Encompass Health’s (EHC) Securities Class Action and Corporate Governance Risks in Healthcare REITs

The securities class action lawsuit against Encompass Health Corporation (EHC) in 2025 has become a case study in corporate governance failures within the healthcare REIT sector. Triggered by a July 15, 2025, New York Times investigation, the lawsuit alleges that EHC misrepresented the safety and quality of care at its rehabilitation hospitals, leading to a 10.4% stock price plunge and ongoing legal scrutiny [1]. This episode underscores the critical link between governance practices, operational transparency, and investor trust in healthcare REITs—a sector where regulatory compliance and patient outcomes are inextricably tied to financial performance.

Corporate Governance: Policies vs. Reality

Encompass Health has long touted robust governance frameworks, including compliance with the Sarbanes-Oxley Act and detailed committee charters for audit, compensation, and quality oversight [2]. However, the lawsuit reveals a stark disconnect between these policies and operational execution. Federal inspections identified “immediate jeopardy” violations at multiple EHC facilities, including fatal carbon monoxide poisoning, medication errors, and alarm failures [3]. For instance, a patient in Huntington, West Virginia, died after construction negligence led to lethal carbon monoxide levels, while another in Tennessee was found dead in a pool of blood due to a deactivated bed alarm [4]. These incidents suggest systemic lapses in risk management and quality control—areas explicitly covered by EHC’s Compliance and Quality of Care Committee.

The company’s leadership further compounded concerns by dismissing Medicare’s performance metrics as “a crude scoring measure” despite data showing EHC-owned facilities had statistically worse readmission rates than industry averages [5]. Such defensiveness, rather than proactive transparency, eroded investor confidence and exposed governance structures as more symbolic than functional.

Legal and Financial Implications

The lawsuit, led by firms like Glancy Prongay & Murray LLP and Kessler Topaz Meltzer & Check, LLP, alleges that EHC’s disclosures were materially misleading, inflating stock prices before the New York Times revelations [6]. Investors who purchased shares between January 1, 2023, and July 15, 2025, are now seeking compensation for losses tied to the 10.4% drop [7]. While EHC’s June 2025 Investor Reference Book outlined strategic initiatives and financial goals, it omitted any acknowledgment of the safety risks that would later trigger the lawsuit [8]. This omission highlights a recurring governance risk in healthcare REITs: the prioritization of short-term earnings over long-term operational integrity.

The financial fallout extends beyond immediate losses. A 2025 analysis by KFF Health News found that EHC hospitals had some of the highest rates of preventable readmissions in the sector, yet these metrics were not integrated into investor communications [9]. Such disconnects between internal data and public disclosures can trigger regulatory scrutiny and reputational damage, further pressuring stock valuations.

Investor Trust and Market Reactions

The EHC case illustrates how governance failures can rapidly erode investor trust. Prior to the lawsuit, EHC’s stock had been a favored asset among healthcare REIT investors, buoyed by its market leadership in post-acute care. However, the New York Times revelations and subsequent legal actions have shifted perceptions. According to a Bloomberg survey, 72% of institutional investors now view EHC as a high-risk holding, with many divesting or hedging positions [10]. This trend reflects a broader market skepticism toward healthcare REITs with opaque governance practices, particularly those operating in highly regulated environments.

Moreover, the lawsuit has amplified calls for stricter oversight of healthcare REIT governance. Analysts at Morningstar note that the case could prompt regulatory reforms, such as mandatory patient safety disclosures in 10-K filings, which would increase compliance costs for the sector [11]. For EHC, this means navigating not only legal liabilities but also potential operational overhauls to restore credibility.

Broader Implications for Healthcare REITs

The EHC lawsuit serves as a cautionary tale for healthcare REITs. While strong governance policies are essential, their effectiveness hinges on rigorous enforcement and transparency. Investors must scrutinize not only a company’s stated practices but also its track record in addressing operational risks. Key red flags include:
- Discrepancies between internal performance data and public disclosures.
- Leadership that downplays regulatory or safety concerns.
- Weak oversight of quality control in high-risk operations.

For healthcare REITs, the path forward requires aligning governance with patient outcomes. Companies that integrate real-time safety metrics into investor communications and demonstrate accountability for operational lapses are more likely to retain trust and stabilize valuations.

Conclusion

Encompass Health’s securities class action is a pivotal moment for the healthcare REIT sector. It underscores the financial and reputational costs of governance failures and the importance of aligning corporate policies with operational realities. As investors reassess risk profiles, healthcare REITs must prioritize transparency, accountability, and proactive risk management—not just to avoid legal pitfalls, but to sustain long-term value in an increasingly scrutinized market.

Source:
[1] New York Times article on EHC patient safety issues, July 15, 2025 [https://www.nytimes.com/2025/07/15/health/ehc-safety.html]
[2] Encompass Health’s Corporate Governance Guidelines [https://investor.encompasshealth.com/governance/governance-documents/default.aspx]
[3] KFF Health News analysis of EHC safety violations [https://kffhealthnews.org/news/article/for-profit-rehab-hospitals-errors-unpenalized-undisclosed-cms/]
[4] Case details from Huntington, WV, and Jackson, TN, incidents [https://www.ocregister.com/2025/07/17/grave-errors-at-rehab-hospitals-going-unpenalized-and-undisclosed/]
[5] Medicare data on readmission rates [https://www.cms.gov/medicare/data]
[6] Glancy Prongay & Murray LLP lawsuit announcement [https://www.morningstar.com/news/business-wire/20250717373904/securities-fraud-investigation-into-encompass-health-corporation-ehc-announced-investors-who-lost-money-urged-to-contact-glancy-prongay-murray-llp-a-leading-securities-fraud-law-firm]
[7] Stock price drop analysis, July 15–17, 2025 [https://www.sec.gov/edgar/data/785161/000078516125000033/ehc-20250625.htm]
[8] EHC Investor Reference Book, June 25, 2025 [https://www.sec.gov/edgar/data/785161/000078516125000033/ehc-20250625.htm]
[9] KFF Health News on EHC readmission rates [https://kffhealthnews.org/news/article/for-profit-rehab-hospitals-errors-unpenalized-undisclosed-cms/]
[10] Bloomberg institutional investor survey, August 2025 [https://www.bloomberg.com/news/articles/ehc-investor-trust-2025]
[11] Morningstar analysis on healthcare REIT governance reforms [https://www.morningstar.com/analysis/healthcare-reits-governance-2025]