Good morning, ladies and gentlemen. Welcome to today's Encompass Health Fourth Quarter 2025 Earnings Conference Call. Just a reminder, today's call is being recorded. And if you have any objections, you may disconnect at this time. I will now turn the call over to Mr. Mark Miller, Encompass Health's Chief Investor Relations Officer. Mark, please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Fourth Quarter 2025 Earnings Call. Before we begin, if you do not already have a copy, the fourth 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, such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments, as well as volume, bad debt, and cost trends 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 release and related Form 8-K and the Form 10-K for the year ended December 31, 2025, when filed. We encourage you to read them. 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, reconciliation 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. I would like to remind everyone that we will adhere to the 1 question and 1 follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to our President and Chief Executive Officer, Mark Tarr.

Thank you, Mark, and good morning, everyone. Our Q4 performance was again very strong, capping a stellar 2025. Our 2025 revenue increased 10.5%, driven by 6% discharge growth and pricing growth benefiting from patient mix and patient outcome quality. 2025 EBITDA grew 14.9% as we gained operating leverage and exercised disciplined expense management. Most notably, premium labor spend in 2025 declined by more than $21 million from 2024, even as we added capacity and significantly increased the number of patients we treated. Our quality and patient outcome scores for 2025 were outstanding. Our full-year discharge to community rate was 84.6%, discharge to acute care was 8.6%, and discharge to SNF rate was 6.1%. Each of these quality metrics is favorable compared to the industry average. I'd like to recognize our clinicians and support staff who bring their expertise and compassion to our hospitals every day and deliver outstanding patient care. We continue to generate attractive returns from the investments we are making and capacity additions. In 2025, we added 517 beds, 390 via 8 new hospitals and 127 through the addition of beds to existing hospitals. We will continue investing in capacity additions as the underlying growth in the target demographic remains at approximately 4%, and the demand/supply gap of licensed IRF beds continues to widen. We'll be augmenting our historical two-pronged approach to capacity expansion, de novo and bed additions, with a third modality, small-format hospitals beginning in 2027. This will facilitate a hub and spoke strategy to larger and growing markets. In October, we converted our enterprise resource planning, or ERP system, to Oracle Fusion without significant disruptions to our business. Fusion provides us a flexible and sustainable cloud-based IT infrastructure to support our growing business. We are keenly aware of market anxiety regarding IRF industry regulatory changes, specifically the extension of RCD and the initiation of the team model. Beginning with RCD, during 2025, we undertook significant engagement with Palmetto and CMS to ensure correct and consistent application of reimbursement criteria. Our 7 hospitals in Alabama currently have an aggregate average affirmation rate of approximately 93% for cycle 4, which we believe validates our admissions and documentation practices. Leveraging our experience in Alabama, we believe we are prepared for the expansion of RCD into Texas and California this year. The MACs responsible for our hospitals in these states are Novitas and Noridian. Novitas, the MAC responsible for most of our hospitals in Texas, has gained substantial expertise with RCD in Pennsylvania, where providers have achieved very favorable affirmation rates. As RCD extends to other states, and we elect 100% prepayment review, affirmation of our claims should reduce our exposure to other Medicare claims audits. The TEAM model implementation began on January 1. Encompass has 89 hospitals in the initial team markets, 41 of which are joint ventures with acute care partners. As a reminder, there is no downside risk to the subject acute care hospitals in 2026 under the default track. As we have consistently done with all regulatory changes, we have prepared extensively for team. It is another episodic payment pilot similar to previous models such as CJR and BPCI, versions of which have been continuously in place since 2014. In those prior cases, concerns regarding the impact on our patient flows were greatly overstated. The presence of these models notwithstanding, with the exception of 2020 for obvious reasons, we have recorded positive total and same-store discharge growth every year. Regulatory change is a constant in our business, and we have a long track record of successfully adapting and continuing to grow as the underlying demand for IRF services continues to grow. Our strategic relationship with Palantir continues to bear fruit. In 2025, we focused on initiatives that streamlined admission documentation and enhanced our responses to claims denials. We have recently extended and expanded our agreement with Palantir and look forward to additional successes in 2026 and beyond. In 2025, in addition to substantial investments we made in our operations, we allocated $158 million to share repurchases and returned in excess of $70 million in cash dividends. We maintain a strong balance sheet with year-end net financial leverage of 1.9x. The need for the services we provide has never been greater and is growing. We are uniquely positioned to fill the void. We are incredibly proud of our recent historical performance, but we do not rest on our laurels. Our focus is on the future, which for Encompass Health is very bright. Our company has never before been presented with greater opportunity, and we have never been better positioned to capitalize. Our expectation for continued growth is reflected in our initial 2026 guidance. I'll now turn it over to Doug to provide some additional details on Q4 and the specifics of our 2026 guidance.

