6
448.8
226.0
223.7
(33.6 ) 936.5
Interest expense and amortization of debt discounts and fees 30.1
6.2
1.3
6.4
(6.8 ) 37.2
Other income (7.7 ) (0.3 ) (2.5 ) —
6.8
(3.7 )
Equity in net income of nonconsolidated affiliates —
(2.0 ) (0.1 ) (0.4 ) —
(2.5 )
Equity in net income of consolidated affiliates (130.2 ) (17.1 ) —
—
147.3
—
Management fees (39.8 ) 29.5
10.3
—
—
—
Income from continuing operations before income tax (benefit) expense 81.1
141.4
61.5
19.8
(147.3 ) 156.5
Provision for income tax (benefit) expense (21.7 ) 37.8
10.2
4.5
—
30.8
Income from continuing operations 102.8
103.6
51.3
15.3
(147.3 ) 125.7
Loss from discontinued operations, net of tax (0.5 ) —
—
—
—
(0.5 )
Net and comprehensive income 102.3
103.6
51.3
15.3
(147.3 ) 125.2
Less: Net and comprehensive income attributable to noncontrolling interests —
—
(21.2 ) (1.7 ) —
(22.9 )
Net and comprehensive income attributable to Encompass Health $ 102.3
$ 103.6
$ 30.1
$ 13.6
$ (147.3 ) $ 102.3

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~Condensed Consolidating Balance Sheet~~

As of March 31, 2020
Encompass Health Corporation Guarantor Subsidiaries Non-guarantor Subsidiaries Holdings Eliminating Entries Encompass Health Consolidated
(In Millions)
Assets
Current assets:
Cash and cash equivalents $ 79.0
$ 3.7
$ 7.8
$ 14.4
$ —
$ 104.9
Restricted cash —
—
56.7
—
—
56.7
Accounts receivable —
270.8
131.6
141.0
—
543.4
Other current assets 79.8
34.7
45.1
7.2
(87.3 ) 79.5
Total current assets 158.8
309.2
241.2
162.6
(87.3 ) 784.5
Property and equipment, net 138.5
1,268.0
567.4
29.4
—
2,003.3
Operating lease right-of-use assets 9.7
158.0
80.1
43.2
(23.1 ) 267.9
Goodwill —
912.2
329.0
1,070.9
—
2,312.1
Intangible assets, net 15.8
98.9
64.8
285.2
—
464.7
Deferred income tax assets 52.6
11.1
0.1
—
(62.3 ) 1.5
Other long-term assets 51.7
86.8
152.9
12.3
—
303.7
Intercompany receivable and investments in consolidated affiliates 4,245.7
657.6
—
7.5
(4,910.8 ) —
Total assets $ 4,672.8
$ 3,501.8
$ 1,435.5
$ 1,611.1
$ (5,083.5 ) $ 6,137.7
Liabilities and Shareholders’ Equity

Current liabilities:

Current portion of long-term debt $ 17.0
$ 10.8
$ 3.9
$ 8.5
$ —
$ 40.2
Current operating lease liabilities 1.4
19.2
14.2
13.6
(7.6 ) 40.8
Accounts payable 12.5
57.2
25.0
3.3
—
98.0
Accrued expenses and other current liabilities 171.5
110.4
134.0
78.6
(87.3 ) 407.2
Total current liabilities 202.4
197.6
177.1
104.0
(94.9 ) 586.2
Long-term debt, net of current portion 2,973.0
302.5
40.6
5.8
—
3,321.9
Long-term operating lease liabilities 8.6
143.5
69.1
29.6
(15.7 ) 235.1
Other long-term liabilities 44.9
12.0
105.0
63.6
(62.2 ) 163.3
Intercompany payable —
—
66.0
—
(66.0 ) —
3,228.9
655.6
457.8
203.0
(238.8 ) 4,306.5
Commitments and contingencies

Redeemable noncontrolling interests —
—
34.0
—
—
34.0
Shareholders’ equity:

Encompass Health shareholders’ equity 1,443.9
2,846.2
590.4
1,408.1
(4,844.7 ) 1,443.9
Noncontrolling interests —
—
353.3
—
—
353.3
Total shareholders’ equity 1,443.9
2,846.2
943.7
1,408.1
(4,844.7 ) 1,797.2
Total liabilities and shareholders’ equity $ 4,672.8
$ 3,501.8
$ 1,435.5
$ 1,611.1
$ (5,083.5 ) $ 6,137.7

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~Condensed Consolidating Balance Sheet~~

As of December 31, 2019
Encompass Health Corporation Guarantor Subsidiaries Non-guarantor Subsidiaries Holdings Eliminating Entries Encompass Health Consolidated
(In Millions)
Assets
Current assets:
Cash and cash equivalents $ 53.7
$ 5.2
$ 6.0
$ 29.9
$ —
$ 94.8
Restricted cash —
—
57.4
—
—
57.4
Accounts receivable —
280.4
125.6
100.1
—
506.1
Other current assets 64.3
35.4
9.3
7.8
(19.3 ) 97.5
Total current assets 118.0
321.0
198.3
137.8
(19.3 ) 755.8
Property and equipment, net 133.4
1,246.0
551.2
28.7
—
1,959.3
Operating lease right-of-use assets 10.1
171.5
86.5
43.7
(35.3 ) 276.5
Goodwill —
912.2
323.0
1,070.0
—
2,305.2
Intangible assets, net 17.7
101.7
65.3
291.6
—
476.3
Deferred income tax assets 27.2
11.1
0.1
—
(35.5 ) 2.9
Other long-term assets 53.6
85.4
151.6
14.1
—
304.7
Intercompany notes receivable 737.8
—
—
—
(737.8 ) —
Intercompany receivable and investments in consolidated affiliates 3,155.4
523.6
—
—
(3,679.0 ) —
Total assets $ 4,253.2
$ 3,372.5
$ 1,376.0
$ 1,585.9
$ (4,506.9 ) $ 6,080.7
Liabilities and Shareholders’ Equity

Current liabilities:

Current portion of long-term debt $ 17.0
$ 10.4
$ 3.8
$ 8.1
$ —
$ 39.3
Current operating lease liabilities 1.3
21.9
16.0
12.1
(10.9 ) 40.4
Accounts payable 9.8
56.5
24.3
4.0
—
94.6
Accrued expenses and other current liabilities 147.4
108.7
109.2
200.7
(19.3 ) 546.7
Total current liabilities 175.5
197.5

153.3

224.9
(30.2 ) 721.0
Long-term debt, net of current portion 2,670.6
305.4
41.6
5.7
—
3,023.3
Long-term operating lease liabilities 9.0
153.9
73.6
31.9
(24.6 ) 243.8
Intercompany notes payable —
—
—
737.8
(737.8 ) —
Other long-term liabilities 45.9
12.2
100.3
37.0
(35.5 ) 159.9
Intercompany payable —
—
66.0
4.4
(70.4 ) —
2,901.0
669.0

434.8

1,041.7
(898.5 ) 4,148.0
Commitments and contingencies

Redeemable noncontrolling interests —
—
31.4
208.2
—
239.6
Shareholders’ equity:

Encompass Health shareholders’ equity 1,352.2
2,703.5
568.9
336.0
(3,608.4 ) 1,352.2
Noncontrolling interests —
—
340.9
—
—
340.9
Total shareholders’ equity 1,352.2
2,703.5

909.8

336.0
(3,608.4 ) 1,693.1
Total liabilities and shareholders’ equity $ 4,253.2
$ 3,372.5

$ 1,376.0

$ 1,585.9
$ (4,506.9 ) $ 6,080.7

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~Condensed Consolidating Statement of Cash Flows~~

Three Months Ended March 31, 2020
Encompass Health Corporation Guarantor Subsidiaries Non-guarantor Subsidiaries Holdings Eliminating Entries Encompass Health Consolidated
(In Millions)
Net cash (used in) provided by operating activities $ (31.2 ) $ 117.7
$ 56.8
$ (114.0 ) $ —
$ 29.3
Cash flows from investing activities:

Purchases of property and equipment (9.3 ) (49.5 ) (23.4 ) (1.3 ) —
(83.5 )
Acquisitions of businesses, net of cash acquired —
—
—
(1.1 ) —
(1.1 )
Funding of intercompany note receivable (15.0 ) —
—
—
15.0
—
Other, net (2.8 ) 0.7
3.9
(0.2 ) —
1.6
Net cash used in investing activities (27.1 ) (48.8 )
(19.5 )
(2.6 )
15.0
(83.0 )
Cash flows from financing activities:

Principal borrowings on intercompany note payable —
—
—
15.0
(15.0 ) —
Borrowings on revolving credit facility 330.0
—
—
—
—
330.0
Payments on revolving credit facility (25.0 ) —
—
—
—
(25.0 )
Dividends paid on common stock (28.9 ) —
—
(0.1 ) —
(29.0 )
Purchase of equity interests in consolidated affiliates (162.3 ) —
—
—
—
(162.3 )
Distributions paid to noncontrolling interests of consolidated affiliates —
—
(19.1 ) —
—
(19.1 )
Taxes paid on behalf of employees for shares withheld (14.6 ) —
—
(1.0 ) —
(15.6 )
Other, net (8.5 ) (2.5 ) 5.0
(1.9 ) —
(7.9 )
Change in intercompany advances (7.1 ) (67.9 ) (14.1 ) 89.1
—
—
Net cash provided by (used in) financing activities 83.6
(70.4 )
(28.2 )
101.1

(15.0 ) 71.1
Increase (decrease) in cash, cash equivalents, and restricted cash 25.3
(1.5 )
9.1

(15.5 )
—
17.4
Cash, cash equivalents, and restricted cash at beginning of period 53.7
5.2
70.8
29.9
—
159.6
Cash, cash equivalents, and restricted cash at end of period $ 79.0
$ 3.7

$ 79.9

$ 14.4

$ —
$ 177.0

Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period $ 53.7
$ 5.2
$ 6.0
$ 29.9
$ —
$ 94.8
Restricted cash at beginning of period —
—
57.4
—
—
57.4
Restricted cash included in other long term assets at beginning of period —
—
7.4
—
—
7.4
Cash, cash equivalents, and restricted cash at beginning of period $ 53.7
$ 5.2
$ 70.8

$ 29.9
$ —
$ 159.6

Cash and cash equivalents at end of period $ 79.0
$ 3.7
$ 7.8
$ 14.4
$ —
$ 104.9
Restricted cash at end of period —
—
56.7
—
—
56.7
Restricted cash included in other long-term assets at end of period —
—
15.4
—
—
15.4
Cash, cash equivalents, and restricted cash at end of period $ 79.0
$ 3.7
$ 79.9

$ 14.4
$ —
$ 177.0

Supplemental schedule of noncash financing activity:
Capital contribution of intercompany note $ 853.0
$ —
$ —
(853.0 ) $ —
$ —

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~Condensed Consolidating Statement of Cash Flows~~

Three Months Ended March 31, 2019
Encompass Health Corporation Guarantor Subsidiaries Non-guarantor Subsidiaries Holdings Eliminating Entries Encompass Health Consolidated
(In Millions)
Net cash provided by operating activities $ 18.6
$ 89.6
$ 42.4
$ 9.3
$ —
$ 159.9
Cash flows from investing activities:

Purchases of property and equipment (6.8 ) (32.5 ) (29.4 ) (3.6 ) —
(72.3 )
Acquisitions of businesses, net of cash acquired —
—
—
(13.7 ) —
(13.7 )
Funding of intercompany note receivable (8.0 ) —
—
—
8.0
—
Proceeds from repayment of intercompany note receivable 5.0
—
—
—
(5.0 ) —
Other, net (4.0 ) (0.1 ) (0.7 ) (0.7 ) —
(5.5 )
Net cash used in investing activities (13.8 ) (32.6 ) (30.1 )
(18.0 ) 3.0
(91.5 )
Cash flows from financing activities:

Principal borrowings on intercompany note payable —
—
—
8.0
(8.0 ) —
Principal payments on intercompany note payable —
—
—
(5.0 ) 5.0
—
Borrowings on revolving credit facility 25.0
—
—
—
—
25.0
Payments on revolving credit facility (30.0 ) —
—
—
—
(30.0 )
Dividends paid on common stock (28.2 ) —

(0.1 ) —
(28.3 )
Distributions paid to noncontrolling interests of consolidated affiliates —
—
(19.5 ) —
—
(19.5 )
Taxes paid on behalf of employees for shares withheld (14.7 ) —
—
(1.2 ) —
(15.9 )
Other, net (14.7 ) (2.1 ) 5.6
(1.8 ) —
(13.0 )
Change in intercompany advances 51.0
(54.4 ) 2.1
1.3
—
—
Net cash used in financing activities (11.6 ) (56.5 ) (11.8 )
1.2
(3.0 ) (81.7 )
(Decrease) increase in cash, cash equivalents, and restricted cash (6.8 ) 0.5
0.5

(7.5 ) —
(13.3 )
Cash, cash equivalents, and restricted cash at beginning of period 41.5
3.0
69.4
19.6
—
133.5
Cash, cash equivalents, and restricted cash at end of period $ 34.7
$ 3.5
$ 69.9

$ 12.1
$ —
$ 120.2

Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period $ 41.5
$ 3.0
$ 5.1
$ 19.6
$ —
$ 69.2
Restricted cash at beginning of period —
—
59.0
—
—
59.0
Long term restricted cash at beginning of period —
—
5.3
—
—
5.3
Cash, cash equivalents, and restricted cash at beginning of period $ 41.5
$ 3.0
$ 69.4

$ 19.6
$ —
$ 133.5

Cash and cash equivalents at end of period $ 34.7
$ 3.5
$ 5.8
$ 12.1
$ —
$ 56.1
Restricted cash at end of period —
—
59.0
—
—
59.0
Long term restricted cash at end of period —
—
5.1
—
—
5.1
Cash, cash equivalents, and restricted cash at end of period $ 34.7
$ 3.5
$ 69.9

$ 12.1
$ —
$ 120.2


~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to Encompass Health Corporation and its subsidiaries and should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report. In addition, the following MD&A should be read in conjunction with our audited consolidated financial statements for the year ended December 31, ~~2019~~,2020, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 1, Business, and Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 filed on February ~~27, 2020~~26, 2021 (collectively, the ~~“2019~~“2020 Form 10‑K”).

