Encompass Health Corporation (NYSE: EHC) posted solid revenue growth in the fourth quarter of 2018, despite an ongoing Department of Justice (DOJ) investigation, continued hurricane recovery efforts and uncertainty about future home health payment changes. Volume growth within the Birmingham, Alabama-based company’s home health and hospice segment was a driving factor in its success.
Encompass Health is the largest owner and operator of in-patient rehabilitation facilities (IRFs) and the fourth-largest provider of Medicare-certified home health services in the United States. While the overall company is based in Birmingham, its home health and hospice segment is headquartered in Dallas.
In Q4 of 2018, Encompass Health’s net operating revenues grew to nearly $1.1 billion, up 8.6% from the same period in 2017, according to its latest earnings report released Thursday. For the year, revenue grew 9.3% from 2017, to nearly $4.3 billion.
Home health and hospice services accounted for $250.3 million of the company’s consolidated quarterly net operating revenue. That’s up 21.3% from 2017, when the segment brought in a Q4 net operating revenue of $206.4 million. For the year, Encompass Health’s home health and hospice segment revenue grew 20.5%, to $931.1 million.
Volume growth within home health and hospice is largely to credit, according to company leadership. Encompass Health added 23 home health locations and 22 hospice locations in 2018, with many of those coming as a result of the acquisition of Camellia Healthcare. Meanwhile, four of those home health locations and two hospice locations were added in Q4.
The segment also saw admissions growth of 10.7% and same store growth of 5.4%.
Additionally, the company’s full-year 2018 adjusted free cash flow grew to $538.1 million, up 14.8% from the year before. Executives attributed the bump to increased adjusted EBITDA — which reached $221.8 million, a 6.5% increase year-over-year — and favorable working capital changes.
However, the company saw its income from continuing operations attributable per diluted share drop significantly — by 57.4% year-over-year — due to loss of contingencies of $52 million and ongoing settlement discussions of $48 million with the United States Department of Justice over a class action lawsuit involving alleged fraudulent Medicare and Medicaid claims.
“This investigation has been pending since 2013, and we’ve cooperated fully,” Encompass Health President and CEO Mark Tarr told investors on a Friday conference call. “We are not aware of any evidence of fraud, falsity or wrongdoing, however based on recent discussions with DOJ and having considered the burdens and distractions associated with continuing the investigation and the likely cost of future litigation, the company now estimates a settlement value of $48 million dollars.”
“Given the sensitive and confidential nature of the discussions, we can’t say more about it at present,” he added.
Investors shouldn’t be overly concerned about the settlement, Stephens analysts stated in a post-call note. Instead, they should see it as a “cost of doing business” with Medicare and not an indication of corporate malfeasance.
On the call, Tarr also reiterated 2019 goals outlined earlier this year.
Those include spending $50 to $100 million to grow and acquire new home health and hospice locations and continuing to push back on the Patient-Driven Groupings Model’s widely opposed behavioral adjustments.
Encompass Health’s stock was down 4.56% near end-of-day trading on Friday, trading for $65.28 per share.
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