Thank you, Mark, and good morning, everyone. Q4 revenue increased 9.9% to $1.5 billion, and adjusted EBITDA increased 15.9% to $335.6 million. The revenue increase was comprised of 5.3% discharge growth and a 4.1% increase in net revenue per discharge. Net revenue per discharge benefited from a $2.7 million settlement with a managed care payer related to prior year claims. Bad debt expense for the quarter was 2.1%, flat on a year-over-year basis. Q4 SWB per FTE increased 2.1%. Premium labor costs comprised of contract labor and sign-on and shift bonuses declined $5.8 million from Q4 '24 to $23.8 million. This was the lowest since the first quarter of 2021. Contract labor FTEs as a percent of total FTEs was 1.1%, also the lowest since the first quarter of 2021. Benefit expense per FTE increased 2.9% as we anniversaried the large increase in group medical expense experienced in Q4 of last year. Net reopening and ramp-up costs were $2.9 million in Q4 '25, bringing our full year total to $13.9 million. Q4 net costs were lower than expected as 4 of our 8 hospitals opened during 2025 contributed positive adjusted EBITDA during the quarter, and the losses for our hospitals opened during Q4 were less than budgeted, in part due to faster Medicare certifications. We continue to generate significant free cash flow. Q4 adjusted free cash flow increased 23.6% to $235.4 million, bringing our 2025 full-year total to $818 million, an increase of 18.5% from 2024. The strength of our cash flow allowed us to fund $736 million of capital expenditures, $158 million in share repurchases, and $71 million in cash dividends, while holding long-term debt essentially flat on a year-over-year basis. Our year-end net leverage ratio of 1.9x connotes substantial flexibility for continuing investments in our business augmented with shareholder distributions. Moving on to guidance. Our 2026 guidance includes net operating revenue of $6.365 billion to $6.465 billion, adjusted EBITDA of $1.34 billion to $1.38 billion, and adjusted earnings per share of $5.81 to $6.10. The key considerations underlying our guidance can be found on Page 11 of the supplemental slides. And with that, we'll now open the lines for Q&A.

We'll go first this morning to Matthew Gillmor of KeyBanc.

I thought I might ask a couple of questions on the volume front. The way volumes evolve this year was stronger in the first half and then moderate a little bit in the back half. I think there were some comp issues you talked about last call. I was curious if you could sort of flesh those out and then help us think through any comp issues we should be thinking about during 2026, especially the dynamic of the de novos rolling into the same-store base and that timing issue?

Yes. So certainly, in the back half of the year, we were up against some pretty challenging comps. Q3 '24 total discharges were up 8.8%, and 6.8% of that was in the same-store. And then in a similar fashion, when you moved into Q4 of last year, we were up 8.3% in terms of total discharges, and 5.8% of that was in the same-store. It was also the case that with regard to contributions from new stores, we were more skewed towards the back end of this year with new hospitals coming on board. You may recall that we had 1 hospital that opened in the last week of the third quarter and then 3 hospitals that opened in the fourth quarter, 1 in each month. And then there was the issue of the unit consolidations and closures that we talked about last quarter. And so as a reminder, we had 2 units, 1 in Sewickley, Pennsylvania, and 1 in Cincinnati, Ohio. Those were spaces that were leased from a host acute care hospital. For various reasons, we terminated the lease, and we anticipate that we'll consolidate that volume into another hospital in the market, but there's a period of time in which that's not happening. We estimated that that was a headwind of about 30 basis points to total and same-store discharge in Q3. Cincinnati actually closed relatively late in Q3, so we had a full-quarter impact in Q4. And so the impact in Q4 was probably closer to 45 basis points.

I think it's worth noting in terms of our track record of bringing on our de novos. Last year was a good example of how if we can get the Medicare survey quicker than having a long drawn-out waiting period for them to come into the survey. It certainly benefits us. Our teams have done a great job getting these hospitals staffed, getting the word out in the marketplaces, our design and construction has done the same thing. There are a lot of factors outside of our control as you go through the startup processes. But our team has just done a really nice job in delivering these hospitals pretty much when the due dates are there. So that has benefited from us in our continued planning and execution.

Got it. Understood. And then as a follow-up, I thought I might get a comment or 2 on the mix. It seemed like the Medicare fee-for-service mix was a little bit higher in the fourth quarter. Is there something you'd attribute that to? And if you had any comments on just sort of the growth across different payer classes that would be great?