This MD&A is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. See “Cautionary Statements Regarding Forward-Looking Statements” on page iii of this report for a description of important factors that could cause actual results to differ from expected results. See also Item 1A, Risk Factors, of this report and to the ~~2019~~2020 Form 10‑K.

Executive Overview

Our Business

We are a ~~national leader in integrated~~leading provider of post-acute healthcare services, offering both facility-based and home-based patient care through our network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. As of March 31, ~~2020,~~2021, our national footprint includes 3739 states and Puerto Rico. As discussed in this Item, “Segment Results of Operations,” we manage our operations in two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. For additional information about our business, see Item 1, Business, of the ~~2019~~2020 Form 10‑K.

On December 9, 2020, we announced a formal process to explore strategic alternatives for our home health and hospice business. A range of options are under consideration, including the full or partial separation of the home health and hospice business from Encompass Health through an initial public offering, spin-off, merger, sale or other transaction. No timetable has been established for the completion of the strategic review.

The onset of the COVID-19 Pandemic (the “pandemic”) in the United States resulted in significant changes to our operating environment. For discussion of the financial and operational impacts we experienced in 2020 as a result of the pandemic, see Item 1, Business, Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Results of Operations” and “Segment Results of Operations” of the 2020 Form 10-K. For discussion of the financial and operational impacts we are experiencing in 2021 as a result of the pandemic, see “Key Challenges” below and the “Results of Operations” and “Segment Results of Operations” sections of this Item.

Inpatient Rehabilitation

We are the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, ~~and discharged,~~ revenues, and number of hospitals. We provide specialized rehabilitative treatment on ~~both~~predominantly an inpatient ~~and outpatient~~ basis. We operate hospitals in 3335 states and Puerto Rico, with concentrations in the eastern half of the United States and Texas. As of March 31, ~~2020,~~2021, we operate ~~134~~138 inpatient rehabilitation hospitals and manage ~~three~~four inpatient rehabilitation units through management contracts. Our inpatient rehabilitation segment represents approximately ~~77%~~78% of our Net operating revenues for the three months ended March 31, ~~2020.~~2021.

Home Health and Hospice

Our home health business is the nation’s fourth largest provider of Medicare-certified skilled home health services in terms of revenues. Our home health services include a comprehensive range of Medicare-certified home nursing services to adult patients in need of care. ~~These services include, among others, skilled nursing, physical, occupational, and speech therapy, medical social work, and home health aide services.~~ Our hospice business is the nation’s ~~eleventh~~eighth largest provider of Medicare-certified hospice services in terms of revenues. We provide hospice services to terminally ill patients and their families that address patients’ physical needs, including pain control and symptom management, and to provide emotional and spiritual support. As of March 31, ~~2020,~~2021, we provide home health services in ~~245~~241 locations and provide hospice services in 8382 locations across 31 states, with concentrations in the ~~Southeast and Texas.~~southern half of the United States. In addition, one of these home health agencies operates as a joint venture that we account for using the equity method of accounting. Our home health and hospice segment represents approximately ~~23%~~22% of our Net operating revenues for the three months ended March 31, ~~2020.~~2021.

~~2020~~

2021 Overview

During the three months ended March 31, ~~2020,~~2021, Net operating revenues increased ~~5.2%~~4.1% over the same period of ~~2019~~2020 due primarily to ~~volume and~~favorable pricing ~~growth~~partially offset by decreased volumes in ~~our inpatient rehabilitation segment and volume growth in our home health and hospice segment. As discussed in the~~both segments. See “Results of Operations” ~~section, through February 2020 both of our segments were experiencing strong volume growth. In March, we began to experience declines in volume due to conditions resulting from~~and the novel coronavirus disease 2019 (“COVID-19”) pandemic. Within our inpatient rehabilitation segment, discharge growth of 4.7% coupled with a 0.3% increase in net patient revenue per discharge in the first quarter of 2020 generated 4.5% growth in inpatient revenue compared to the first quarter of 2019. Discharge growth included a 2.4% increase in same-store discharges. Within our home health and hospice segment, home health admission growth of 11.9% and hospice admission growth of 25.6% contributed to 7.4% growth in home health and hospice revenue compared to the first quarter of 2019. Home health admission

~~growth included a 0.2% increase in same-store admissions. See the “Results of Operations” and~~ “Segment Results of Operations” sections of this ~~Item.~~Item for additional volume and pricing information.

~~Our growth~~ We have continued our development and expansion efforts ~~thus far~~ in ~~2020 related to~~2021. In our inpatient rehabilitation segment ~~have included the following:~~we:

•began operating our new ~~50-bed~~40-bed inpatient rehabilitation hospital in ~~Murrieta, California~~San Angelo, Texas with our joint venture partner Shannon Health in ~~February 2020;~~March 2021;

•continued our capacity expansions by adding 2315 new beds to existing hospitals; and

•announced or continued the development of the following hospitals:


	Number of New Beds
	2021	2022	2023
De novos:
Cumming, Georgia	50	—	—
North Tampa, Florida*	50	—	—
Stockbridge, Georgia	50	—	—
Greenville, South Carolina	40	—	—
Pensacola, Florida	40	—	—
Shreveport, Louisiana	40	—	—
Waco, Texas	40	—	—
Libertyville, Illinois	—	60	—
St. Augustine, Florida	—	40	—
Lakeland, Florida	—	50	—
Clermont, Florida	—	50	—
Naples, Florida	—	50	—
Cape Coral, Florida	—	40	—
Jacksonville, Florida	—	50	—
Bowie, Maryland	—	60	—
Kissimmee, Florida	—	—	50
Prosper, Texas	—	—	40
Fort Mill, South Carolina	—	—	39
Joint ventures:
Knoxville, Tennessee	—	73	—
Shiloh, Illinois	—	40	—
Moline, Illinois	—	40	—
Owasso, Oklahoma	—	40	—



	~~Number of New Beds~~
	~~2020~~⁽¹⁾	~~2021~~⁽¹⁾
~~De novos:~~
~~Sioux Falls, South Dakota~~	40	—
~~Toledo, Ohio~~	40	—
~~Cumming, Georgia~~	—	50
~~North Tampa, Florida~~	—	50
~~Stockbridge, Georgia~~	—	50
~~Greenville, South Carolina~~	—	40
~~Pensacola, Florida~~	—	40
~~Shreveport, Louisiana~~	—	40
~~Waco, Texas~~	—	40
~~Joint ventures:~~
~~Coralville, Iowa~~	40	—
~~San Angelo, Texas~~	—	40

⁽¹⁾~~Certain development projects may be delayed due to the COVID-19 pandemic.~~*We began operating this hospital in April 2021.

We also continued our ~~growth~~expansion efforts in our home health and hospice segment. ~~We acquired one~~In April 2021, we announced we entered into a definitive agreement to purchase the home health ~~location~~and hospice assets of Frontier Home Health and Hospice in ~~Lynchburg, Virginia~~Alaska, Colorado, Montana, Washington, and ~~began accepting patients at~~Wyoming for a cash purchase price of $95 million. At closing, 9 home health and 11 hospice locations will become part of our ~~new~~national network of home health and hospice ~~location~~locations. This transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close in ~~Allen, Texas.~~the second quarter of 2021. We expect to fund this transaction with cash on hand and borrowings under our revolving credit facility. In connection with this transaction, we expect to realize an income tax benefit with an estimated present value of approximately $10 million.

We continued our shareholder distributions during the three months ended March 31, ~~2020~~2021 by paying a quarterly cash dividend of $0.28 per share on our common stock in January and April. On May 6, 2020, our board of directors declared a cash dividend of $0.28 per share, payable on July 15, 2020, to holders of record on July 1, 2020. In addition, we repurchased 0.1 million shares of our common stock in the open market for approximately $4.9 million during the three months ended March 31, 2020. Repurchases were suspended in mid-March 2020. For additional information see the “Liquidity and Capital Resources” section of this Item.

~~COVID-19 Pandemic~~

The rapid onset of the COVID-19 outbreak in the United States has resulted in significant changes to our operating environment. The willingness and ability of patients to seek healthcare services has been negatively affected by restrictive measures, such as travel bans, social distancing, quarantines, and shelter-in-place orders. Acute-care hospitals and physician practices have also significantly reduced the volume of elective procedures. Patients recovering from elective surgeries have historically represented approximately 15% of our home health admissions. While not a significant percentage of our inpatient rehabilitation population, we treat patients recovering from elective surgery with multiple comorbidities that qualify for inpatient rehabilitation care. These changes to the healthcare environment, along with the factors noted in the “Results of Operations” section of this Item, caused decreased patient volumes in both our inpatient rehabilitation and home health and hospice segments beginning in mid-March and continuing into April and May. We are also experiencing supply chain disruptions as a result of the COVID-19 pandemic, including increased procurement timelines, and we have experienced and are likely to continue to experience significant price increases in medical supplies, particularly personal protective equipment (“PPE”). Beginning in March 2020, we experienced increased supply expenses due to higher utilization of PPE and increased purchasing of other medical supplies and cleaning and sanitization materials. The federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to the healthcare industry during the COVID-19

pandemic as described below in the “Key Challenges” section. These initiatives have given our hospitals and agencies the types of enhanced flexibilities they need to care for our patients and assist acute-care hospitals in maintaining hospital capacity in the current environment. The COVID-19 pandemic is still rapidly evolving and much of its impact remains unknown and difficult to predict, with the impact on our operations and financial performance being dependent on numerous factors, including the nature of the COVID-19 pandemic, such as its rate of spread, duration, and geographic coverage; the legal, regulatory, and administrative developments related to the pandemic at federal, state, and local levels; and our infectious disease prevention and control efforts.

While the operating environment for healthcare providers is continuously changing during this pandemic, we have taken the following steps to ensure the safety and well-being of our patients and employees:



ü	~~Staying current with the Centers for Disease Control and Prevention’s (the “CDC”) guidance on the use of PPE, which is frequently updated~~
ü	~~Limiting visitors in our hospitals to primary caregivers who require training in order to safely discharge a patient home~~
ü	~~Screening everyone entering our hospitals and self-screening all home health and hospice employees~~
ü	~~Performing pre-visit telephone calls to assess risk factors within the home, including patient and caregiver health status~~
ü	~~Following social distancing recommendations in our therapy gyms and performing therapy in patient rooms, if needed~~
ü	~~Suspended all hospital-based outpatient services~~
ü	~~Implemented work-at-home policies for home office and certain field personnel~~
ü	~~Halted all non-essential travel~~

We also continue to take actions to enhance our operational and financial flexibility and ensure our long-term sustainability. Recently, our executive team voluntarily reduced their base compensation for six months. In addition, we have:



ü	~~secured secondary sources of PPE and other medical supplies, at times paying premium prices;~~
ü	~~aligned staffing with patient demand;~~
ü	~~amended our senior credit facility in April 2020 (primarily provided covenant relief due to disruptions from the COVID-19 pandemic);~~
ü	~~developed plans for reducing capital expenditures; and~~
ü	~~suspended our authorized share repurchase program in mid-March.~~

~~After lengthy consideration, we developed plans to manage labor costs in response to lower patient volumes via furloughs, changes to compensation structures and workforce reductions.~~

~~Given the rapidly changing operating conditions related to the COVID-19 pandemic, we cannot accurately estimate the effects it may have on our full-year 2020 financial results.~~

Business Outlook

Notwithstanding the current impacts from the ~~COVID-19~~ pandemic, we remain optimistic regarding the intermediate and long-term prospects for both of our business segments. Demographic trends, such as population aging, should continue to increase long-term demand for the services we provide. While we treat patients of all ages, most of our patients are 65 and older, and the number of Medicare enrollees is expected to grow approximately 3% per year for the foreseeable future. Even more specifically, the average age of our patients is approximately 76, and the population group ranging in ages from 75 to 79 is expected to grow at approximately 5% per year through 2026. We believe the demand for the services we provide will continue to increase as the U.S. population ages. We believe these factors align with our strengths in, and focus on, post-acute services. In addition, we believe we can address the demand for facility-based and home-based post-acute care services in markets where we currently do not have a presence by constructing or acquiring new hospitals and by acquiring or opening home health and hospice agencies in those ~~extremely~~ fragmented industries.

