Encompass Health Regains Balance Amid COVID-19 Headwinds

Referral volumes for Encompass Health’s (NASDAQ: EHC) hospice and home health businesses have returned to pre-pandemic levels, even as their inpatient rehabilitation hospital segment also regains financial ground lost to COVID-19 during the first quarter. 

The company took hits in March and April due to the pandemic, which brought on declining referrals and skyrocketing costs for personal protective equipment and expenses for telehealth and employee paid leave. Encompass at the end of Q1 was implementing staff furloughs and changes to employee compensation in some business segments.

Revenue gleaned from the 2019 acquisition of Alacare Home Health & Hospice for $217 million contributed to positive Q1 and Q2 results for its hospice segment, which saw an 39.5% increase from the prior year. However, conditions are starting to normalize for Encompass in terms of how their performance compares to the world before COVID.

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“We’re very pleased with the volume trends that we see for both of our operating segments. Both our segments are virtually at or above pre-pandemic levels, which represents some some very nice gains for us,” said Encompass Health CEO Mark Tarr in a presentation at Baird’s 2020 Global Healthcare Conference. “I think that we are seeing in both of the segments our marketplaces starting to return back to some sense of a normal referral pattern.”

Like the rest of the country, Encompass is not entirely out of woods as pandemic-induced uncertainties continue to proliferate. The virus is spreading rapidly with heavy concentrations in some geographic hotspots. These include markets with high rates of hospice and home health utilization in which Encompass has a strong presence, such as Texas, Arizona and Florida.

As the number of COVID infections tick upwards in a given market, acute care utlization starts to trend downwards, according to Tarr. This can in turn reduce the number of incoming referrals to hospice and home health providers.

“The primary challenge for us is the geographic concentration. The states of Texas and Florida, which represent about 40% of our business, are two states that have well-known surgeons in many markets in those states,” Tarr said. “We have been impacted, particularly more so on the home health side. The good news is that both of those states seem to be on the other side of the worst part of their surge … States that have restrictions on our ability to enter into assisted living facilities because of COVID and restrictions on visitors have impacted us as well. Those are two of the larger factors.”

The company is building greater efficiency into its work flows and expense management efforts to stave off further disruption and is counting on continued high demand for its inpatient rehabilitation, home health and hospice services as the baby boomer generation continues to age.

“There are going to be temporary restraints, cost efficiency, we ask frequently whether or not there are things we can do to offset those costs. We entered into the pandemic being by far the most efficient operator in each of our two business centers. We are not of the opinion that [COVID] has changed the demand for services,” said Encompass Chief Financial Officer Doug Coltharp.

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