Yes. Fee-for-service growth was strong in the fourth quarter. That's good because that's our best payer. We did experience some challenges with regard to Medicare Advantage in the fourth quarter, and it was specifically with 1 national payer where we saw the conversion rate drop, not insignificantly in the fourth quarter. I'm not going to name names right now. I will tell you that if this persists into next year, we may be inclined to name names. The referrals within that specific Medicare Advantage plan were actually up nicely, high single digits for the quarter, but conversion rate, which is the ratio of admits to referrals, was down significantly. And there's no reason for that. Again, as we look at the underlying nature of those referrals, they were consistent with the referrals we were getting across the system and across payers. And so what that translates into is, for whatever reason, that plan elected to start the care to a segment of the Medicare beneficiary population, which we believe is in direct contravention of Medicare coverage requirements. We're going to be undertaking some specific actions to address that as we move into Q1. That includes maintaining active communication with the subject plan and also with CMS regarding what we view as noncompliance with the Medicare coverage requirements. As we did in the fourth quarter, we think that there's going to be an opportunity to backfill with IRF-appropriate patients covered by fee-for-service, other MA plans, and the continued growth in our veterans community care network. We will ensure in terms of doing our own part that our clinical liaisons are responding timely to all referrals and doing so with high-quality medical necessity documentation. It's probably an opportunity to enhance that process with some AI tools. And we're going to be implementing an admit and appeal strategy on those MA denials that we believe are clearly in contravention of the Medicare coverage requirements. And then finally, we'll make sure that we continue to reinforce the value proposition for IRFs with the Medicare beneficiaries, making sure they understand the right of choice that they have, with referral sources, with respective patients and also with families and caregivers.

Matt, this is Pat. I would like to add a few points to what Doug mentioned. One key highlight he noted was regarding the VA program, which we have discussed previously. We are actively pursuing this initiative and have implemented some best practices and training throughout our organization, and we are very pleased with the outcomes. This program has now grown to account for 19% of our managed care volume. We have achieved our third consecutive quarter of growth in discharges within that segment, exceeding 20% for the quarter and finishing the year at a total growth rate of 22%. There is significant potential for further growth in this area, and it represents a fantastic opportunity for us to enhance IRF access for veterans. Another important point I want to address is our strategy regarding MA admissions and appeals, which is a new undertaking for us. Currently, two major payers have conversion rates lower than 20%. In some of these markets, if the patient qualifies according to Medicare coverage criteria, we will admit those patients and pursue the various levels of the appeal process. There are five levels of administrative appeals, reaching all the way to the ALJ and Federal District Court, where we will advocate for access to care.

Despite the challenges with this particular MA plan, which are not entirely new, we have observed recurring issues. There is a large population of patients suitable for IRF treatment who have not yet received it. Therefore, we have ample opportunities to reach out to these patients.

We'll go next now to Ann Hynes with Mizuho Securities.

Thank you for all the detail on some of the regulatory unknowns. That was very helpful. Can you tell us just like how these pilots usually play out? Like I know the team pilots 5 years, 2032, what typically happens after that pilot program? Like do most of these pilots just kind of die out or are they implemented nationally? If you can give us some examples, that would be great.

No. Ann, if you go back and even back to 2016, 2015, with the plans I mentioned, the CJR, there was a little bit of both in terms of people required to do it or voluntarily got into it. You saw some people really go into it strong, kind of what I would refer to on the bleeding edge. Then you saw a lot of systems kind of wait and see what happens and didn't want to get after it too far. I think it's the nice thing about our ability to work with our joint venture partners in these markets where the team will come out. We have a very collaborative approach. Pat and his team have been out talking to all the major systems in our markets impacted to see what their plans are and also to bring forth our value proposition because there's a big quality factor in teams that where the acute care hospitals will be penalized for readmissions. So that's a big part of the value that we bring in to that. So I think that, in large part, as I noted, there is typically an overreaction in terms of what people think will be the impact on our facilities. And with time, as noted, we just continue to grow through them because there are enough patients that would fall outside these plans that can benefit from the care that we provide. So I'll ask Pat just to talk a little bit about what he and his team have done, I think specifically in the Boston marketplace, where we have some team introduction.