We are a leading provider of ~~integrated~~post-acute healthcare services, offering both facility-based and home-based patient care through our network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. We are committed to delivering high-quality, cost-effective, integrated patient ~~care across the healthcare continuum with a primary focus on the post-~~

~~acute sector.~~care. As the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, ~~and discharged,~~ revenues, and number of hospitals, we believe we differentiate ourselves from our competitors based on the quality of our clinical outcomes, our cost-effectiveness, our financial strength, and our extensive application of technology. As the fourth largest provider of Medicare-certified skilled home health services in terms of revenues, we believe we differentiate ourselves from our competitors by the application of a highly integrated technology platform, our ability to manage a variety of care pathways, and a proven track record of consummating and integrating acquisitions.

Although the healthcare industry is currently engaged in addressing the healthcare crisis caused by the ~~COVID-19~~ pandemic, the industry also faces the prospect of ongoing efforts to transform the healthcare system to coordinated care delivery and payment models. The nature, timing and extent of that transformation remains uncertain, as the development and implementation of new care delivery and payment systems will require significant time and resources. Our short-term goal is to serve our communities and provide the best care possible during the ~~COVID-19~~ pandemic. Our long-term goal is to position the Company in a prudent manner to be responsive to industry shifts. We have invested in our core business and created an infrastructure that enables us to provide high-quality care on a cost-effective basis. We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2023. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate and significant availability under our revolving credit facility. For these and other reasons, we believe we will be able to adapt to changes in reimbursement, sustain our business model, and grow through acquisition and consolidation opportunities as they arise. See also Item 1, Business, “Competitive Strengths” and “Strategy and ~~2020~~2021 Strategic Priorities” inof the ~~2019~~2020 Form 10‑K.

Key Challenges

Healthcare is a highly-regulated industry facing many well-publicized regulatory and reimbursement challenges. The industry also is facing uncertainty associated with the efforts to identify and implement workable coordinated care and integrated delivery payment models as well as post-acute site neutrality in Medicare reimbursement. The Medicare reimbursement systems for both inpatient rehabilitation and home health ~~are undergoing~~have recently undergone significant changes. The future of many aspects of healthcare regulation remains uncertain. Successful healthcare providers are those able to adapt to changes in the regulatory and operating environments, build strategic relationships, ~~across the healthcare continuum,~~ and consistently provide high-quality, cost-effective care. 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. For a detailed discussion of the challenges we face, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive ~~Overview-Key~~Overview—Key Challenges” toof the ~~2019~~2020 Form ~~10-K.~~10‑K.

As we continue to execute our business plan, the following are some of the challenges we face.

•

•Operating in a Highly Regulated Industry. We are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. More specifically, because Medicare comprises a significant portion of our Net operating revenues, failure to comply with the laws and regulations governing the Medicare program and related matters could materially and adversely affect us. These rules and regulations have affected, or could in the future affect, our business activities by having an impact on the reimbursement we receive for services provided or the costs of compliance, mandating new documentation standards, requiring additional

~~Operating in a Highly Regulated Industry~~. We are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. More specifically, because Medicare comprises a significant portion of our ~~Net operating revenues~~, failure to comply with the laws and regulations governing the Medicare program and related matters could materially and adversely affect us. These rules and regulations have affected, or could in the future affect, our business activities by having an impact on the reimbursement we receive for services provided or the costs of compliance, mandating new documentation standards, requiring additional licensure or certification, regulating our relationships with physicians and other referral sources, regulating the use of our properties, and limiting our ability to enter new markets or add new capacity to existing hospitals and agencies. Ensuring continuous compliance with extensive laws and regulations is an operating requirement ~~for all healthcare providers. See Item 1,~~ ~~Business, “Regulation,” Item 1A,~~ ~~Risk Factors, and Item 7,~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~, “Executive Overview-Key Challenges,” to the 2019 Form 10‑K for detailed discussions of the most important regulations we face and our programs intended to ensure we comply with those regulations.


•	~~Changes to Our Operating Environment Resulting from the COVID-19 pandemic. In March 2020, the federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to the healthcare industry during the COVID-19 pandemic.~~

~~Temporary suspension of the automatic 2% reduction of Medicare program payments, known as “sequestration”~~

~~On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which provided for an automatic 2% reduction of Medicare program payments~~ for all healthcare providers. ~~This automatic reduction, known as “sequestration,~~See Item 1, Business, “Regulation,” ~~began affecting payments received after April 1, 2013~~Item 1A, Risk Factors, and ~~as a result~~Item 7, Management’s Discussion and Analysis of ~~subsequent legislation, will~~Financial Condition and Results of Operations, “Executive Overview—Key Challenges,” of the 2020 Form 10‑K for detailed discussions of the most important regulations we face and our programs intended to ensure we comply with those regulations.

•Changes to Our Operating Environment Resulting from the pandemic. In response to the public health emergency associated with the pandemic, Congress and the Centers for Medicare & Medicaid Services (“CMS”) adopted several statutory and regulatory measures intended to provide relief to healthcare providers in order to ensure patients would continue ~~through fiscal year 2030.~~to have adequate access to care. On March 27, 2020, former President Trump signed into law the

Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), which ~~temporarily suspends~~suspended sequestration under the ~~automatic 2% reduction~~Budget Control Act of ~~Medicare claim reimbursements~~2011 (the “2011 BCA”) for the period of May 1 through December 31, 2020. ~~At this time, we cannot reasonably estimate~~On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “2021 Budget Act”) was enacted into law, which extended the sequestration suspension through March 31, 2021. On April 14, 2021, the sequestration suspension period was extended through December 31, 2021 by the enactment into law of An Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes. During the three months ended March 31, 2021, the impact of the sequestration suspension ~~of sequestration~~ on our ~~revenues due to the ongoing volume volatility in both segments (see “Results of Operations” section of this Item).~~

~~Payment of relief funds directly to healthcare providers~~

~~The CARES Act also authorized the cash distribution of relief funds from the Department of Health and Human Services (“HHS”) to healthcare providers. To date, our~~ inpatient rehabilitation ~~hospitals~~ and home health and hospice ~~agencies have received in aggregate approximately $238 million. HHS requires providers to submit an attestation accepting certain terms~~revenues was $12.5 million and ~~conditions. If a provider does not wish to comply with these terms~~$4.2 million, respectively. For additional discussion, see the “Results of Operations” and ~~conditions, the provider must remit the full payment to HHS. On May 7, 2020, we informed HHS we would not accept any~~“Segment Results of ~~the CARES Act relief funds. We are currently seeking direction on how to process the repayment~~Operations” sections of ~~those funds.~~

~~Temporary suspension of certain patient coverage criteria and documentation and care requirements~~

this Item. The CARES Act, the 2021 Budget Act, and CMS regulatory actions include a ~~series~~number of ~~waivers~~other provisions affecting our reimbursement and ~~guidance issued by~~operations in both segments. These provisions are discussed in Item 1, Business, “Sources of Revenue,” Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Results of Operations” of the ~~Centers~~2020 Form 10-K.

On August 21, 2020, CMS announced a new “phased-in approach” to the home health Review Choice Demonstration (“RCD”) due to the public health emergency and subsequently announced the delay of the phased-in participation of the RCD in Florida and North Carolina until June 30, 2021. As a result, North Carolina and Florida agencies may submit pre-claim review requests for Medicare and Medicaid Services (“CMS”) suspend various Medicare patient coverage criteria and documentation and care requirements. These efforts to provide regulatory relief help to ensure patients continue to have adequate access to care notwithstanding the burdens being placed on healthcare providers by the COVID-19 pandemic.billing periods beginning August 31, 2020.

~~Inpatient Rehabilitation~~•Changes to Our Operating Environment Resulting from Federal Regulatory and Legislative Actions. ~~Medicare pays our~~On April 7, 2021, CMS released its Notice of Proposed Rulemaking for Fiscal Year 2022 for inpatient rehabilitation ~~hospitals a fixed payment reimbursement amount per discharge~~facilities under the inpatient rehabilitation facility prospective payment system (the ~~“IRF-PPS”~~“2022 Proposed IRF Rule”). The 2022 Proposed IRF Rule would implement a net 2.2% market basket increase (market basket update of 2.4% reduced by a productivity adjustment of 0.2%) ~~based~~effective for discharges between October 1, 2021 and September 30, 2022. The 2022 Proposed IRF Rule also includes changes that impact our hospital-by-hospital base rate for Medicare reimbursement. Such changes include, but are not limited to, revisions to the wage index and labor-related share values and updates to the case-mix group relative weights and average lengths of stay values. The 2022 Proposed IRF Rule would also add one new quality reporting measure and update the denominator of another measure. Based on the patient’s rehabilitation impairment category established by CMS and other characteristics and conditions identified by the attending clinicians. In order to qualify for reimbursement under the IRF-PPS, our hospitals must comply with various Medicare rules and regulations including documentation and coverage requirements, or specifications as to what conditions must be met to qualify for reimbursement. These requirements relate to,analysis that utilizes, among other things, ~~pre-admission screening, post-admission evaluations,~~the acuity of our patients annualized over a six-month period ended March 31, 2021, our experience with outlier payments over this same time frame, and ~~individual treatment planning that all delineate~~other factors, we believe the ~~role~~2022 Proposed IRF Rule will result in a net increase to our Medicare payment rates of ~~physicians in ordering and overseeing patient care. The CARES Act regulatory relief includes~~approximately 2.1% effective October 1, 2021.

As discussed above, the ~~temporary~~ suspension of Medicare sequestration under the ~~requirement~~2011 BCA is currently set to end December 31, 2021, which would result in an approximate 2% reduction in Medicare reimbursement otherwise due in 2022. Additional Medicare payment reductions are also possible under the Statutory Pay-As-You-Go Act of 2010 (“Statutory PAYGO”). Statutory PAYGO requires, among other things, that ~~patients must be able~~mandatory spending and revenue legislation not increase the federal budget deficit over a 5- or 10-year period. If the Office of Management and Budget (the “OMB”) finds there is a deficit, Statutory PAYGO requires OMB to ~~tolerate~~order sequestration of Medicare. The Congressional Budget Office has estimated that the COVID-19 relief package enacted in March 2021, the American Rescue Plan Act of 2021, would result in a minimum of 3 hours of therapy per day for 5 days per week, waiver of the requirement that at least 60% of a facility’s patients must have a diagnosis from at least 1 of 13 specified medical conditions that typically require intensive therapy and supervision, and waiver of the requirement for a physician4% reduction in fiscal year 2022 Medicare spending under Statutory PAYGO unless Congress acts to ~~conduct and document a post-admission evaluation.~~waive or otherwise avoid this sequestration.

•Maintaining Strong Volume Growth. In addition to the ~~requirement of physician face-to-face visits at least 3 days a week may be fulfilled using telehealth.~~

~~Home Health and Hospice. Medicare pays home health benefits for patients discharged~~factors described in our 2020 Form 10‑K, we continued to experience decreased volumes in both segments which we believe resulted from a hospital or patients otherwise suffering from chronic conditions that require ongoing but intermittent skilled care. As a condition of participation under Medicare, patients must be homebound (meaning unable to leave their home without a considerable and taxing effort), require intermittent skilled nursing, physical therapy or speech therapy services, or have a continuing need for occupational therapy, and receive treatment under a plan of care established and periodically reviewed by a physician. A physician must document that he or she or a qualifying nurse practitioner has had a face-to-face encounter with the patient and then certify to CMS that a patient meets the eligibility requirements for the home health benefit. The CARES Act includes a provision allowing nurse practitioners and physician assistants under certain conditions to certify, establish and periodically review the plan of care, as well as supervise the provision of items and services for beneficiaries under the Medicare home health benefit and expands the use of telehealth.

~~Medicare pays hospice benefits for patients with life expectancies of six months or less, as documented by the patient’s physician(s). Medicare hospice reimbursements to each provider are subject to~~ a number of conditions related to the pandemic which are expected to continue as discussed in the “Results of ~~participation. These conditions require, among others, the use~~Operations” section of ~~volunteers~~this Item.

