Encompass Health's Strategic Expansion in Texas: Leveraging Joint Ventures to Dominate the Inpatient Rehabilitation Sector

The inpatient rehabilitation sector is undergoing a transformative phase, driven by demographic shifts, regulatory tailwinds, and a growing demand for specialized post-acute care. At the forefront of this evolution is Encompass Health Corp. (NYSE: EHC), which has strategically positioned itself as a leader in Texas—a state representing 12% of the U.S. population and a critical growth corridor for its business. By forging joint ventures with regional healthcare systems like BSA Health System, Encompass is not only addressing acute capacity shortages but also embedding itself into the fabric of local healthcare ecosystems, ensuring long-term scalability and market dominance.

A Case Study in Scalable Growth: The Amarillo Joint Venture

Encompass's partnership with BSA Health System in Amarillo, Texas, exemplifies its strategic approach to expansion. The joint venture involves constructing a 50-bed freestanding inpatient rehabilitation hospital, replacing BSA's existing 24-bed unit and relocating it to a state-of-the-art facility. This move more than doubles the regional capacity for rehabilitative care while freeing up acute care space for BSA. The new hospital, set to open on November 10, 2025, will serve patients recovering from strokes, spinal injuries, and complex orthopedic conditions, offering 24/7 nursing care and therapies delivered by specialized professionals.

This partnership is emblematic of Encompass's broader strategy: leveraging existing referral networks and infrastructure to reduce the costs and timelines associated with greenfield development. By aligning with regional players like BSA, Encompass gains immediate access to established patient populations and physician relationships, accelerating market penetration. The Amarillo project also underscores the company's commitment to high-acuity care, a segment with higher reimbursement rates and stronger demand due to its focus on complex cases.

Market Dynamics and Regulatory Tailwinds

Texas's inpatient rehabilitation sector is uniquely positioned for growth. The state currently has only 1.2 inpatient rehabilitation beds per 100,000 residents, far below the national average, creating a critical unmet need. Encompass's expansion aligns with demographic trends: Texas's population aged 65 and older is projected to grow by 40% by 2035, directly increasing demand for post-acute care.

Regulatory changes further bolster Encompass's position. Texas SB699, effective September 2025, mandates a minimum of three hours of daily therapy for inpatient rehabilitation patients, a standard Encompass has long adhered to. This legislation not only raises the bar for quality but also aligns with Encompass's intensive care model, which emphasizes advanced therapies and technology. The company's investments in infrastructure—such as in-house dialysis, private rooms, and AI-driven rehabilitation tools—position it to attract skilled therapists and reduce reliance on manual labor, mitigating workforce shortages.

Financial Performance and Strategic Payoffs

Encompass's Texas-focused strategy is already delivering measurable results. In Q2 2025, the company reported 12.0% year-over-year growth in net operating revenue, driven by a 7.2% increase in discharges and favorable pricing dynamics. Same-store revenue growth stood at 4.7%, reflecting strong utilization rates and operational efficiency. These metrics have prompted Encompass to raise its full-year 2025 guidance, projecting $5.88 billion to $5.98 billion in net operating revenue and $1.22 billion to $1.25 billion in adjusted EBITDA.

The Amarillo joint venture is a key contributor to this momentum. By expanding its Texas footprint to 29 locations, Encompass is capitalizing on the state's fragmented inpatient rehabilitation market. The company's national network of 168 hospitals provides a scalable template for replication, with plans to open a second facility in Haslet by 2027. This geographic diversification, combined with a focus on high-acuity cases, ensures that Encompass can sustain growth even in a competitive landscape.

Investment Thesis: A Compelling Long-Term Play

For investors, Encompass Health represents a rare combination of defensive growth and strategic agility. Its joint ventures with regional systems like BSA not only address immediate capacity gaps but also create durable partnerships that enhance referral networks and brand equity. The company's ability to align with regulatory trends—such as SB699—and demographic shifts positions it to outperform peers in a sector expected to grow at a CAGR of 6.5% through 2030.

Key risks include reimbursement rate volatility and labor shortages, but Encompass's focus on high-acuity care and technology-driven solutions mitigates these concerns. The company's strong balance sheet, with a debt-to-EBITDA ratio of 4.2x, also provides flexibility for further acquisitions or infrastructure investments.

Conclusion: A Sector Leader with Tailwinds

Encompass Health's strategic expansion in Texas is more than a geographic play—it's a masterclass in leveraging partnerships, regulatory alignment, and demographic trends to build a scalable, high-margin business. As the company continues to open new facilities and deepen its presence in the Texas Panhandle, it is well-positioned to dominate the inpatient rehabilitation sector for years to come. For investors seeking exposure to a resilient, high-growth healthcare subsector, Encompass Health offers a compelling case for long-term investment.