This is Pat. Thank you, Mark. To reinforce what Mark mentioned regarding the team and to address part of your question, BPCI and BPCI Advanced were both 5-year programs that did not expand afterwards. Between those two models and CJR, we added around 4,500 beds during that time, showing significant growth despite those models. I want to highlight three key points, in addition to the VA strategy that allows us to mitigate any potential impacts and patient choice remaining. First, we have had numerous discussions in our marketplace. As Mark noted, two of our largest hospitals likely to be impacted are in the Boston area. We aren't hearing much concern from them or our joint venture partners about changing how they manage patients. They are focused on quality, length of stay, capacity issues, and readmissions, which align with our long-standing value proposition. Second, as Doug mentioned, there is a significant opportunity for us to capture other diagnostic volumes. For instance, in categories like stroke, brain injury, neuro, cardiac, and pulmonary, patients are still more likely to end up in a nursing home rather than an inpatient rehab hospital. We are actively working to enhance our market share in these areas. Lastly, from a team perspective, patients on dialysis with end-stage renal disease are exempt from team. Currently, about 4% of our volume falls into this category, but thanks to our investments in Tableau, with nearly 70% of our hospitals covered, and the rest serviced by external dialysis, we can more than double that volume across our portfolio based on current usage. Therefore, we have substantial opportunities to capture IRF-appropriate patients in various diagnosis categories or within team-affected groups as well.

And at the risk of piling on, I'll just add a couple of things. First, our anecdotal evidence, and this has been consistent for multiple months right now as we canvass the acute care hospitals in the impacted markets, is that there is very little focus on team from those hospitals. And it's perhaps not surprising as they face a substantially larger issues with regard to what's going to happen on Medicaid supplemental payments and what's going to happen with regard to the extension or the lack thereof of any ACA subsidies. Further, as we drill down and looked at the target prices that have been set for these conditions in the impacted markets, in almost all cases, regardless of the patient's condition, those target prices cannot be achieved unless the patient bypasses a post-acute inpatient stay, IRF or SNF altogether and go directly to the home. The only way that, that could be safely accomplished is if you increase the length of stay in the acute care hospital. And doing so by even a couple of days would completely erase any of the participation in the risk corridor.

And one last comment on this. We've done an analysis early. It's 1 month, but there's been no impact of team associated diagnosis categories within our team impacted markets. So it's really been no impact to volume.

We'll go next now to Andrew Mok of Barclays.

There was a pretty meaningful beat on labor costs in the quarter with improvements in both wage growth and EPOB. Can you help us understand the drivers of that in the context of moderating volume growth?

Andrew, just real quick. I think it's kind of twofold. I'll ask Pat to talk specific about premium pay. But I think we're seeing some softening in the labor markets as a whole, which has been a positive thing for us for the last year or so. And then I think, secondly, while we've always been very disciplined around the use of premium pay and managing our staffing ratios, Pat has really dug in with his team to look at some of the outliers we had with our portfolio, and it's been meaningful. So Pat, do you want to give some detail?

Yes. I want to acknowledge a few different groups. First, our operators have done an excellent job of reducing turnover, which has fallen to pre-pandemic levels. Simultaneously, our centralized talent acquisition team has been very effective in hiring. We added 300 net registered nurses in 2025 from a same-store perspective, bringing our four-year total to approximately 1,700. Both teams have done a fantastic job. While we expect the rate of improvement to slow, we see an opportunity to potentially reduce the gap in pay variation in some of our high-utilization markets, especially regarding premium pay. In our ten most challenging markets, which account for a significant portion of our expenditure, we are significantly increasing our recruitment efforts and marketing to improve hiring in those areas where it has been slower. Notably, all the growth we've achieved in new markets has been accomplished without using contract labor. We are reallocating some resources usually designated for opening and staffing a hospital to apply the same approach in these more difficult markets. On the EPOB front, despite some minor timing issues with new openings, we are committed to maintaining operational discipline in our regions and local markets, ensuring we do not compromise on quality outcomes or clinical excellence. Mark mentioned our discharge outcomes, which reached record levels in 2025 along with patient satisfaction. We managed to make additional efficiencies while continuing to prioritize clinical quality.

And then just to go through the specifics on the Q4 labors, as we mentioned, total SWB per FTE in Q4 was up 2.1%. The composition of that core SW, which does not include contract labor per FTE, was up 2.8%. Benefits, again, anniversarying the substantial increase in Q4 of last year was up 2.9%, and premium labor was down year-over-year $5.8 million. The EPOB came in at 3.38. That was better than our expectation, and that was largely attributable to the fast ramp-up of the de novos that opened in 2025. And as we cited during our comments previously, that was boosted in Q4 by the fact that we got our Medicare certifications on those openings faster than we had anticipated. We don't control that, so we can't guarantee it's going to happen on future openings, but it was a lift in Q4. Importantly, we were able to achieve all of these things with regard to our labor cost while holding nursing turnover at 20.2% for the year and therapy turnover at 7.8%.