•Recruiting and ~~onsite visits to evaluate aids. Volunteers provide day-to-day administrative and/or direct patient care services in an amount that, at a minimum, equals five percent~~Retaining High-Quality Personnel. See Item 1A, Risk Factors, of the ~~total patient care hours~~2020 Form 10‑K for a discussion of ~~all paid hospice employees~~competition for staffing, shortages of qualified personnel, and ~~contract staff. A nurse or~~ other professional conducts an onsite visit every two weeks to evaluate if aides are providing care consistent with the care plan. The CARES Act includes the temporary waiver of the requirement to use volunteersfactors that may increase our labor costs. Additionally, our operations have been affected and ~~to conduct a nurse visit every two weeks to evaluate aides, as well as the expanded use of telehealth.~~

On March 30, 2020, CMS announced a pause of certain claims processing requirements for the Home Health Review Choice Demonstration (“RCD”) in Illinois, Ohio, and Texas until the Public Health Emergency for the COVID-19 pandemic has ended. In addition, the demonstration will not begin in North Carolina and Florida in May 2020 as previously scheduled. CMS has also offered home health agencies the option of continuing their participationmay in the ~~RCD, which we have elected to do at this point in time. We operate agencies (representing approximately 44% of our home health Medicare claims) in these five states.~~

~~On March 30~~^th, CMS also suspended most medical reviews, including pre-payment medical reviews by Medicare Administrative Contractors (“MACs”) under the Targeted Probe and Educate (“TPE”) initiative and post-payment reviews conducted by MACs, Supplemental Medical Review Contractors and Recovery Audit Contractors until the Public Health Emergency for the COVID-19 pandemic has ended.

These regulatory actions provide flexibility to our hospitals and agencies to care for patients and assist acute-care hospitals in maintaining hospital capacity during the COVID-19 pandemic when the otherwise applicable rules would likely have constrained our ability to do so.

•

~~Changes to Our Operating Environment Resulting from Healthcare Reform~~. On April 16, 2020, CMS released its Notice of Proposed Rulemaking for Fiscal Year 2021 for inpatient rehabilitation facilities under the inpatient rehabilitation facility prospective payment system (the “2021 Proposed IRF Rule”). The 2021 Proposed IRF Rule would implement a net 2.5% market basket increase (market basket update of 2.9% reduced by a productivity adjustment of 0.4%) effective for discharges between October 1, 2020 and September 30, 2021. The 2021 Proposed IRF Rule also includes changes that impact our hospital-by-hospital base rate for Medicare reimbursement. Such changes include, but are not limited to, revisions to the wage index and labor-related share values. The 2021 Proposed IRF Rule would update case-mix group relative weights and average lengths of stay values. The 2021 Proposed IRF Rule would also remove the post-admission physician evaluation requirement for all IRF discharges beginning on or after October 1, 2020, codify certain inpatient rehabilitation coverage documentation requirements, and, under certain conditions, allow the use of non-physician practitioners to perform the IRF services and documentation requirements currently required tofuture be performed by the rehabilitation physician. Based on our analysis that utilizes, among other things, the acuity of our patients over the six-month period prior to the 2021 Proposed IRF Rule’s release, our experience with outlier payments over this same time frame, and other factors, we believe the 2021 Proposed IRF Rule will result in a net increase to our Medicare payment rates of approximately 2.4% effective October 1, 2020.


•	~~Maintaining Strong Volume Growth~~. In addition to the factors described in our 2019 Form 10-K, beginning in March, we experienced decreased volumes in both segments which we believe resulted from a number of conditions related to the COVID-19 pandemic which are expected to continue as discussed in the “Results of Operations” section of this Item.

•

~~Recruiting and Retaining High-Quality Personnel. See Item 1A,~~ ~~Risk Factors~~, to the 2019 Form 10‑K for a discussion of competition for staffing, shortages of qualified personnel, and other factors that may increase our labor costs. Additionally, our operations may be adversely affected by staffing shortages where employees must self-quarantine due to exposure to COVID-19 or where employees are unavailable due to a lack of childcare or care for elderly family.

We remain confident in the prospects of both of our business segments based on the increasing demands for the services we provide to an aging population. This confidence is further supported by our strong financial foundation and the substantial investments we have made in our businesses. We have a proven track record of working through difficult situations, and we believe in our ability to overcome current and future challenges.

Results of Operations

Payor Mix

We derived consolidated Net operating revenues from the following payor sources:


	Three Months Ended March 31,
	2021		2020
Medicare	68.1	%	73.4	%
Medicare Advantage	15.1	%	11.9	%
Managed care	10.3	%	8.7	%
Medicaid	3.5	%	3.0	%
Other third-party payors	1.0	%	0.9	%
Workers’ compensation	0.5	%	0.6	%
Patients	0.4	%	0.5	%
Other income	1.1	%	1.0	%
Total	100.0	%	100.0	%

Three Months Ended March 31,
2020 2019
Medicare 73.4 % 76.0 %
Medicare Advantage 11.9 % 9.8 %
Managed care 8.7 % 8.2 %
Medicaid 3.0 % 2.7 %
Other third-party payors 0.9 % 0.9 %
Workers’ compensation 0.6 % 0.7 %
Patients 0.5 % 0.6 %
Other income 1.0 % 1.1 %
Total 100.0 % 100.0 %
Medicare as a percentage of revenue decreased during the three months ended March 31, 2021 as compared to the same period of 2020 primarily due to the pandemic, as discussed below. For additional discussion by segment, see the “Segment Results of Operations” section of this Item.

For additional information regarding our payors, see the “Sources of Revenues” section of Item 1, Business, of the ~~2019~~2020 Form 10‑K.

Our Results

For the three months ended March 31, ~~2020~~2021 and ~~2019~~,2020, our consolidated results of operations were as follows:


	Three Months Ended March 31,				Percentage Change
	2021		2020		2021 vs. 2020
	(In Millions, Except Percentage Change)
Net operating revenues	$	1,230.4	$	1,182.0	4.1	%
Operating expenses:
Salaries and benefits	687.2		679.1		1.2	%
Other operating expenses	162.3		159.6		1.7	%
Occupancy costs	20.2		20.2		—	%
Supplies	51.9		45.7		13.6	%
General and administrative expenses	38.6		35.6		8.4	%
Depreciation and amortization	62.5		58.8		6.3	%
Government, class action, and related settlements	—		2.8		(100.0)	%

Total operating expenses	1,022.7		1,001.8		2.1	%

Interest expense and amortization of debt discounts and fees	42.8		43.2		(0.9)	%
Other (income) expense	(1.4)		1.9		(173.7)	%
Equity in net income of nonconsolidated affiliates	(1.0)		(0.8)		25.0	%
Income from continuing operations before income tax expense	167.3		135.9		23.1	%
Provision for income tax expense	34.5		27.1		27.3	%
Income from continuing operations	132.8		108.8		22.1	%
Loss from discontinued operations, net of tax	—		(0.1)		(100.0)	%
Net income	132.8		108.7		22.2	%
Less: Net income attributable to noncontrolling interests	(25.5)		(21.7)		17.5	%
Net income attributable to Encompass Health	$	107.3	$	87.0	23.3	%

Three Months Ended March 31, Percentage Change
2020 2019 2020 vs. 2019
(In Millions, Except Percentage Change)
Net operating revenues $ 1,182.0
$ 1,124.0
5.2 %
Operating expenses:

Salaries and benefits 679.1
620.8
9.4 %
Other operating expenses 159.6
150.1
6.3 %
Occupancy costs 20.2
19.6
3.1 %
Supplies 45.7
40.1
14.0 %
General and administrative expenses 35.6
53.4
(33.3 )%
Depreciation and amortization 58.8
52.5
12.0 %
Government, class action, and related settlements 2.8
—
N/A
Total operating expenses 1,001.8
936.5
7.0 %
Interest expense and amortization of debt discounts and fees 43.2
37.2
16.1 %
Other expense (income) 1.9
(3.7 ) (151.4 )%
Equity in net income of nonconsolidated affiliates (0.8 ) (2.5 ) (68.0 )%
Income from continuing operations before income tax expense 135.9
156.5
(13.2 )%
Provision for income tax expense 27.1
30.8
(12.0 )%
Income from continuing operations 108.8
125.7
(13.4 )%
Loss from discontinued operations, net of tax (0.1 ) (0.5 ) (80.0 )%
Net income 108.7
125.2
(13.2 )%
Less: Net income attributable to noncontrolling interests (21.7 ) (22.9 ) (5.2 )%
Net income attributable to Encompass Health $ 87.0
$ 102.3
(15.0 )%

Operating Expenses as a % of Net Operating Revenues


	Three Months Ended March 31,					Three Months Ended March 31,
	2020		2019			2021		2020
Operating expenses:					Operating expenses:
Salaries and benefits	57.5	%	55.2	%	Salaries and benefits	55.9	%	57.5	%
Other operating expenses	13.5	%	13.4	%	Other operating expenses	13.2	%	13.5	%
Occupancy costs	1.7	%	1.7	%	Occupancy costs	1.6	%	1.7	%
Supplies	3.9	%	3.6	%	Supplies	4.2	%	3.9	%
General and administrative expenses	3.0	%	4.8	%	General and administrative expenses	3.1	%	3.0	%
Depreciation and amortization	5.0	%	4.7	%	Depreciation and amortization	5.1	%	5.0	%
Government, class action, and related settlements	0.2	%	—	%	Government, class action, and related settlements	—	%	0.2	%

Total operating expenses	84.8	%	83.3	%	Total operating expenses	83.1	%	84.8	%

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 and home health and hospice locations open throughout both the full current periods and prior periods presented. 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.

Net Operating Revenues

Our consolidated Net operating revenues increased induring the three months ended March 31, ~~2020 over~~2021 compared to the same period of ~~2019~~2020 primarily due to ~~volume~~favorable pricing partially offset by decreased volumes in both segments. Pricing included reimbursement rate increases and ~~pricing growth in our inpatient rehabilitation segment and volume growth in our home health and hospice segment.~~the suspension of sequestration for both segments. See additional discussion in the “Segment Results of Operations” section of this Item.

~~During January and February 2020, both segments were exhibiting strong year-over-year volume growth as shown in the table below.~~ Beginning in mid-March 2020, we experienced decreased volumes in both segments which we believe resulted from a number of conditions related to the ~~COVID-19~~ pandemic including: lower acute-care hospital censuses due to the deferral of elective surgeries and shelter-in-place orders, restrictive visitation policies in place at acute-care hospitals that ~~have served to~~ severely limit access to patients and caregivers by our clinical rehabilitation liaisons and care transition coordinators, lock down of assisted living facilities, and heightened anxiety among patients and their family members regarding the risk of exposure to COVID-19 during acute-care and post-acute care treatment. ~~We believe~~Certain of these ~~factors~~conditions have ~~contributed to~~continued into 2021 resulting in a ~~decline~~year-over-year decrease in new patients for all of our business lines, a lower length of stay in the inpatient rehabilitation segment, and fewer visits per episode in home health. For the two-month period of January and February and the month of March, year-over-year volume results were as follows:

2020 vs. 2019
January - February March
Inpatient Rehabilitation
Total discharges 7.7% (1.0)%

Home Health and Hospice
Home health total admissions 18.5% (0.5)%
Hospice total admissions 31.5% 13.9%

~~We continued to experience lower~~ volumes in ~~April and May than we did in January and February.~~ ~~Certain volume results for April and May, including~~ ~~certain year-over-year volume growth information for the month of April, are included below.~~



	~~April 2020 vs. April 2019~~
~~Inpatient Rehabilitation~~
~~Total discharges~~	~~(20.9)%~~

~~Home Health and Hospice~~
~~Home health total admissions~~	~~(23.5)%~~
~~Hospice total admissions~~	~~27.8%~~

Inpatient Rehabilitation - Patient Census Information
February 29, 2020 March 31, 2020
April 12, 2020
(Easter Weekend)
April 29, 2020 May 6, 2020
6,782 5,342 5,139 5,989 6,119

Home Health - Starts of Episodes (Includes Starts of Care and Recertifications)

Week Ended
March 1, 2020
Week Ended
March 29, 2020
Week Ended
April 12, 2020
Week Ended
April 26, 2020
Week Ended
May 3, 2020
4,950 4,778 4,120 4,283 4,628

Hospice - Admissions
Week Ended
March 1, 2020
Week Ended
March 29, 2020
Week Ended
April 12, 2020
Week Ended
April 26, 2020
Week Ended
May 3, 2020
259 197 236 239 242
both segments.

Salaries and Benefits

Salaries and benefitsincreased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily due to salary increases for our employees ~~increased benefit costs,~~ and ~~increased patient volumes, including an increase~~the ramping up of new stores partially offset by the home health and hospice clinician compensation model changes implemented in ~~the number of full-time equivalents~~May 2020 and improved clinician labor management in both segments.

