Corp.

Barbara A. Jacobsmeyer – Executive Vice President & President-Inpatient Hospitals, Encompass

Health Corp.

Matt Larew – Analyst, William Blair & Co. LLC

Bradley Bowers – Analyst, BofA Securities, Inc.

Operator: Good morning, everyone, and welcome to Encompass Health’s First Quarter 2020

Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in

a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period.

[Operator Instructions] Today’s conference call is being recorded. If you have any objections, you

may disconnect at this time.

I will now turn the call over to Crissy Carlisle, Encompass Health’s Chief Investor Relations Officer.

Please go ahead.

Before we begin, if you do not already have a copy, the first quarter earnings release, supplemental

information, and related Form 8-K filed with the SEC are available on our website at

encompasshealth.com. On page 2 of the supplemental information, you will find the Safe Harbor

statements, which are also set forth in greater detail on the last page of the earnings release.

During the call, we will make forward-looking statements which are subject to risk and uncertainties,

many of which are beyond our control. Certain risk and uncertainties, like the magnitude and impact

of the COVID-19 pandemic, that could cause actual results to differ materially from our projections,

estimates, and expectations are discussed in the company’s SEC filings, including the earnings

You are cautioned not to place undue reliance on the estimates, projections, guidance, and other

forward-looking information presented, which are based on current estimates of future events and

speak only as of today. We do not undertake a duty to update these forward-looking statements.

Our supplemental information and discussion on this call will include certain non-GAAP financial

measures. For such measures, reconciliations to the most directly comparable GAAP measure is

available at the end of the supplemental information, at the end of the earnings release, and as part

of the Form 8-K filed yesterday with the SEC; all of which are available on our website.

Mark J. Tarr, President, Chief Executive Officer & Director, Encompass Health Corp.

Thank you, Crissy, and good morning, everyone. I hope that you and your family are at home, safe

and healthy. We had a lot of momentum heading into 2020, and January and February were a

strong start to the year. In mid-March, we began experiencing a significant impact from the COVID-

19 pandemic. While we will touch on our results for the quarter, I will focus my comments on our

response to the pandemic and the current operating environment. Specifically, I’ll address patient

and employee safety, supply chain management, current observations in both of our business

segments, and legislative and regulatory relief efforts by the federal government. Doug will address

steps we have taken to enhance our liquidity and ensure availability under our credit agreement.

frontline workers in both of our segments through an award of additional paid time off. To our teams

in the field, I thank you for your commitment to your profession and for contributing to our country’s

safety and future.

The safety of our patients and employees is of paramount importance to us at Encompass Health.

We have taken numerous steps to ensure their well-being, including the creation of COVID-19 task

forces for each segment comprised of company leadership with a variety backgrounds, both clinical

from state and federal resources, constantly evaluating and updating the measures in place to help

our patients and employees stay safe.

premium prices that are as much as 15 times our normal pricing, and managing through limited

I need to pause here and thank the members of our supply chain teams who are working around

the clock to secure PPE and other medical supplies for us. They have demonstrated resiliency and

resourcefulness. Thank you for your commitment to keeping our patients and employees safe.

In addition to our persistent efforts to secure PPE, other steps we have taken include limiting

patient visitors in our hospitals to primary caregivers while required training in order to safely

discharge a patient home. We implemented screening procedures for anyone entering our

hospitals, including employees, physicians and vendors. We also are following the CDC social

distancing recommendations in our therapy gyms and performing therapy in patient rooms as

Now, let’s shift the discussion to current operating trends and actions we have taken in response to

them. Prior to the explosive growth of COVID-19 cases in United States, all of our business lines

were experiencing strong volume growth. However, beginning in mid-March, we began

experiencing decreased volumes in both segments, and the lower volume trends we saw in March

In home health, our starts of episodes, which includes starts of care and recertifications, dropped

5% in March compared to the January and February average of approximately 28,000, and they’re

expected to decline by an additional 18% in April. Recent weeks’ trends suggest a leveling off of

decline. In hospice, ADC has remained relatively stable, going from an average of 3,677 in January

and February to an estimated 3,633 in April.

We believe a number of factors related to the COVID-19 pandemic have contributed to the

decrease in our volumes in both segments. The deferral of elective surgeries has served to lower

census levels at acute care hospitals. While this is not a large percentage of our overall inpatient

rehabilitation volume, we do take care of patients with multiple comorbidities that have elective

levels at acute care hospitals. Restricted visitation policies in place at acute care hospitals have

severely limited access to patients and caregivers by our clinical rehabilitation liaisons and care

transition coordinators. Assisted Living Facilities have also been on lockdown, which has resulted in

a decline in home health admissions and our ability to provide in-person care to existing home

our ability to admit new patients and continue to care for existing patients. The message from the

government and health officials has been consistent and clear to the public at large: stay home. We

believe it has been so clear and consistent that some individuals having strokes, heart attacks, and

go to an acute care hospital for treatment due to fear of contracting the virus. This has served to

further lower census at acute care hospitals and, in turn, has resulted in a decrease in our volumes.

While we cannot address a patient’s fear of contracting the virus while receiving care at an acute

care hospital, we’ve taken steps to address these fears for patients in our care. For example, in our

inpatient rehabilitation segment, we are conducting more therapy individually in patient rooms when

to educate patients and their families on the risk associated with avoiding post-acute care. In

addition to limiting overall volumes in our segments, the fear of exposure resulted in a decrease in

the length of stay in our inpatient rehabilitation segment and a decrease in visits per episode in

home health, which has resulted in an elevated proportion of LUPA period.