One last comment here that I failed to mention is, we have talked about this before, but we have made a substantial investment in the development of clinical ladders and tweaking those to increase participation. Because if we can get a clinician on the ladder, their turnover is about 1/3 of what a non-laddered clinician is. And I'm really, again, proud of our operators. We have our nursing participation up to 32%. 36% of our therapists and 47% of our nurse techs are participating on our clinical ladders. Again, we still see upside here, but we're really pleased with our progress.

Great. Just to confirm, the improved labor and earlier Medicare certifications are what are contributing to the better-than-expected pre-opening costs, right? Is there anything else?

No. Again, you had not only that impact from Q4, which was predominantly where it was, but the performance of the de novos that opened in 2025 prior to Q4, in Q4 was favorable, and we cited a number of those, 4 of those actually had positive 4-wall EBITDA in Q4.

We'll go next now to Pito Chickering of Deutsche Bank.

So I apologize in advance for this one, but I want to go in the weeds and talk about the Alabama RCB experience. From a process perspective, can you explain with the 93% affirmation rate, what happens with 77% of claims that weren't affirmed? When you appeal at 7%, so what percent of those are you winning? And when you appeal to the administrative law judge level, what percentage of those are you winning? So at the end of the day, after you peel and go to the ALJ, what percent of these claims do you guys need to reserve for?

Well, you were in line. You were down in the weeds. Let me first kind of pull us up a little bit, and then I'll see if I can get down to that level. So first of all, there's a perception out there that both team and RCD represent new risk to IRFs. And Mark referred to some of this. In our opinion, they do not. They are ordinary course of business. We have lived continuously with episodic payment models since 2014. And CMS has always had the right to audit 100% of IRF Medicare claims on both a prepayment and post-payment basis. And they have done so under a series of programs such as TPE, ADR, RACK, SMRK, etc. RCD is just a new acronym for the same old thing. The Medicare coverage requirements under RCD have not changed. The documentation requirements under RCD have not changed. And the third parties performing the RCD audits have not changed. The potential upside to RCD is that if we choose to remain on a 100% review, and Mark alluded to this in his comments, it potentially obviates the other audit programs. Moving specifically to Alabama. 93% is the current affirmation rate for the 7 hospitals in Alabama, where we're dealing with a difficult MAC who continues to non-affirm claims for reasons that are in contravention of Medicare coverage requirements and guidelines. As a result, we appeal the overwhelming majority of non-affirm claims through the multiple levels available to us. And although it's still early to call the ultimate resolution rate because those claims are still pending and because the sample size is relatively small, we're having a good success reversing the denials. We continue to educate Palmetto, and we continue to involve CMS, and we believe that it is more likely than not that that 93% affirmation rate moves up. When we look at the Pennsylvania experience, it covers more hospitals, and we believe that that rate, 98% to 99% is more representative of where a broadly adjudicated RCD program will land. And so all of that suggests to us that the go-forward bad debt expense rate that we experience is going to be consistent with our recent historical experience, thus the 2% to 2.5% number that is included in our 2026 guidance.

Just 1 quick addition on RCD in Alabama, not necessarily on the bad debt front, but just on the volume and occupancy front. So virtually, again, no impact here. We have expansions that will be underway at 3 of our Alabama hospitals. We're going to be filing for the CON for 3 additional expansions. So that covers 6 of the 7 hospitals in the state. So on the volume side, unimpacted.

Look, Palmetto is a pain in the butt in Alabama. They were a pain in the butt before RCD.

Okay. Fair enough. That's a pretty honest response. A follow-up question that you discussed earlier. I think you mentioned that the referrals were up in the high single digits, but admissions were significantly down. Can you explain what you are seeing from MA in terms of the conversion ratio this quarter? Additionally, from a legal standpoint, how much leeway does MA have to deny post-acute care?

Yes. So I'll start and then maybe pass it over to Pat. So historically, our total MA conversion rates have run between 25% and 30%, and that's going to compare to Medicare fee-for-service, which is the same patient population, subject to the same Medicare coverage requirements, which has run in the mid-60%. And so that's been a problem all along. A particular payer who shall remain unnamed for at least this quarter has always been our lowest conversion rate, but they dropped by about 500 basis points in the quarter. This is, again, in contravention of Medicare requirements. So we do have the ability to take this directly to CMS. Because the change was so material in Q4, our first order of business is going to be to try to work directly with the plan itself and say, is there something different, is there something that we can do better to try to do that in partnership? But we're not going to wait and see the effect of that before we get more aggressive with this admit and appeal strategy that Pat outlined just a bit earlier.