Salaries and benefits as ~~a result of our development activities. As~~ a percent of Net operating revenues ~~Salaries and benefits~~ ~~increased~~decreased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily ~~as a result of higher salary and benefit cost increases compared~~due to revenue ~~pricing increases.~~growth, improved labor management which contributed to lower employees per occupied bed (as defined in “Segment Results” of this Item), and the clinician compensation model changes discussed above. See additional discussion in the “Segment Results of Operations” section of this Item.

Additionally, as announced on April 6, 2020, we initiated a program for eligible frontline employees to earn additional paid time off in recognition of their outstanding efforts responding to the COVID-19 pandemic. With more than 21,000 employees potentially benefiting from this additional paid time off, we estimate this investment will be up to $50 million in the second quarter of 2020.

Other Operating Expenses

~~Other operating expenses~~ ~~increased during the three months ended March 31, 2020 compared to the same period of 2019 primarily due to increased patient volumes.~~ As a percent of Net operating revenues, Other operating expenses ~~increased~~decreased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily due to ~~higher repairs and maintenance expense, including demolition costs for development projects.~~the increase in Net operating revenues as discussed above.

Supplies

Supplies increased in terms of dollars and as a percent of revenue during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily due to increased utilization and cost of medical supplies, including personal protective equipment (“PPE”), ~~beginning in March 2020~~ due to the ~~COVID-19~~ pandemic. We expect to continue to see increased utilization and cost of medical supplies in ~~2020 as a result of the COVID-19 pandemic.~~2021.

General and Administrative Expenses

General and administrative expenses ~~decreased~~increased in terms of dollars and as a percent of revenue during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily due to ~~decreased expenses associated with stock appreciation rights as well as~~ the ~~$4.4~~$3.5 million year-over-year change in the mark-to-market adjustment on our non-qualified 401(k) ~~liability. For additional information on stock appreciation rights, see Note 6,~~ ~~Share-Based Payments, to the accompanying condensed consolidated financial statements included in Part I, Item 1,~~ ~~Financial Statements (Unaudited), of this report,~~liability and ~~Note 14,~~ ~~Share-Based Payments~~, ~~to the consolidated financial statements accompanying the 2019 Form 10‑K.~~higher costs associated with incentive compensation.

Depreciation and Amortization

Depreciation and amortization increased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 due to our capital investments. We expect Depreciation and amortization to increase going forward as a result of our recent and ongoing capital investments.

Other (Income) Expense ~~(Income)~~

Other (income) expense ~~Other expense (income)~~ ~~decreased~~increased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily due to the ~~$4.4~~$3.5 million year-over-year change in the mark-to-market adjustment on our non-qualified 401(k) liability ~~offset by a $2.2 million gain as a result of our consolidation of the Treasure Coast home health location~~(offsetting impact in General and ~~the remeasurement of our previously held equity interest at fair value.~~administrative expenses).

Income from Continuing Operations Before Income Tax Expense

Our pre-tax income from continuing operations ~~decreased~~increased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily due to the ~~decrease~~increase in ~~earnings,~~Net operating revenues as discussed ~~in the “Segment Results of Operations” section of this Item.~~above.

Provision for Income Tax Expense

Our Provision for income tax expense ~~decreased~~increased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily due to ~~lower~~higher Income from ~~Continuing Operations Before Income Tax Expense.~~continuing operations before income tax expense.

~~At this time, we cannot reasonably~~We currently estimate ~~how much~~ our cash payments for income taxes ~~will~~to be ~~in 2020 due~~approximately $100 million to ~~the impact~~$130 million, net of ~~the COVID-19 pandemic discussed above~~refunds, for 2021. These payments are expected to primarily result from federal and ~~in the “Executive Overview” section~~state income tax expenses based on estimates of ~~this Item.~~taxable income for 2021.

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. This determination is based on our evaluation of all available evidence in these jurisdictions including results of operations during the preceding three years, our forecast of future earnings, and prudent tax planning strategies. 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.

We recognize the financial statement effects of uncertain tax positions when it is more likely than not, based on the technical merits, a position will be sustained upon examination by and resolution with the taxing authorities. Total remaining unrecognized tax benefits were ~~$0.4~~$0.2 million as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

See Note 7,8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 16, Income Taxes, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K.

Net Income Attributable to Noncontrolling Interests

The increase in Net Income Attributable to Noncontrolling Interests during the three months ended March 31, 2021

compared to the same period of 2020 resulted from new joint ventures and increased profitability of our existing joint ventures.

Segment Results of Operations

Our internal financial reporting and management structure is focused on the major types of services provided by Encompass Health. We manage our operations using two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. For additional information regarding our business segments, including a detailed description of the services we provide, financial data for each segment, and a reconciliation of total segment Adjusted EBITDA to income from continuing operations before income tax expense, see Note 10,11, Segment Reporting, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Inpatient Rehabilitation

Our inpatient rehabilitation segment derived its Net operating revenues from the following payor sources:


	Three Months Ended March 31,
	2021		2020
Medicare	63.9	%	70.5	%
Medicare Advantage	16.5	%	12.3	%
Managed care	11.7	%	9.9	%
Medicaid	4.1	%	3.4	%
Other third-party payors	1.3	%	1.2	%
Workers’ compensation	0.6	%	0.8	%
Patients	0.5	%	0.6	%
Other income	1.4	%	1.3	%
Total	100.0	%	100.0	%

Three Months Ended March 31,
2020 2019
Medicare 70.5 % 73.5 %
Medicare Advantage 12.3 % 9.8 %
Managed care 9.9 % 9.6 %
Medicaid 3.4 % 3.0 %
Other third-party payors 1.2 % 1.1 %
Workers’ compensation 0.8 % 0.9 %
Patients 0.6 % 0.7 %
Other income 1.3 % 1.4 %
Total 100.0 % 100.0 %

Additional information regarding our inpatient rehabilitation segment’s operating results for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 is as follows:


	Three Months Ended March 31,						Percentage Change
	2021			2020			2021 vs. 2020
	(In Millions, Except Percentage Change)
Net operating revenues:
Inpatient	$	942.3		$	890.0		5.9	%
Outpatient and other	17.6			19.2			(8.3)	%
Inpatient rehabilitation segment revenues	959.9			909.2			5.6	%
Operating expenses:
Salaries and benefits	501.9			482.3			4.1	%
Other operating expenses	140.0			134.7			3.9	%
Supplies	45.2			39.6			14.1	%
Occupancy costs	15.1			15.3			(1.3)	%
Other (income) expense	(1.5)			1.6			(193.8)	%
Equity in net income of nonconsolidated affiliates	(0.8)			(0.6)			33.3	%
Noncontrolling interests	25.1			20.8			20.7	%
Segment Adjusted EBITDA	$	234.9		$	215.5		9.0	%

	(Actual Amounts)
Discharges	47,187			47,750			(1.2)	%
Net patient revenue per discharge	$	19,969		$	18,639		7.1	%
Outpatient visits	40,194			69,743			(42.4)	%
Average length of stay (days)	13.0			12.7			2.4	%
Occupancy %	71.4		%	71.3		%	0.1	%
# of licensed beds	9,560			9,322			2.6	%
Full-time equivalents*	22,383			22,318			0.3	%
Employees per occupied bed	3.31			3.38			(2.1)	%

Three Months Ended March 31, Percentage Change
2020 2019 2020 vs. 2019
(In Millions, Except Percentage Change)
Net operating revenues:
Inpatient $ 890.0
$ 847.6
5.0 %
Outpatient and other 19.2
22.5
(14.7 )%
Inpatient rehabilitation segment revenues 909.2
870.1
4.5 %
Operating expenses:
Salaries and benefits 482.3
445.0
8.4 %
Other operating expenses 134.7
127.6
5.6 %
Supplies 39.6
35.6
11.2 %
Occupancy costs 15.3
15.8
(3.2 )%
Other expense (income) 1.6
(2.8 ) (157.1 )%
Equity in net income of nonconsolidated affiliates (0.6 ) (2.1 ) (71.4 )%
Noncontrolling interests 20.8
21.0
(1.0 )%
Segment Adjusted EBITDA $ 215.5
$ 230.0
(6.3 )%

(Actual Amounts)
Discharges 47,750
45,609
4.7 %
Net patient revenue per discharge $ 18,639
$ 18,584
0.3 %
Outpatient visits 69,743
102,028
(31.6 )%
Average length of stay (days) 12.7
12.8
(0.8 )%
Occupancy % 71.3 % 72.3 % (1.4 )%
# of licensed beds 9,322
8,941
4.3 %
Full-time equivalents* 22,318
21,345
4.6 %
Employees per occupied bed 3.38
3.34
1.2 %


*	* Full-time equivalents included in the above table represent our employees who participate in or support the operations of our hospitals and exclude an estimate of full-time equivalents related to contract labor.

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. The number of occupied beds is determined by multiplying the number of licensed beds by our occupancy percentage.

Operating Expenses as a % of Net Operating Revenues


	Three Months Ended March 31,
	2021		2020
Operating expenses:
Salaries and benefits	52.3	%	53.0	%
Other operating expenses	14.6	%	14.8	%
Supplies	4.7	%	4.4	%
Occupancy costs	1.6	%	1.7	%
Total operating expenses	73.2	%	73.9	%

Three Months Ended March 31,
2020 2019
Operating expenses:
Salaries and benefits 53.0 % 51.1 %
Other operating expenses 14.8 % 14.7 %
Supplies 4.4 % 4.1 %
Occupancy costs 1.7 % 1.8 %
Total operating expenses 73.9 % 71.7 %

Net Operating Revenues

~~Revenue growth~~Inpatient revenue increased during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019 resulted from volume growth and an increase in net patient revenue per discharge.~~2020 primarily due to favorable pricing partially offset by decreased volumes. Discharge growth from new stores of 1.0% during the three months ended March 31, 2021 resulted from our joint ~~ventures~~venture in ~~Lubbock, Texas (May 2019) and Boise, Idaho (July 2019)~~Coralville, Iowa (June 2020) and wholly owned hospitals in ~~Katy, Texas (September 2019) and~~ Murrieta, California (February 2020), Sioux Falls, South Dakota (June 2020), and Toledo, Ohio (November 2020). ~~New-store~~Same-store discharges declined 2.2% during the three months ended March 31, 2021 compared to the same period of 2020 primarily due to the pandemic. Discharge growth ~~also resulted from a joint venture hospital in Yuma, Arizona changing from the equity method~~was impacted by COVID-related limitations on elective procedures and capacity and staffing constraints at certain of ~~accounting to a consolidated entity effective July 1, 2019.~~our hospitals. Growth in net patient revenue per discharge ~~primarily resulted from an increase in reimbursement rates offset by prior period cost report adjustments. Revenue reserves were lower~~ during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily ~~due to the continued favorable resolution of medical claims reviews. See Note 1,~~ ~~Summary of Significant Accounting Policies~~, ~~“Net Operating Revenues,” to the consolidated financial statements accompanying the 2019 Form 10‑K for information regarding claims reviews.~~

~~The decrease~~resulted from a higher acuity patient mix, an increase in ~~outpatient~~reimbursement rates, and ~~other revenue during the three months ended March 31, 2020 compared to the same period of 2019 resulted from~~ the suspension of ~~hospital-based outpatient services in mid-March 2020 and the closure of certain hospital-based outpatient programs in 2019.~~sequestration.

See Note 2, Business Combinations, ~~and Note 9,~~ ~~Investments in and Advances to Nonconsolidated Affiliates~~, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K for information regarding the joint ~~ventures~~venture discussed above.

Adjusted EBITDA

The ~~decrease~~increase in Adjusted EBITDA during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily resulted from ~~higher~~ ~~Salaries and benefits~~ ~~and~~ ~~Supplies~~ ~~expenses. Expense ratios for three months ended March 31, 2020 benefited from a decrease~~the increase in net patient revenue, ~~reserves~~ as discussed above. Salaries and benefits ~~increased~~ as a percent of ~~revenue~~revenues decreased during the three months ended March 31, 2021 compared to the same period of 2020 primarily due to ~~the ramp up of new stores, overtime paid~~revenue growth and improved labor management which contributed to lower employees as a result of increased volumes early in the first quarter, and declining employee productivity in March. The employee productivity decrease primarily was the result of COVID-19 pandemic conditions including performing more individual therapy in patient rooms, donning and doffing of PPE, and screenings of everyone entering the hospital.per occupied bed. Supplies increased as a percent of revenue primarily due to increased purchase and use of medical supplies in March ~~2020~~2021 due to the ~~COVID-19~~ pandemic. Other (income) expense ~~(income)~~ within the segment ~~decreased $4.4~~increased $3.5 million primarily due to the year-over-year change in the mark-to-market adjustment on our ~~non-qualified~~nonqualified 401(k) liability, which is offset in General and administrative ~~expenses~~expenses.. Lower revenues and higher expense trends resulting from the COVID-19 pandemic have continued into April and May and could lead to a significant reduction in inpatient rehabilitation segment Adjusted EBITDA.

