Encompass Health: Building a Fortress in Long-Term Care Through Strategic Expansion and Operational Excellence

Encompass Health (NYSE:EHC) has emerged as a standout performer in the U.S. healthcare sector, leveraging strategic growth initiatives, operational discipline, and a focus on Medicare Advantage expansion to outpace peers. Recent earnings results, analyst upgrades, and a robust capital allocation plan underscore its resilience in an evolving market. This article explores why Encompass Health is positioned to capitalize on long-term care demand while navigating near-term cost pressures.

Q1 2025 Earnings: A Catalyst for Growth

Encompass Health reported a 10.6% year-over-year revenue surge to $1.46 billion in Q1 2025, exceeding analyst estimates by 1.8%. Net income jumped 35% to $152 million, while adjusted EPS rose 22% to $1.37, comfortably beating forecasts. The company also raised its full-year guidance, projecting revenue of $5.85–5.925 billion and adjusted EPS of $4.85–$5.10—up from prior expectations.

Medicare Advantage: A Key Growth Lever

While Encompass Health's Q1 results highlighted strength in Medicare Fee-for-Service and commercial payers, its Medicare Advantage expansion strategy is a critical underpinning of long-term growth. Medicare Advantage discharges now account for 20% of total discharges, up from under 9% in 2018, driven by strategic payer partnerships and clinical outcomes. The company has narrowed the reimbursement gap between Medicare Advantage and Fee-for-Service to less than 2%, down from over 25% previously, by shifting contracts to episodic payment models.

Encompass Health is also deploying predictive analytics to identify high-risk patients and reduce readmissions to acute care settings. This focus on value-based care aligns with Medicare Advantage plans' priorities, enabling higher patient retention and conversion rates.

Operational Efficiency: The Engine of Margins

The company's margin expansion is fueled by operational efficiency gains, including:
- A 33% drop in contract labor costs due to improved workforce planning.
- Lower clinical staff turnover, reducing recruitment and training expenses.
- Higher occupancy rates, reaching 78.8% in Q1 2025—a record high—thanks to private room investments (now 56% of its portfolio).

These improvements pushed adjusted EBITDA margins to 21.5%, up 80 basis points year-over-year.

Capital Allocation: Building for the Future

Encompass Health is executing a disciplined bed expansion plan to capitalize on underpenetrated markets. In 2025 alone, the company aims to:
- Open seven de novo hospitals (340 beds).
- Add 100–120 beds to existing facilities.
- Launch a 50-bed satellite hospital in partnership with acute care providers.

These investments target regions with aging populations and supply-demand imbalances, such as Florida and Texas. By 2027, Encompass Health plans to add 6–10 hospitals annually, bolstering its 167-hospital footprint and reinforcing its leadership in inpatient rehabilitation.

Analyst Sentiment: Bullish and Growing Stronger

Analysts have upgraded Encompass Health aggressively in 2025, with price targets rising across the board:
- Bank of America Securities raised its target to $140, citing Medicare Advantage traction and margin resilience.
- UBS increased its price target to $130, highlighting execution risks as “manageable” amid strong demand.
- KeyBanc and Truist now project targets of $135, emphasizing scalability and demographic tailwinds.

The average price target stands at $131.56, implying 10.4% upside from current levels. Analysts note Encompass Health's low execution risk compared to peers, given its proven track record of integrating new hospitals and managing labor costs.

Near-Term Risks: Manageable in a Favorable Landscape

While Encompass Health faces headwinds like rising labor costs (+7.2% year-over-year in Q1) and potential reimbursement rate changes, management has mitigated these risks through:
- Economies of scale from expanded operations.
- Pre-negotiated material contracts to avoid tariff impacts.
- A diversified payer mix (Medicare: 45%, commercial: 35%, others: 20%), reducing dependency on any single reimbursement stream.

CEO Mark Tarr emphasized in the Q1 call: “Our focus on cost discipline and clinical excellence ensures we can navigate these pressures while maintaining margin growth.”

Investment Thesis: A Long-Term Play on Aging Demographics

Encompass Health's 7.0% annual growth in discharges through 2027 aligns with the 73 million Medicare enrollees expected by 2030—a demographic tailwind with no near-term end. With a strong balance sheet ($288.6 million in Q1 operating cash flow) and a 21.5% adjusted EBITDA margin, the company is well-positioned to fund expansions while rewarding shareholders.

Conclusion: A Compelling Opportunity

Encompass Health combines operational excellence, strategic payer diversification, and prudent capital allocation to outperform peers in a growing but fragmented market. While near-term labor costs warrant monitoring, the company's execution track record and analyst upgrades suggest it will continue to deliver. For investors seeking exposure to long-term care's structural growth, Encompass Health is a must-watch stock, particularly at current valuations.

Final Take: Buy EHC for its fortress balance sheet, scalable growth, and dominant position in a $1.2 trillion healthcare segment. Monitor Medicare reimbursement updates and labor trends, but stay long-term bullish.