What I would add is that Medicare Advantage is required to operate under the same coverage criteria as traditional fee-for-service Medicare. They can have a prior authorization requirement, which they do, but they are expected to follow those same coverage criteria. What we observe regularly, and this is not new, is the noncompliance with the Medicare coverage criteria. We usually manage that, but it has become frustrating for our referral sources, for us, and most importantly, for the seniors in this country who deserve our high level of care. Therefore, we have determined that there currently are no consequences for not adhering to the Medicare requirement. We are going to pilot taking claims that align with the Medicare coverage criteria through the administrative appeal process, through the Administrative Law Judge, and possibly further. We are hopeful about this approach and are committed to ensuring that seniors have access to our level of care in this country.

I think it's important to note as well, perhaps another silver lining out of RCD is that the affirmation rates that we're seeing in Alabama and that the others are seeing in Pennsylvania suggest that under fee-for-service, which has that much higher conversion rate, the overwhelming majority of patients are appropriate for IRF care, which means that those that are being denied that access by Medicare Advantage are being done so, again, in contravention of Medicare coverage requirements.

We'll go next now to Whit Mayo of Leerink Partners.

Doug, just wanted to take your temperature on leverage and how you're thinking about the appropriate target. You're going to probably drift below 1.5x soon. Just any thoughts on upping the dividend more, stepping up buybacks on a permanent basis, maybe buying up leases? Just any updated views would be helpful.

Yes. So maybe what we can do is kind of use our guidance to 2026 as a proxy for what things might look like. And so if you look at our free cash flow assumptions, the midpoint of those assumptions is right at about $828 million. Again, using the midpoint of other ranges within our growth CapEx, that's up $725 million. The dividend at its current level is $77 million. So that would suggest, again, if we are achieving our midpoint of EBITDA guidance and our midpoint of the free cash flow that we would fund those uses internally and still have about $25 million of cash. And that would leave us, all other things equal, at the end of 2026 with a leverage ratio of 1.83x. And that implies even if you wanted to be conservative and leave leverage at, say, 2x that there would be capacity for another $230 million to $250 million of buybacks or other distributions. There really aren't other opportunities to buy back leases. So I think to the extent that we generate excess cash and have capacity within the leverage ratio, the most likely utilization of that is going to be additional share repurchases and increases in the dividend.

Okay. And then we haven't heard much about malpractice from you guys. Some of the other providers have been talking about it more. Just how did that develop in 2025, thoughts on 2026? You've got this new reasonable care standard change, I think, with malpractice. Does this change your views at all how you're thinking about it?

Yes. We've seen no significant change in our GPL activity from 2024 to 2025.

We'll go next now to A.J. Rice of UBS.

This is James on for A.J. I just wondered if you can give us some color on the rationale behind the changing development as you look to add these small format hospitals and what advantages this type of hospital provides versus the traditional de novos?

Yes. So it's the confluence of design and opportunity maybe with a dose of necessity cost in. And so from a design perspective, historically, we had trouble coming up with an economically feasible model that would be in the size range that we're talking about. But as we have ascended the learning curve regarding our de novos, really, over the past 5 or so years, and have been able to incorporate more in the way of prefabricated construction, whether in a hybrid model or fully, it's helped us kind of crack the code on this 24-bed prototype. It solves an issue for us where we've got 1 or 2 situations. One is, we've got an existing hospital in a market that doesn't have any more physical ability to expand, and yet the demand of the market suggests that more beds are needed. And so this is an economically feasible way of adding more capacity into that market even on a chassis that can't be expanded. It's also the case that as we find in a lot of larger metropolitan markets in Dallas and Houston and Tampa or 3 that come immediately to mind, that the overall market is growing, but based on traffic patterns and based on the growth in specific neighborhoods and geographies, the additional beds might best be positioned elsewhere in the market as opposed to in the existing hospital. So again, the standard format that we have come up with, and the first will open in 2027, is what we acquire 2 to 2.5 acres based on specific topography. It is a single-story 24-bed chassis. It's got a smaller kitchen because there's no food preparation on site. Obviously, the gym is smaller because we've got fewer patients. And we're able to leverage the management team and the marketing resources associated with the host hospital. So the returns are very favorable.