Home Health and Hospice

Our home health and hospice segment derived its Net operating revenues from the following payor sources:


	Three Months Ended March 31,
	2021		2020
Medicare	82.7	%	83.0	%
Medicare Advantage	10.4	%	10.8	%
Managed care	5.3	%	4.4	%
Medicaid	1.4	%	1.5	%

Workers’ compensation	—	%	0.1	%
Patients	0.1	%	0.1	%
Other income	0.1	%	0.1	%
Total	100.0	%	100.0	%

Three Months Ended March 31,
2020 2019
Medicare 83.0 % 84.6 %
Medicare Advantage 10.8 % 10.0 %
Managed care 4.4 % 3.3 %
Medicaid 1.5 % 1.7 %
Workers’ compensation 0.1 % 0.1 %
Patients 0.1 % 0.2 %
Other income 0.1 % 0.1 %
Total 100.0 % 100.0 %

Additional information regarding our home health and hospice segment’s operating results for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 is as follows:


	Three Months Ended March 31,				Percentage Change
	2021		2020		2021 vs. 2020
	(In Millions, Except Percentage Change)
Net operating revenues:
Home health	$	219.9	$	224.8	(2.2)	%
Hospice	50.6		48.0		5.4	%
Home health and hospice segment revenues	270.5		272.8		(0.8)	%
Operating expenses:
Cost of services (excluding depreciation and amortization)	118.1		130.9		(9.8)	%
Support and overhead costs	101.4		100.2		1.2	%

Equity in net income of nonconsolidated affiliates	(0.2)		(0.2)		—	%
Noncontrolling interests	0.4		0.9		(55.6)	%
Segment Adjusted EBITDA	$	50.8	$	41.0	23.9	%

	(Actual Amounts)
Home health:
Total admissions	50,799		52,754		(3.7)	%
Episodic admissions	40,215		42,476		(5.3)	%
Total recertifications	31,902		29,463		8.3	%
Episodic recertifications	28,083		26,553		5.8	%
Episodes	66,435		68,652		(3.2)	%
Total starts of care	82,701		82,217		0.6	%
Revenue per episode	$	2,923	$	2,909	0.5	%
Episodic visits per episode	15.8		16.3		(3.1)	%
Total visits	1,239,073		1,306,230		(5.1)	%
Cost per visit	$	77	$	81	(4.9)	%
Hospice:
Admissions	3,330		2,986		11.5	%
Patient days	334,400		334,545		—	%
Average daily census	3,716		3,676		1.1	%
Revenue per day	$	151	$	144	4.9	%

Three Months Ended March 31, Percentage Change
2020 2019 2020 vs. 2019
(In Millions, Except Percentage Change)
Net operating revenues:
Home health $ 224.8
$ 219.5
2.4 %
Hospice 48.0
34.4
39.5 %
Home health and hospice segment revenues 272.8
253.9
7.4 %
Operating expenses:
Cost of services sold (excluding depreciation and amortization) 130.9
116.5
12.4 %
Support and overhead costs 100.2
88.8
12.8 %
Equity in net income of nonconsolidated affiliates (0.2 ) (0.4 ) (50.0 )%
Noncontrolling interests 0.9
2.7
(66.7 )%
Segment Adjusted EBITDA $ 41.0
$ 46.3
(11.4 )%

(Actual Amounts)
Home health:
Admissions 42,476
37,944
11.9 %
Recertifications 26,553
28,282
(6.1 )%
Episodes 68,652
63,626
7.9 %
Revenue per episode $ 2,909
$ 3,057
(4.8 )%
Episodic visits per episode 16.3
17.7
(7.9 )%
Total visits 1,306,230
1,308,610
(0.2 )%
Cost per visit $ 81
$ 75
8.0 %
Hospice:
Admissions 2,986
2,378
25.6 %
Patient days 334,545
239,022
40.0 %
Average daily census 3,676
2,656
38.4 %
Revenue per day $ 144
$ 144
— %

Operating Expenses as a % of Net Operating Revenues


	Three Months Ended March 31,					Three Months Ended March 31,
	2020		2019			2021		2020
Operating expenses:					Operating expenses:
Cost of services sold (excluding depreciation and amortization)	48.0	%	45.9	%
Cost of services (excluding depreciation and amortization)					Cost of services (excluding depreciation and amortization)	43.7	%	48.0	%
Support and overhead costs	36.7	%	35.0	%	Support and overhead costs	37.5	%	36.7	%
Total operating expenses	84.7	%	80.9	%	Total operating expenses	81.1	%	84.7	%

Net Operating Revenues

~~Revenue growth~~ Total starts of care (total admissions plus total recertifications) were up 0.6% during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019 primarily was driven by volume growth. Volume growth included a 0.2% increase~~2020 due to increases in ~~home health same-store~~recertifications and non-episodic admissions. ~~New-store admission growth was~~Non-episodic admissions increased 3% year over year primarily due to the ~~acquisition~~new national contract with United Healthcare. Total home health admissions declined during the three months ended March 31, 2021 compared to the same period of ~~Alacare~~2020 as a result of episodic admissions decreasing 22% from patients residing in senior living facilities, 35% from patients discharging from skilled nursing

facilities, and 18% from patients receiving elective procedures in acute care hospitals. The combined impact of these declines represented a loss of approximately 3,700 admissions, or a 880 basis points negative impact on ~~July 1, 2019. Revenue~~the episodic growth rate for the three months ended March 31, 2021. During the three months ended March 31, 2021, the segment averaged 250 home health employees per day on COVID-related quarantine, which further impacted its ability to accept referrals.

The increase in revenue per episode ~~decreased primarily due~~during the three months ended March 31, 2021 compared to ~~implementation~~the same period of ~~the Patient Driven Groupings Model (the “PDGM”) on January 1,~~ 2020 ~~and the patient mix of the former Alacare locations. The effects of PDGM were exacerbated by the COVID-19 pandemic, including~~resulted from an increase in ~~low utilization payment adjustments, or “LUPAs.”~~reimbursement rates and the suspension of sequestration partially offset by the impact of the timing of completed episodes. Revenue per episode during the three months ended March 31, 2020 benefited from the reversal of a $1.6 million reserve for a Zone Program Integrity Contractor audit.

Hospice same-store admissions growth of 11.4% yielded a 5.4% increase in hospice revenue ~~increased~~ during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020. Hospice revenue growth was impacted by ~~39.5%, with approximately 75%~~a decrease in length of ~~the increase~~stay resulting from ~~the acquisition of Alacare.~~

~~See Note 2,~~ ~~Business Combinations, to the consolidated financial statements accompanying the 2019 Form 10‑K for information regarding the acquisition discussed above.~~a change in patient mix.

The ~~decrease~~increase in Adjusted EBITDA during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019 primarily~~2020 resulted from a decrease ~~in Medicare reimbursement rates primarily related to the implementation of PDGM and an increase~~ in Cost of services ~~and~~ ~~Support and overhead costs~~ as a percent of ~~revenues.~~revenue. Cost of services as percent of revenues for the three months ended March 31, 2020 increased primarily due to COVID-19 pandemic related impacts on patient volumes, staff productivity and medical supplies, as well as an increase in salaries and wages per full-time equivalent. ~~Support and overhead costs~~decreased as a percent of revenues for the three months ended March 31, 2021 compared to the same period of 2020 ~~increased~~ primarily due to ~~increased administrative costs associated with~~lower cost per visit supported by changes in the ~~implementation of PDGM and the Review Choice Demonstration Program,~~clinician compensation model changes implemented in May 2020, as well as ~~an increase in sales force~~effective management of overall productivity of full-time equivalents. Lower revenues and higher expense trends resulting from the COVID-19 pandemic have continued into April and May and could lead to a significant reduction in home health and hospice segment Adjusted EBITDA.staff.

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility.

The objectives of our capital structure strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allow us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our unrestricted Cash and cash equivalents and our available borrowing capacity. Maintaining flexibility in our capital structure is a function of, among other things, the amount of debt maturities in any given year, the options for debt prepayments without onerous penalties, and limiting restrictive terms and maintenance covenants in our debt agreements.

~~To further enhance our liquidity~~Consistent with these objectives, in March 2021, we issued notice for redemption of $100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the “2023 Notes”). We completed this redemption on April 5, 2021 using cash on hand and ~~ensure availability~~capacity under our revolving credit ~~agreement, in April 2020, we amended our credit agreement primarily~~facility. Pursuant to ~~provide covenant relief due to business disruptions from~~ the ~~COVID-19 pandemic. The amendment included, among other things, the carve-out~~terms of the ~~COVID-19 pandemic from~~2023 Notes, this optional redemption was made at a price of par. As a result of this redemption, we have classified approximately $100 million of the ~~definition of material adverse effect for 364 days and modifications to the interest coverage and leverage ratios under the agreement. For additional information see Note 3,~~ ~~Long-term Debt, to the~~2023 Notes as current in our accompanying March 31, 2021 condensed consolidated ~~financial statements included~~balance sheet, and we expect to record an approximate $0.6 million loss on early extinguishment of debt in ~~Part I, Item 1,~~ ~~Financial Statements (Unaudited)~~,the second quarter of ~~this report,~~2021.

We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2023. 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 cash flows from operations and we have significant flexibility with how we choose to invest our cash and return capital to shareholders.

For additional information, see Note 3,4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt,, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K.

As of March 31, ~~2020,~~2021, we had ~~$104.9~~$223.9 million in Cash and cash equivalents. This amount excludes ~~$72.1~~$72.4 million in restricted cash ($~~56.7~~62.2 million included in Restricted cash and ~~$15.4~~$10.2 million included in Other long-term assets in our condensed consolidated balance sheet) and ~~$71.2~~$73.1 million of restricted marketable securities (included in Other long-term assets in our condensed 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. See Note 4, Cash and Marketable Securities, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K.

In addition to Cash and cash equivalents, as of March 31, ~~2020~~,2021, we had approximately ~~$613.3~~$962 million available to us under our revolving credit facility. Our credit agreement governs the substantial majority of our senior secured borrowing

capacity and contains a leverage ratio and an interest coverage ratio as financial covenants. Our leverage ratio is defined in our credit agreement as the ratio of consolidated total debt (less up to $300 million of cash on hand) to Adjusted EBITDA for the trailing four quarters. In calculating the leverage ratio under our credit agreement, we are permitted to use pro forma Adjusted EBITDA, the calculation of which includes historical income statement items and pro forma adjustments resulting from (1) the dispositions and repayments or incurrence of debt and (2) the investments, acquisitions, mergers, amalgamations, consolidations and operational changes from acquisitions to the extent such items or effects are not yet reflected in our trailing four-quarter financial statements. Our interest coverage ratio is defined in our credit agreement as the ratio of Adjusted EBITDA to consolidated interest expense, excluding the amortization of financing fees, for the trailing four quarters. As of March 31, ~~2020,~~2021, the maximum leverage ratio requirement per our credit agreement was ~~4.50x~~6.50x and the minimum interest coverage ratio requirement was ~~3.0x,~~2.0x, and we were in compliance with these covenants. Based on Adjusted EBITDA for the trailing four quarters and the interest rate in effect under our credit agreement during the three-month period ended March 31, ~~2020,~~2021, if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for that entire period, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements.

We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2024, and our bonds all mature in 2023 and beyond. See the “Contractual Obligations” section below for information related to our contractual obligations as of March 31, ~~2020~~.

We acquired a significant portion of our home health and hospice business when we purchased EHHI Holdings, Inc (“EHHI”) on December 31, 2014. In the acquisition, we acquired all of the issued and outstanding equity interests of EHHI, other than equity interests contributed to Encompass Health Home Health Holdings, Inc. (“Holdings”), a subsidiary of Encompass Health and an indirect parent of EHHI, by certain sellers in exchange for shares of common stock of Holdings. Those sellers were members of EHHI management, and they contributed a portion of their shares of common stock of EHHI, valued at approximately $64 million on the acquisition date, in exchange for approximately 16.7% of the outstanding shares of common stock of Holdings. At any time after December 31, 2017, each management investor had the right (but not the obligation) to have his or her shares of Holdings stock repurchased by Encompass Health for a cash purchase price per share equal to the fair value. The fair value was determined using the product of the trailing twelve-month adjusted EBITDA measure for Holdings and a specified median market price multiple based on a basket of public home health companies and transactions, after adding cash and deducting indebtedness that included the outstanding principal balance under any intercompany notes. In February 2018, each management investor exercised the right to sell one-third of his or her shares of Holdings stock to Encompass Health, representing approximately 5.6% of the outstanding shares of the common stock of Holdings. On February 21, 2018, Encompass Health settled the acquisition of those shares upon payment of approximately $65 million in cash. In July 2019, we received additional exercise notices, representing approximately 5.6% of the outstanding shares of the common stock of Holdings. In September 2019, Encompass Health settled the acquisition of those shares upon payment of approximately $163 million in cash. As of December 31, 2019, the fair value of those outstanding shares of Holdings owned by management investors was approximately $208 million. In January 2020, we received additional exercise notices, representing approximately 4.3% of the outstanding shares of the common stock of Holdings. In February 2020, Encompass Health settled the acquisition of those shares upon payment of approximately $162 million in cash. Upon settlement of these exercises, approximately $46 million of the shares of Holdings held by two management investors remained outstanding.

