Encompass Health's Strategic Expansion in Texas: A High-Conviction Growth Play in the Inpatient Rehabilitation Sector

The U.S. inpatient rehabilitation sector is on fire—and Encompass Health (ENHC) is leading the charge in Texas, a state poised to become the epicenter of this growth. With an aging population, rising chronic disease prevalence, and a critical shortage of rehabilitation beds, the company's strategic expansion into Texas represents a high-conviction play for investors seeking exposure to a sector with decades of tailwinds.

The Texas Opportunity: A Perfect Storm of Demand

By 2035, inpatient rehabilitation discharges in the U.S. are projected to hit 31.9 million, with over half of patients aged 65 and older. Texas, home to 10% of the U.S. population and a rapidly aging demographic, is a prime beneficiary of this trend. The state's inpatient rehabilitation days are expected to grow by 10% over the next decade, driven by complex conditions like congestive heart failure and behavioral health disorders. Yet, capacity remains strained. For every 100,000 residents, Texas has only 1.2 inpatient rehabilitation beds, far below the national average.

Encompass Health is betting big on this gap. Its joint venture with BSA Health System to open a 50-bed facility in Amarillo—replacing a 24-bed unit—more than doubles capacity in a region with limited access to post-acute care. The new hospital, set to open in late 2025, will feature advanced technologies like in-house dialysis and a therapy gym with cutting-edge equipment. This isn't just a hospital; it's a full-service recovery hub for patients with strokes, spinal injuries, and complex orthopedic conditions.

Infrastructure as a Growth Engine

Encompass's playbook is simple: build where demand outpaces supply. The Amarillo expansion is part of a broader strategy to leverage joint ventures with local hospitals, which provide both credibility and operational efficiency. By partnering with established systems like BSA, Encompass avoids the high costs of greenfield development while tapping into existing referral networks.

Meanwhile, Select Medical (SLP) is also expanding in Texas, opening a 40-bed facility in Temple. But Encompass's scale and focus on high-acuity cases give it an edge. Its Amarillo hospital, for instance, will dedicate 30% of beds to neurological rehabilitation—a niche with limited competition. This specialization allows Encompass to capture higher-margin patients and justify premium reimbursement rates.

Regulatory Tailwinds and Long-Term Durability

Texas' new SB699 legislation, effective September 1, 2025, adds another layer of support. While the bill introduces licensing requirements for inpatient rehab facilities, it also sets a minimum standard of three hours of daily therapy, aligning with Encompass's model of intensive, multidisciplinary care. The transition period until 2026 gives Encompass time to optimize operations before compliance becomes a hurdle for smaller players.

Critics may point to workforce shortages—246 of 254 Texas counties are mental health professional shortage areas—but Encompass's infrastructure investments mitigate this risk. By building facilities with private rooms and advanced tech, the company reduces reliance on manual labor and attracts skilled therapists. Plus, its national network allows it to redeploy staff across facilities during peak demand.

The Numbers Don't Lie

Encompass Health's Texas expansion isn't just about bricks and mortar—it's about capturing a $12 billion inpatient rehabilitation market in the state alone. With each new bed generating $50,000–$70,000 in annual revenue, the Amarillo and Haslet (planned for 2027) facilities could add $3.5 million to $4.9 million in annual revenue per bed. At scale, this translates to a $175 million to $245 million revenue boost by 2030.

The stock has already priced in much of this growth, but with Texas' aging population and the rollout of new facilities, there's room for more upside. At a forward P/E of 18x, Encompass trades at a discount to its historical average of 22x, suggesting the market hasn't fully priced in its Texas ambitions.

Why This Is a High-Conviction Play

1. Demographic Tailwinds: Texas' 65+ population will grow by 40% by 2035, driving demand for rehab services.
2. Strategic Partnerships: Joint ventures with local hospitals reduce risk and accelerate market entry.
3. Regulatory Alignment: SB699 creates a level playing field while reinforcing Encompass's quality-focused model.
4. Scalable Infrastructure: New facilities are designed for long-term utilization, with private rooms and tech that future-proof against capacity constraints.

The Bottom Line

Encompass Health's Texas expansion is a masterclass in capitalizing on unmet demand. By building where others can't or won't, the company is positioning itself to dominate a sector with $100 billion in U.S. market potential by 2035. For investors, this isn't just a growth story—it's a blueprint for compounding returns in a healthcare niche with structural demand.

Investment Takeaway: Buy Encompass Health (ENHC) for its Texas-driven growth and long-term demographic tailwinds. With a forward P/E of 18x and a 10-year revenue CAGR of 12%, this is a stock that rewards patience—and punishes complacency.