Market density is a big part of the strategy. Not only do you get scale from staff, but you get brand recognition in the marketplace, which helps us with staffing as you have the employees and the workforce there starts to become more and more familiar with Encompass Health. We've seen that in markets. It gives us an opportunity to provide growth opportunities for our existing staff and management teams. So that helps with retention and also decreases the risk as we add another location in the marketplace. So we think there are a lot of benefits from the small format hospital. And as I noted, it's just yet another modality that we have to add capacity in a marketplace where the need is pointing out the required capacity. So we've got some strong plans going out in the future on this, and we think it's going to be really helpful as we expand that capacity.

And it's important to note that because all of these small-format hospitals will be remote locations, meaning that they are tied to a host hospital, they operate under the same Medicare provider number, which in almost all cases means that managed care contracts and so forth can be extended and don't have to be renegotiated. It also means that you're not subject to another Medicare certification. And so you don't have to do the 33 patients and the ramp-up there.

This is Pat. I want to mention that we currently have three locations. While they aren't officially classified as small format hospitals, they function similarly and serve as satellites to a main location. They deliver impressive results and returns, so we have some experience with this operational model. This approach is a fantastic opportunity for us to expand nationwide. We have numerous potential locations that we are considering. We previously discussed expanding in larger growing markets, but also in underserved or fringe markets where we have a hospital, as these areas might have nearby locations within 30 miles that lack the patient density required for a new hospital but could benefit from a smaller facility. We can still leverage the advantages that both Mark and Doug mentioned. We are genuinely excited about this initiative, as it will play a significant role in our strategy going forward, allowing us to help patients while also enhancing our returns.

We'll go next now to Joanna Gajuk of Bank of America.

So I guess I have 2 questions. So I want to start a follow-up on the team discussion. And then I have a question on volumes. So first on the team, so thanks for sizing up the exposure here. So 2% of volumes seems very manageable, and you expect to be able to replace any lost volumes. So that's good. But just a couple of questions as we try to like do sum up maybe in the future, too. So are these procedures that are included in the team model in the 5 categories coming at an average revenue per discharge that's much different than average? Any kind of direction would be helpful here. And it sounds like I just want to clarify, you don't assume much of an impact, I guess, to bottom line this year. But I just want to make sure like is there some sort of a number in terms of EBITDA headwind that you included in your '26 guidance? And with that comment around the acute hospitals not taking risk in year 1, but would you expect things to change dramatically over time as these hospitals take more risk in the future years?

So Joanna, this is Doug. I'm going to start with the margin and then I'll pass it to Pat for the remainder. There isn't a significant variation in margins across our patient categories. While reimbursement is linked to RIC and patient acuity, when you examine individual patients, you also need to consider factors like comorbidity. Although higher reimbursements often come with more acute patients, this is largely because they need more intensive care and typically have a longer length of stay. Therefore, there isn't a noticeable difference in the margin profiles of patients potentially involved in this demonstration compared to our other patients.

Thanks, Doug. From a margin perspective, Doug is absolutely correct. We do not foresee any impact on margin. In terms of net revenue per discharge, most of these are in line with our average. The only two that are slightly higher are related to lower extremity fractures and hip fractures, but we do not expect this to be material. This is already reflected in our 2026 guidance, and we feel positive about our opportunities to backfill. Additionally, the majority of our team-impacted markets have fewer than 10 discharges associated with the team's diagnosis. Almost all of our team impact is linked to 50 markets, half of which are joint ventures. We have accounted for this in our guidance and believe we are prepared to manage any issues that may arise; however, we are not hearing of any changes in referrals or admissions in our markets.

I will note also just further on the margin issue. Part of the reason that you get to that parity with our average revenue per discharge on those particular categories that are subject to team is because those specific patients have more comorbidities that would make them less likely to actually be a participant within the team model in terms of diverting their care away from the IRF because they really need to be in that intense setting.

Joanna, if you're talking about overall volume and just on a RIC basis, we did see nice growth in brain injury up 8.7%, cardiac up 5.1%, neuro 4.5%. Major trauma was up 5%, and stroke was up 3.8%. So again, broad-based growth across diagnosis categories. From a mix perspective, with brain injury being our third largest discharge RIC category, that was up 40 basis points to be our largest mover. So again, that's something we're pretty excited about, especially given that it's not a team impacted diagnosis.

We'll go next now to Brian Tanquilut of Jefferies.

Maybe, Mark, as I think about concerns that are emerging on Medicare Advantage rates and how that could potentially translate to payer pressure on providers. I mean, how are you thinking about that dynamic? And what are those discussions like with payers as you think about your scale and local market power?