In conjunction with the EHHI acquisition, we granted stock appreciation rights (“SARs”) based on Holdings common stock to certain members of EHHI management at closing. Half of the SARs vested on December 31, 2018 and the remainder vested on December 31, 2019. Upon exercise, each SAR must be settled for cash in the amount by which the per share fair value of Holdings’ common stock on the exercise date exceeds the per share fair value on the grant date. As of December 31, 2019, the fair value of the remaining 115,545 SARs was approximately $101 million, all of which was included in ~~Accrued expenses and other current liabilities~~ in the condensed consolidated balance sheet. In January 2020, members of the management team exercised the remaining SARs and in February 2020, we settled those awards upon payment of approximately $101 million in cash. See also Note 6, ~~Share-Based Payments, to the accompanying condensed consolidated financial statements included in Part I, Item 1,~~ ~~Financial Statements (Unaudited), of this report.~~2021.

For a discussion of risks and uncertainties facing us see Item 1A, Risk Factors, under Part II, Other Information, of this report and Item 1A, Risk Factors, of the ~~2019~~2020 Form 10‑K.

Sources and Uses of Cash

The following table shows the cash flows provided by or used in operating, investing, and financing activities for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (in millions):

Operating activities.The ~~decrease~~increase in Net cash provided by operating activities for the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily resulted from the approximate $101 million payment to management investors of our home health and hospice segment during the first quarter of ~~approximately $101 million~~2020 for vested stock appreciation rights. For additional information, see Note 6, 7, S~~Share-Based~~hare-Based Payments, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Investing activities. The deincreasein Net cash used in investing activities during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily resulted from ~~acquisitions during the first quarter of 2019 offset by~~ an increase in purchases of property and ~~equipment during the first quarter of 2020. See Note 2,~~ ~~Business Combinations, to the consolidated financial statements accompanying the 2019 Form 10‑K.~~equipment.

Financing activities. The increase in Net cash ~~provided by~~used in financing activities during the three months ended March 31, ~~2020~~2021 compared to the same period of ~~2019~~2020 primarily resulted from the 2020 net borrowings on our revolving credit facility offset by cash used for the purchase of equity interests held by the home health and hospice management team during the first quarter of 2020. For additional information, see Note 3, ~~Long-term Debt~~, ~~and Note 4,~~5, Redeemable Noncontrolling

Interests, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this ~~report.~~report and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10‑K.

Contractual Obligations

Our consolidated contractual obligations as of March 31, ~~2020~~2021 are as follows (in millions):


	Total		April 1 through December 31, 2021		2022 - 2023		2024 - 2025		2026 and thereafter
Long-term debt obligations:
Long-term debt, excluding revolving credit facility and finance lease obligations (a)	$	2,895.1	$	110.3	$	240.4	$	582.1	$	1,962.3

Interest on long-term debt (b)	897.7		98.0		250.6		224.9		324.2
Finance lease obligations (c)	645.0		40.4		101.3		100.9		402.4
Operating lease obligations (d)	340.2		44.5		95.8		67.2		132.7
Purchase obligations (e)	110.8		40.6		43.0		17.9		9.3
Other long-term liabilities (f)(g)	3.3		0.3		0.4		0.4		2.2
Total	$	4,892.1	$	334.1	$	731.5	$	993.4	$	2,833.1

Total April 1 through December 31, 2020 2021 - 2022 2023 - 2024 2025 and thereafter
Long-term debt obligations:

Long-term debt, excluding revolving credit facility and finance lease obligations ^(a)
$ 2,630.9
$ 14.7
$ 41.5
$ 1,237.2
$ 1,337.5
Revolving credit facility 350.0
—
—
350.0
—
Interest on long-term debt ^(b)
840.3
107.4
284.0
244.2
204.7
Finance lease obligations ^(c)
630.3
38.3
96.2
90.2
405.6
Operating lease obligations ^(d)
372.0
42.0
100.6
75.9
153.5
Purchase obligations ^(e)
138.3
51.4
61.7
18.9
6.3
Other long-term liabilities ^(f)(g)
3.3
0.2
0.5
0.4
2.2
Total $ 4,965.1
$ 254.0
$ 584.5
$ 2,016.8
$ 2,109.8

~~Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 3,~~ ~~Long-term Debt, accompanying the condensed consolidated financial statements included in Part I, Item 1,~~ ~~Financial Statements (Unaudited), of this report, and Note 10,~~(a) Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 4, Long-term Debt, accompanying the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10‑K.

(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 March 31, 2021. 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. 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.

(d) Our inpatient rehabilitation segment leases approximately 12% of its hospitals as well as other property and equipment under operating leases in the normal course of business. Our home health and hospice segment leases relatively small office spaces in the localities it serves, space for its corporate office, and other 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 7, Leases, to the consolidated financial statements accompanying the 2020 Form 10‑K.

(e) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Encompass Health and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Our purchase obligations primarily relate to software licensing and support and medical equipment. Purchase obligations are not recognized in our condensed consolidated balance sheet.

(f) ~~to the consolidated financial statements accompanying the 2019 Form 10‑K.~~

~~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~~ ~~March 31, 2020~~. 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. 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.

Our inpatient rehabilitation segment leases approximately 14% of its hospitals as well as other property and equipment under operating leases in the normal course of business. Our home health and hospice segment leases relatively small office spaces in the localities it serves, space for its corporate office, and other 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 7, ~~Leases~~, ~~to the consolidated financial statements accompanying the 2019 Form 10‑K.~~

Because their future cash outflows are uncertain, the following noncurrent liabilities are excluded from the table above: general liability, professional liability, and workers' compensation risks, noncurrent amounts related to third-party billing audits, and deferred income taxes. For more information, see Note 11, Self-Insured Risks,, Note 16,~~Income Taxes~~, ~~and Note 18,~~ ~~Contingencies and Other Commitments~~, ~~to the consolidated financial statements accompanying the 2019 Form 10‑K and Note 7,~~ Income Taxes, and Note 18, Contingencies and Other Commitments, to the consolidated financial statements accompanying the 2020 Form 10‑K and Note 8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

(g) The table above does not include Redeemable noncontrolling interests of $31.7 million because of the uncertainty surrounding the timing and amounts of any related cash outflows. See Note 5, Redeemable Noncontrolling Interests, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

~~The table above does not include~~ ~~Redeemable noncontrolling interests~~ ~~of $34.0 million because of the uncertainty surrounding the timing and amounts of any related cash outflows. See Note 4,~~ ~~Redeemable Noncontrolling Interests, to the condensed consolidated financial statements included in Part I, Item 1,~~ ~~Financial Statements (Unaudited), of this report.~~

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. During the three months ended March 31, ~~2020~~,2021, we made capital expenditures of approximately ~~$85~~$101 million for property and equipment, capitalized software, and ~~capitalized software. These expenditures are exclusive of approximately $1 million in net cash related to our acquisition activity. At this time, we cannot reasonably estimate how much~~other intangible assets. During 2021, we expect to spend onapproximately $580 million to $665 million for capital ~~expenditures in 2020 due~~expenditures. Approximately $165 million to ~~the impact of the COVID-19 pandemic discussed in the “Executive Overview” section~~$195 million of this ~~Item.~~budgeted amount is considered nondiscretionary expenditures, which we may refer to in other filings as “maintenance” expenditures. In addition, we expect to spend approximately $50 million to $100 million on home health and hospice acquisitions during 2021. Actual amounts spent will be dependent upon the timing of development projects and acquisition opportunities for our home health and hospice business.

Authorizations for Returning Capital to Stakeholders

In October ~~2019~~2020 and February ~~2020,~~2021, our board of directors declared cash dividends of $0.28 per share that were paid in January ~~2020~~2021 and April ~~2020,~~2021, respectively. ~~On May 6, 2020, our board of directors declared a cash dividend of $0.28 per share, payable on July 15, 2020, to holders of record on July 1, 2020.~~We expect quarterly dividends to be paid in January, April, July, and October. However, the actual declaration of any future cash dividends, and the setting of record and payment dates as well as the per share amounts, will be at the discretion of our board of directors after consideration of various factors, including our capital position and alternative uses of funds. Cash dividends are expected to be funded using cash flows from operations, cash on hand, and availability under our revolving credit facility.

On February 14, 2014, our board of directors approved an increase in our existing common stock repurchase authorization from $200 million to $250 million. On July 24, 2018, our board approved resetting the aggregate common stock repurchase authorization to $250 million. As of March 31, ~~2020,~~2021, approximately ~~$199~~$198 million remained under this authorization. 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. Subject to certain terms and conditions, including a maximum price per share and compliance with federal and state securities and other laws, the repurchases may be made from time to time in open market transactions, privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. ~~During~~

Supplemental Guarantor Financial Information

Our indebtedness under our credit agreement and the ~~three months ended March 31, 2020, we repurchased 0.1 million shares~~5.125% Senior Notes due 2023, 5.75% Senior Notes due 2025, 4.50% Senior Notes due 2028, 4.75% Senior Notes due 2030, and 4.625% Senior Notes due 2031 (collectively, the “Senior Notes”) are guaranteed by certain consolidated 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. The other subsidiaries of Encompass Health do not guarantee the Senior Notes (such subsidiaries are referred to as the “non-guarantor subsidiaries”).

The terms of our credit agreement allow us to declare and pay cash dividends on our common stock so long as: (1) we are not in default under our credit agreement, and (2) either (a) our senior secured leverage ratio (as defined in our credit agreement) remains less than or equal to 2x and our leverage ratio (as defined in our credit agreement) remains less than or equal to 4.50x or (b) there is capacity under the Available Amount as defined in the ~~open market for approximately $4.9 million~~credit agreement. The terms of our Senior 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 ~~this repurchase authorization using cash on hand. We suspended stock repurchases in mid-March 2020 in response~~the indenture to incur debt, and (3) we have capacity under the indenture’s restricted payments covenant to declare and pay dividends. See Note 4, Long-term Debt, to the ~~uncertainty resulting from~~accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the ~~COVID-19 pandemic.~~consolidated financial statements accompanying the 2020 Form 10‑K.

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. Amounts for prior periods have been revised to reflect the status of guarantors and non-guarantors as of March 31, 2021.


	Three Months Ended March 31, 2021		For the Year Ended December 31, 2020
	(In Millions)
Net operating revenues	$	894.8	$	3,387.1
Intercompany revenues generated from non-guarantor subsidiaries	4.9		19.9
Total net operating revenues	$	899.7	$	3,407.0

Operating expenses	$	759.8	$	2,976.0
Intercompany expenses incurred in transactions with non-guarantor subsidiaries	7.6		30.3
Total operating expenses	$	767.4	$	3,006.3

Income from continuing operations	$	70.6	$	166.2
Net income	$	70.6	$	166.2
Net income attributable to Encompass Health	$	70.6	$	165.7


	As of March 31, 2021		As of December 31, 2020
	(In Millions)
Total current assets	$	767.4	$	716.5

Property and equipment, net	$	1,648.3	$	1,593.9
Goodwill	1,973.6		1,973.6

Intercompany receivable due from non-guarantor subsidiaries	157.8		152.4
Other noncurrent assets	679.9		701.4
Total noncurrent assets	$	4,459.6	$	4,421.3

Total current liabilities	$	679.5	$	580.8

Long-term debt, net of current portion	$	3,106.9	$	3,213.1
Other noncurrent liabilities	251.7		253.9
Total noncurrent liabilities	$	3,358.6	$	3,467.0

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. We reconcile Adjusted EBITDA to Net income and to Net cash provided by operating activities.

We use Adjusted EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on a consolidated basis is important in analyzing our liquidity because it is the key component of certain material covenants contained within our credit agreement, which is discussed in more detail in Note 10, Long-term Debt, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K. These covenants are material terms of the credit agreement. Noncompliance with these financial covenants under our credit agreement—our interest coverage ratio and our leverage ratio—could result in our lenders requiring us to immediately repay all amounts borrowed. If we anticipated a potential covenant violation, we would seek relief from our lenders, which would have some cost to us, and such relief might be on terms less favorable to us than those in our existing credit agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under our credit agreement from engaging in certain activities, such as incurring additional indebtedness, paying common stock dividends, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to our assessment of our liquidity.

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 not in excess of

20% of Adjusted Consolidated EBITDA. We also subtract from consolidated Net income all unusual or nonrecurring items to the extent they increase consolidated Net income.