To summarize, the COVID-19 pandemic is creating near-term pressures on our operations. It’s

impacting volumes, revenue per patient and expenses. At a minimum, we expect this choppiness to

continue in the second quarter. But at this time, we cannot reasonably predict when it may end. As I

before accepting a patient that was exposed or positive for the virus.

obtain. In early April, the timing of testing results began improving. In most markets, we can obtain

results in three to five days, and in some markets, we are receiving results within 24 hours. Thus,

we are now able to take patients more quickly from acute care hospitals.

We also believe our clinical liaisons and care transition coordinators have now adapted to working

remotely. Normally, our liaisons are in the hospitals communicating directly with referral sources,

patients and families. They had to learn to work remotely and find ways to improve their

good stewards of our resources in order to ensure we are here for the long-term to care for the

patients in our communities. After lengthy consideration to align staffing with current patient

demand, we have developed plans to manage labor costs in response to lower volumes in both

operating segments. In our inpatient rehabilitation segment, we have implemented market specific

furloughs. In home health, we are considering changes to our compensation structure to create a

greater level of variability in our cost structure to respond to significant declines in visit volume.

government. We are appreciative of the decisive actions that have been taken by the White House,

Congress, HHS and CMS. The scale of this relief is unprecedented. The CARES Act, along with a

series of waivers and guidance issued by CMS, includes efforts to help healthcare providers ensure

patients continue to have adequate access to care throughout the pandemic.

Specifically, the CARES Act temporarily suspends the automatic 2% reduction of Medicare

program payments, known as sequestration, for the period from May 1 through December 31,

2020. CARES Act also authorized the distribution of Relief Fund grants from the Department of

Health and Human Services to healthcare providers to support healthcare-related expenses or lost

conditions and permitted use associated with them.

For our inpatient rehabilitation segment, other regulatory relief efforts include temporary suspension

of the 60% rule and the requirement that patients must be able to tolerate a minimum of three hours

of therapy per day for five days per week. For home health, the relief includes revisions to the

definition of homebound status during the period of the public health emergency, the allowance of

nurse practitioners and physician assistants practicing in accordance with state laws to certify

patient eligibility and provide orders for home health care services, and the ability to accept

relevant for our Medicare Advantage business. Many managed care organizations have waived

pre-authorization requirements for post-acute care, and a few are permitting and paying for home

health televisits.

Lastly, in regards to regulatory updates, on April 16, CMS released its notice of proposed

rulemaking for inpatient rehabilitation facilities for fiscal 2021. The proposed rule includes a net

market basket update of 2.5% comprised of a market basket update of 2.9% offset by a productivity

adjustment of 40 basis points. As expected, the proposal focused on routine updates and minor

technical changes. It does not include any new quality measures or amendments to existing quality

measures. Using our patients from October 1, 2019, through March 31, 2020, we currently believe

addition, because 2020 served as a base year for our five-year growth targets, we withdrew those

targets as well.

Throughout all of this, one thing has not changed. 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’ve made in our businesses. We have a proven track record of working

frontline clinician providing patient care or someone who serves in a support function currently

working from home, I want to thank all of our employees for what they are doing in this time of

altered routines and the countless changes in their daily lives. As noted in our core values, we are

stronger together.

With that, I’ll turn it over to Doug for more details on our financial results.

Thanks, Mark, and good morning, everyone. I’ll start with some observations on Q1, and then I’ll

progress on the continued deployment of the Medalogix Care module, although the COVID-19

pandemic has caused us to pause the rollout of this initiative.

As Mark stated, the effects of PDGM have been greatly exacerbated by the COVID-19 pandemic.

Our Q1 revenue per episode, excluding the positive effect of the ZPIC reversal, was minus 5.9%.

The largest impact within PDGM has been a substantial increase in LUPA episodes. For Q1, our

visits per episode declined to 16.3 versus 17.7 in the prior year period. This decline was largely due

to the heightened anxiety regarding COVID-19 exposure of patients and their families, resulting in

declined visits. Although, we were able to substitute telehealth visits to support the needs of our

patients for a portion of the declined in-home visits, Medicare does not reimburse us for telehealth

classified as late versus early; again, resulting in a lower reimbursement under PDGM.

Our home health volumes have been negatively impacted by the cessation of elective surgeries by

the acute care hospitals, evidenced by a significant decline in the musculoskeletal rehab category

of our patient mix. We believe this trend will improve with the resumption of elective surgeries in an

increasing number of our markets, but it’s going to take time for this pipeline to rebuild.

For Q1, the clinical collaboration rate was 35.9%, essentially flat with Q1 2019. However, as we’ve

I’ll turn, now, to liquidity and cash flow. Dealing with a global pandemic certainly was not a

consideration when we engaged in proactive financings during the fall of 2019, but the actions we

took have provided substantial flexibility to deal with this unprecedented set of circumstances. You

may recall that, last fall, we issued two tranches of senior unsecured notes totaling $1 billion split

evenly between 2028 and 2030 maturities. We utilized those proceeds to replenish capacity under

our revolving credit facility and to retire a portion of our 2024 notes. We also amended our senior

credit facility, increasing the revolver commitment to $1 billion and extending the maturity date to

2024. During Q1, we funded the final tranche of the Home Health equity puts and the exercise of

the SARs, a total of approximately $263 million.

I should note that this time our plans do not contemplate any utilization of the CARE Act (sic)

[CARES Act] (32:25) relief funds we have received or might receive in the future. We continue to

evaluate the terms and conditions governing the utilization of these funds.

covering the period of May 1 through December 31; the deferral in payroll taxes; a reduction of

$100 million to $150 million in 2020 planned capital expenditures, largely based on project pacing;

and, the suspension of activity under our share repurchase program.