Health care services provider Encompass Health (NYSE: EHC) met Wall Streets revenue expectations in Q3 CY2025, with sales up 9.3% year on year to $1.48 billion. The company’s outlook for the full year was close to analysts’ estimates with revenue guided to $5.93 billion at the midpoint. Its non-GAAP profit of $1.23 per share was 3.3% above analysts’ consensus estimates.

Is now the time to buy EHC? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Encompass Health’s third quarter saw revenue and non-GAAP profit meeting or modestly exceeding Wall Street expectations, yet the market responded negatively due to concerns over slowing same-store sales growth and volume headwinds. Management attributed the moderation in same-store discharge growth to tough prior-year comparisons, the timing of new capacity additions, and consolidation of two satellite locations. CEO Mark Tarr highlighted that “quarterly fluctuations in discharge volume growth and the composition of that growth between same and new store is a normal expectation of our business model.” Despite steady overall growth, the company’s explanation of volume softness did not fully allay investor concerns, as evidenced by the market’s reaction.

Looking forward, Encompass Health’s updated guidance relies on accelerating capacity expansions and continued demand for inpatient rehabilitation, especially as the U.S. population ages. Management expects incremental bed additions and new hospital openings to drive future discharge growth, emphasizing that these moves are a response to “significantly underserved” market demand. CFO Douglas Coltharp noted that “bed additions to existing hospitals offer the highest return on invested capital we have.” However, management also acknowledged potential risks around labor inflation, the timing of new capacity ramp-up, and payer mix shifts, which could influence results in coming quarters.

Key Insights from Management’s Remarks

Management identified capacity expansion, labor management, and volume dynamics as the main influences on the quarter’s results, while also discussing operational execution and regulatory developments.

• Capacity expansion focus: The company opened three new hospitals and added 39 beds to existing locations in Q3, with further expansion planned. Management pointed to a pipeline of 14 hospitals and over 40 projects, aiming to address rising demand from the aging Medicare population.

• Volume growth mixed: While total discharge growth was solid, same-store sales growth slowed compared to the previous year. This was attributed to the timing of capacity additions, tough prior-year comparisons, and the temporary impact of consolidating two satellite facilities.

• Labor cost improvements: Premium labor costs, including contract labor and bonuses, declined year over year, aided by improved hiring and lower turnover rates. The company also cited reduced benefits inflation compared to last year, supporting margins.

• ERP system transition: Encompass Health completed a major conversion to Oracle Fusion for its enterprise resource planning (ERP) system. The rollout was largely successful with no significant disruptions, though some post-implementation costs and minor operational bugs remain as expected.

• Payer mix stability: Growth was well-distributed across Medicare, Medicare Advantage, managed care, and Medicaid. The company highlighted continued strong performance with Veterans Affairs (VA) Community Care, which grew substantially and now comprises a larger share of managed care volume.

Drivers of Future Performance

Management’s outlook centers on accelerated capacity expansion, efficient labor management, and stable demand from the aging population, while monitoring regulatory and payer mix developments.

• Accelerated bed additions: The company plans to add more beds to existing facilities and open new hospitals, reflecting optimism about long-term demand for inpatient rehabilitation. Management believes this strategy will support sustained discharge growth and higher occupancy rates, particularly as the Medicare population continues to expand.

• Labor and cost controls: Continued focus on reducing premium labor spend and maintaining efficient staffing levels is expected to underpin margin stability. Management projects that salary, wage, and benefit inflation will likely stabilize, but acknowledges that labor costs remain a key variable for future profitability.

• Regulatory and payer environment: Potential shifts in Medicare Advantage growth, payer mix, and regulatory changes are being closely monitored. Management sees balanced growth across payer types as a positive, but notes that net provider taxes and the evolving reimbursement landscape could introduce variability in financial outcomes.

Catalysts in Upcoming Quarters

Looking ahead, our analysts will closely monitor (1) the ramp-up and occupancy rates of newly opened hospitals and added beds, (2) continued progress in reducing premium labor costs and maintaining efficient staffing, and (3) regulatory and reimbursement developments that could affect net provider taxes or payer mix. The pace of same-store sales stabilization and the success of the Oracle ERP integration will also be important signposts for operational execution.

Encompass Health currently trades at $116.91, down from $125.71 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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