We always prioritize our outcomes as part of our value proposition, and I don't see this changing in the future. The concerns, especially regarding team dynamics and the quality issues with payers, particularly related to readmission rates to acute care hospitals, emphasize the importance of post-acute care providers like us who can effectively manage higher acuity patients and maintain a low readmission rate. We are very focused on presenting our data and outcomes. When we meet with payers or their medical directors, it is beneficial to demonstrate the advantages of an Encompass Health Hospital compared to nursing homes or other IRF providers. I don’t believe our strategy will change; rather, we now possess more data and information than we did five or ten years ago, which strengthens our competitive edge.

What is happening out there is the rate of growth in terms of new MA beneficiaries has declined very substantially. And if you listen to some of the dialogue in response to some of the rate updates and so forth coming out of the major plans, they are stating that they're intending to exit more geographies with regard to their MA plans, which is going to shift those patients over to fee-for-service, and that's not a bad outcome for us.

We'll go next now to Jared Haase of William Blair.

Maybe I'll just stick to one as well. You mentioned the expanded relationship with Palantir. So I'll ask on the technology front. It sounds like you've had some wins around administrative work and revenue cycle management. I guess 2 questions. Number one, just be curious if there's any kind of quick ways to quantify sort of cost savings or other metrics that you track in terms of that deployment? And then as you think about expanding that initiative, is that still broadly around areas that I would bucket under, let's say, revenue cycle management? Or are you seeing other areas of the business to optimize maybe around clinical care and patient experience?

Yes. So on the first, it is difficult to assign a specific ROI to the work that they're doing. But hopefully, what it's going to mean is that our success on claims denials is going to continue to improve. The manpower that we need to process those denials is going to decrease and can be shifted elsewhere. So there are going to be some real tangible benefits. In terms of new projects that we're working on, we are going to be focusing on CRM market analysis specifically to help us identify the optimal strategy for positioning in a market in terms of de novos. De novos with expansion capabilities and the use of small format hospitals. Revenue cycle management is something that we'll be looking at later this year, and clinical staffing is another one that's on the table.

Just to add to that, we're looking for opportunities on the upside to enhance and elevate our clinicians. You talked about clinical care and patient experience in your question. I think that is certainly a goal of ours. People don't go to medical school or nursing school or therapy school to become great at documenting and document for half of their shift. So we'll continue to evaluate opportunities to allow our clinicians to do what they do best and have to take care of patients.

We'll go next now to Raj Kumar of Stephens.

Just one quick one. As we kind of think about in the first quarter and maybe any potential impacts from the winter storm. I see that in your disclosures that one of the facilities that may have been slated for the first quarter was pushed back to the second quarter. So just curious maybe if there's anything embedded in guidance related to any potential winter storm impacts and how we should be thinking about that?

No significant impact from the storm. However, I do want to highlight that we have two other closures that will affect Q1 as well. The first is that since we acquired the facility in Lexington, Kentucky, Cardinal Hill, we have operated a 75-bed skilled nursing facility unit. It was the only skilled nursing unit we had and operated at a low average daily census of 25. Both the beds and the average daily census were included in our inpatient rehab facility bed count and discharge numbers. This unit was not profitable and we closed it at the end of December, which will have some carryover effects. There will also be continued impacts, although they are lessening, from Cincinnati and Sewickley. Additionally, we have another unit consolidation occurring in Bridgeport, West Virginia, located in the Morgantown market, which is situated within an acute care hospital and is at the end of its lease. We will be closing that unit effective February 28. If we do not pick up volume elsewhere in the market as we approach 2026, this will create about a 70-basis-point headwind for 2026 discharge growth, all of which is same-store. We believe we will be able to mitigate between 35 and 40 basis points of that.

We will go next now to Parker Snure at Raymond James.

I was just wondering if you could give some detail just on your outlook on provider taxes or supplemental payments. Maybe just remind us your total exposure there and then just your outlook for '26 and then maybe some potential upside from the few pending programs, particularly in Florida, that you may get some benefit from. Maybe just talk broadly about supplemental payments and kind of your thoughts there.

Yes. So the EBITDA impact from net provider taxes for this year was about $21 million, and a little over $3 million of that was out of period. I think a core assumption is that, that would stay relatively flat as we move into 2026. And by the way, that $21 million compared to an EBITDA contribution of $15.5 million last year, with a comparable amount being out of period.

And gentlemen, it appears we've answered all the questions today. Mr. Miller, I'd like to turn things back to you, sir, for any closing comments.

Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.

Thank you, everyone. Again, that does conclude Encompass Health's fourth quarter earnings conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.