Under the credit agreement, the Adjusted EBITDA calculation does not require us to deduct net income attributable to noncontrolling interests or gains on fair value adjustments of hedging and equity instruments, disposal of assets, and development activities. It also does not allow us to add back losses on fair value adjustments of hedging instruments or unusual or nonrecurring cash expenditures in excess of $10 million. These items and amounts, in addition to the items falling within the credit agreement’s “unusual or nonrecurring” classification, may occur in future periods, but can vary significantly from period to period and may not directly relate to, or be indicative of, our ongoing liquidity or operating performance. Accordingly, the Adjusted EBITDA calculation presented here includes adjustments for them.

Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles in the United States of America, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for Net income or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the policies and procedures described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the ~~2019~~2020 Form 10‑K.

Our Adjusted EBITDA for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 was as follows (in millions):

Reconciliation of Net Income to Adjusted EBITDA


	Three Months Ended March 31,
	2021		2020
Net income	$	132.8	$	108.7
Loss from discontinued operations, net of tax, attributable to Encompass Health	—		0.1
Net income attributable to noncontrolling interests	(25.5)		(21.7)
Provision for income tax expense	34.5		27.1
Interest expense and amortization of debt discounts and fees	42.8		43.2

Government, class action, and related settlements	—		2.8
(Gain) loss on disposal of assets	(0.1)		0.1
Depreciation and amortization	62.5		58.8

Stock-based compensation expense	2.8		7.1
Costs associated with the strategic alternatives review	0.9		—
Gain on consolidation of joint venture formerly accounted for under the equity method of accounting	—		(2.2)

Change in fair market value of equity securities	0.1		2.5

Payroll taxes on SARs exercise	—		1.5
Adjusted EBITDA	$	250.8	$	228.0

Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA

For additional information see the “Results of Operations” and “Segment Results of Operations” sections of this Item.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1, Basis of Presentation, to our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report.

Item 3.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 sensitivity analysis models to evaluate the impact of interest rate changes on our variable rate debt. As of March 31, ~~2020,~~2021, our primary variable rate debt outstanding related to ~~$350.0 million in advances under our revolving credit facility and $261.9~~$248.3 million under our term loan facilities. Assuming outstanding balances were to remain the same, a 1% increase in interest rates would result in an incremental negative cash flow of approximately ~~$5.5~~$2.1 million over the next 12 months, while a 1% decrease in interest rates would result in an incremental positive cash flow of approximately ~~$5.0~~$0.3 million over the next 12 months.



Delaware			63-0860407
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	EHC	New York Stock Exchange



		Page
PART I	Financial Information

Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2515
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4432
Item 4.	Controls and Procedures	4432

PART II	Other Information

Item 1.	Legal Proceedings	4533
Item 1A.	Risk Factors	4533
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4633
Item 6.	Exhibits	4834



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	March 31, 2020		December 31, 2019
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	104.9	$	94.8
Restricted cash	56.7		57.4
Accounts receivable	543.4		506.1
Other current assets	79.5		97.5
Total current assets	784.5		755.8
Property and equipment, net	2,003.3		1,959.3
Operating lease right-of-use assets	267.9		276.5
Goodwill	2,312.1		2,305.2
Intangible assets, net	464.7		476.3
Deferred income tax assets	1.5		2.9
Other long-term assets	303.7		304.7
Total assets⁽¹⁾	$	6,137.7	$	6,080.7
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	40.2	$	39.3
Current operating lease liabilities	40.8		40.4
Accounts payable	98.0		94.6
Accrued expenses and other current liabilities	407.2		546.7
Total current liabilities	586.2		721.0
Long-term debt, net of current portion	3,321.9		3,023.3
Long-term operating lease liabilities	235.1		243.8
Other long-term liabilities	163.3		159.9
	4,306.5		4,148.0
Commitments and contingencies
Redeemable noncontrolling interests	34.0		239.6
Shareholders’ equity:
Encompass Health shareholders’ equity	1,443.9		1,352.2
Noncontrolling interests	353.3		340.9
Total shareholders’ equity	1,797.2		1,693.1
Total liabilities⁽¹⁾and shareholders’ equity	$	6,137.7	$	6,080.7



	Three Months Ended March 31, 2019
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding		Common Stock		Capital in Excess of Par Value			Accumulated Deficit			Treasury Stock			Noncontrolling Interests			Total
Balance at beginning of period	98.9		$	1.1	$	2,588.7		$	(885.2	)	$	(427.9	)	$	280.3		$	1,557.0
Net income	—		—		—			102.3			—			18.9			121.2
Receipt of treasury stock	(0.3	)	—		—			—			(15.9		)	—			(15.9		)
Dividends declared ($0.27 per share)	—		—		(26.9		)	—			—			—			(26.9		)
Stock-based compensation	—		—		7.0			—			—			—			7.0
Distributions declared	—		—		—			—			—			(15.3		)	(15.3		)
Capital contributions from consolidated affiliates	—		—		—			—			—			7.1			7.1
Fair value adjustments to redeemable noncontrolling interests	—		—		(20.3		)	—			—			—			(20.3		)
Repurchases of common stock in open market	(0.2	)	—		—			—			(11.0		)	—			(11.0		)
Other	0.7		—		2.8			—			(0.4		)	11.2			13.6
Balance at end of period	99.1		$	1.1	$	2,551.3		$	(782.9	)	$	(455.2	)	$	302.2		$	1,616.5



	March 31, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	1.1	$	0.2
Accounts receivable	31.3		29.3
Other current assets	7.7		6.4
Total current assets	40.1		35.9
Property and equipment, net	120.9		122.6
Operating lease right-of-use assets	5.8		6.0
Goodwill	19.2		15.9
Intangible assets, net	4.8		3.3
Other long-term assets	31.4		31.3
Total assets	$	222.2	$	215.0
Liabilities
Current liabilities:
Current portion of long-term debt	$	0.9	$	0.8
Current operating lease liabilities	1.5		1.4
Accounts payable	5.6		6.7
Accrued expenses and other current liabilities	16.6		17.0
Total current liabilities	24.6		25.9
Long-term debt, net of current portion	10.3		10.5
Long-term operating lease liabilities	4.4		4.7
Total liabilities	$	39.3	$	41.1


													Fair Value Measurements at Reporting Date Using
			Fair Value Measurements at Reporting Date Using
As of March 31, 2020	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Technique ⁽¹⁾
As of March 31, 2021										As of March 31, 2021	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Technique (1)
Other long-term assets:										Other long-term assets:
Equity securities	$	61.8	$	—	$	61.8	$	—	M	Equity securities	$	73.1	$	0	$	73.1	$	0	M
Debt securities	9.4		9.4		—		—		M

Redeemable noncontrolling interests	34.0		—		—		34.0		I	Redeemable noncontrolling interests	31.7		0		0		31.7		I
As of December 31, 2019
As of December 31, 2020										As of December 31, 2020
Other long-term assets:										Other long-term assets:
Equity securities	$	63.5	$	—	$	63.5	$	—	M	Equity securities	$	72.6	$	0	$	72.6	$	0	M
Debt securities	12.6		12.6		—		—		M

Redeemable noncontrolling interests	239.6		—		—		239.6		I	Redeemable noncontrolling interests	31.6		0		0		31.6		I



	Inpatient Rehabilitation		Home Health and Hospice		Encompass Health Consolidated
As of March 31, 2020
Total assets	$	4,558.8	$	1,639.2	$	6,137.7
Investments in and advances to nonconsolidated affiliates	1.8		3.9		5.7
As of December 31, 2019
Total assets	$	4,501.4	$	1,612.8	$	6,080.7
Investments in and advances to nonconsolidated affiliates	2.0		5.4		7.4



	March 31, 2020			December 31, 2019
Total assets for reportable segments	$	6,198.0		$	6,114.2
Reclassification of deferred income tax liabilities to net deferred income tax assets	(60.3		)	(33.5		)
Total consolidated assets	$	6,137.7		$	6,080.7



	Three Months Ended March 31, 2020
	Encompass Health Corporation			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Holdings			Eliminating Entries			Encompass Health Consolidated
	(In Millions)
Net operating revenues	$	4.6		$	622.5		$	323.3		$	266.8		$	(35.2	)	$	1,182.0
Operating expenses:
Salaries and benefits	16.7			309.8			164.2			193.3			(4.9		)	679.1
Other operating expenses	9.6			86.9			52.0			24.1			(13.0		)	159.6
Occupancy costs	0.6			25.4			6.7			4.8			(17.3		)	20.2
Supplies	—			26.5			13.2			6.0			—			45.7
General and administrative expenses	34.7			—			—			0.9			—			35.6
Depreciation and amortization	5.3			28.7			15.0			9.8			—			58.8
Government, class action, and related settlements	2.8			—			—			—			—			2.8
Total operating expenses	69.7			477.3			251.1			238.9			(35.2		)	1,001.8
Interest expense and amortization of debt discounts and fees	35.8			6.3			1.4			4.9			(5.2		)	43.2
Other (income) expense	(2.3		)	(0.4		)	1.6			(2.2		)	5.2			1.9
Equity in net income of nonconsolidated affiliates	—			(0.5		)	(0.1		)	(0.2		)	—			(0.8		)
Equity in net income of consolidated affiliates	(122.2		)	(17.8		)	—			—			140.0			—
Management fees	(42.0		)	30.2			11.8			—			—			—
Income from continuing operations before income tax (benefit) expense	65.6			127.4			57.5			25.4			(140.0		)	135.9
Provision for income tax (benefit) expense	(21.5		)	33.0			9.1			6.5			—			27.1
Income from continuing operations	87.1			94.4			48.4			18.9			(140.0		)	108.8
Loss from discontinued operations, net of tax	(0.1		)	—			—			—			—			(0.1		)
Net and comprehensive income	87.0			94.4			48.4			18.9			(140.0		)	108.7
Less: Net and comprehensive income attributable to noncontrolling interests	—			—			(21.2		)	(0.5		)	—			(21.7		)
Net and comprehensive income attributable to Encompass Health	$	87.0		$	94.4		$	27.2		$	18.4		$	(140.0	)	$	87.0



	2020 vs. 2019
	January - February	March
Inpatient Rehabilitation
Total discharges	7.7%	(1.0)%

Home Health and Hospice
Home health total admissions	18.5%	(0.5)%
Hospice total admissions	31.5%	13.9%



Inpatient Rehabilitation - Patient Census Information
February 29, 2020	March 31, 2020	April 12, 2020 (Easter Weekend)	April 29, 2020	May 6, 2020
6,782	5,342	5,139	5,989	6,119


1.	~~Basis of Presentation~~


5.	~~Fair Value Measurements~~



Home Health - Starts of Episodes (Includes Starts of Care and Recertifications)
Week Ended March 1, 2020	Week Ended March 29, 2020	Week Ended April 12, 2020	Week Ended April 26, 2020	Week Ended May 3, 2020
4,950	4,778	4,120	4,283	4,628



Hospice - Admissions
Week Ended March 1, 2020	Week Ended March 29, 2020	Week Ended April 12, 2020	Week Ended April 26, 2020	Week Ended May 3, 2020
259	197	236	239	242



	Total		April 1 through December 31, 2020		2021 - 2022		2023 - 2024		2025 and thereafter
Long-term debt obligations:
Long-term debt, excluding revolving credit facility and finance lease obligations ^(a)	$	2,630.9	$	14.7	$	41.5	$	1,237.2	$	1,337.5
Revolving credit facility	350.0		—		—		350.0		—
Interest on long-term debt ^(b)	840.3		107.4		284.0		244.2		204.7
Finance lease obligations ^(c)	630.3		38.3		96.2		90.2		405.6
Operating lease obligations ^(d)	372.0		42.0		100.6		75.9		153.5
Purchase obligations ^(e)	138.3		51.4		61.7		18.9		6.3
Other long-term liabilities ^(f)(g)	3.3		0.2		0.5		0.4		2.2
Total	$	4,965.1	$	254.0	$	584.5	$	2,016.8	$	2,109.8


^(c)	~~Amounts include interest portion of future minimum finance lease payments.~~


^(g)	~~The table above does not include~~ ~~Redeemable noncontrolling interests~~ ~~of $34.0 million because of the uncertainty surrounding the timing and amounts of any related cash outflows. See Note 4,~~ ~~Redeemable Noncontrolling Interests, to the condensed consolidated financial statements included in Part I, Item 1,~~ ~~Financial Statements (Unaudited), of this report.~~


~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~


~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~


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)
January 1, through January 31, 2021	138,780	$	82.69	—	$	198,053,924
February 1, through February 28, 2021	48,735	80.42		—	198,053,924
March 1, through March 31, 2021	2,618	79.94		—	198,053,924
Total	190,133	82.07		—



			ENCOMPASS HEALTH CORPORATION

			By:			/s/ Douglas E. Coltharp
						Douglas E. Coltharp
						Executive Vice President and Chief Financial Officer

			Date:			May ~~11, 2020~~4, 2021