Encompass Health Corporation: Legal Storms and the Fragile Valuation of a Healthcare Giant

The recent turmoil surrounding Encompass Health Corporation (EHC) underscores a critical juncture for investors. A July 15, 2025, exposé by The New York Times revealed systemic patient safety failures at EHC’s rehabilitation hospitals, including “statistically significantly worse rates of potentially preventable readmissions” and incidents like carbon monoxide poisoning and medication errors [1]. The article triggered a 10.3% stock price drop, erasing $1.2 billion in market capitalization [2]. While EHC’s Q2 2025 financials showed robust revenue growth and adjusted EBITDA of $318.6 million [3], the litigation and reputational damage now loom as existential threats to its long-term valuation.

Legal Risks: A Perfect Storm of Misleading Disclosures and Insider Trading

The securities class action lawsuits against EHC allege that the company concealed operational risks, including declining patient mix and regulatory shifts from the Centers for Medicare & Medicaid Services (CMS), in its Q4 2024 and Q1 2025 earnings reports [4]. These omissions, coupled with insider trading by executives—most notably CFO Douglas Coltharp, who sold millions in shares during Q2 2025—have raised serious questions about corporate governance [5]. The litigation, led by firms like Rosen Law Firm and Kirby McInerney LLP, could result in settlements exceeding $250 million, a precedent seen in similar healthcare sector cases [6].

Reputational Damage: A Systemic Crisis in the For-Profit Model

The New York Times revelations have amplified scrutiny of EHC’s business model, which relies heavily on inpatient rehabilitation services for Medicare beneficiaries. The article highlighted a “culture of silence” around patient harm, with internal data suggesting preventable readmissions were 20% higher than industry averages [1]. This has not only eroded public trust but also intensified regulatory pressure from CMS, which is reevaluating reimbursement policies for facilities with poor safety records [7]. For EHC, whose revenue is 60% tied to Medicare and Medicaid [3], such shifts could materially impact profitability.

Financial Resilience vs. Legal Uncertainty

EHC’s Q2 2025 results—12% revenue growth and a 17.2% increase in adjusted EBITDA—demonstrate operational strength [3]. However, these figures mask the volatility introduced by the litigation. A would reveal whether the market has stabilized or if further declines are likely. The company’s $270.2 million in operating cash flows [3] could cushion short-term losses, but prolonged legal battles and potential fines may strain liquidity.

The Path Forward: Transparency and Adaptation

For EHC to regain investor confidence, it must address two critical issues:
1. Disclosures: The company must proactively share data on patient safety improvements and regulatory compliance to counteract the New York Times narrative.
2. Governance: Steps to reinstate trust in leadership, such as independent audits or board restructuring, will be essential to mitigate insider trading concerns [5].

The healthcare sector’s regulatory environment is evolving rapidly, and EHC’s ability to adapt to CMS reforms will determine its survival. While its financials remain strong, the litigation and reputational damage have created a valuation gap that cannot be ignored.

Source:
[1] Encompass Health Corporation (NYSE: EHC) Securities ... [https://www.ktmc.com/encompass-health-corporation-investigation]
[2] Navigating the Storm: Encompass Health's Legal Challenges and Investor Implications [https://www.ainvest.com/news/navigating-storm-encompass-health-legal-challenges-investor-implications-2508/]
[3] Encompass Health reports results for second quarter 2025 [https://www.encompasshealth.com/press-releases/encompass-health-reports-results-for-second-quarter-2025]
[4] Navigating the Storm: Encompass Health's Legal Challenges and Investor Implications [https://www.ainvest.com/news/navigating-storm-encompass-health-legal-challenges-investor-implications-2508/]
[5] Encompass Health's Legal Exposure and Shareholder ... [https://www.ainvest.com/news/encompass-health-legal-exposure-shareholder-implications-assessing-material-risk-ongoing-securities-class-action-2508/]
[6] Encompass Health Corporation EHC Faces Securities ... [https://www.claimdepot.com/investigations/encompass-health-corporation-securities-2025]
[7] Encompass Health Corporation [https://www.kmllp.com/cases-investigations/encompass-health-corporation]