Form 8-K HEALTHSOUTH CORP For: Aug 19
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): August 19, 2016
HealthSouth Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
001-10315 | 63-0860407 |
(Commission File Number) | (I.R.S. Employer Identification No.) |
3660 Grandview Parkway, Suite 200, Birmingham, Alabama 35243
(Address of Principal Executive Offices, Including Zip Code)
(205) 967-7116
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
ITEM 7.01. Regulation FD Disclosure.
Subsequent to its earnings release for the second quarter of 2016, HealthSouth Corporation (the “Company” or “HealthSouth”) assembled an Investor Reference Book, a copy of which is attached to this Current Report on Form 8‑K as Exhibit 99.1 and incorporated herein by reference (the “Investor Reference Book”). The Investor Reference Book addresses, among other things, an overview of the Company and its industry, its business outlook, its financial and operational metrics and initiatives, and its value proposition. The Investor Reference Book is available at http://investor.healthsouth.com by clicking on an available link.
The Company reiterates its guidance previously reported in the Current Report on Form 8-K, dated July 28, 2016, and during the Company's earnings conference call held on July 29, 2016. Accordingly, the Company continues to expect the following full-year 2016 ranges:
•Net operating revenues of $3,600 million to $3,700 million;
•Adjusted EBITDA of $775 million to $795 million; and
•Adjusted earnings per share from continuing operations attributable to HealthSouth of $2.44 to $2.56.
The Company uses “same-store” comparisons to explain the changes in certain performance metrics and line items within its financial statements. Same-store comparisons are calculated based on hospitals open throughout both the full current and prior periods presented. These comparisons include the financial results of market consolidation transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on the Company's results of operations.
The information contained herein is being furnished pursuant to Item 7.01 of Form 8-K, “Regulation FD Disclosure.” This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Note Regarding Presentation of Non-GAAP Financial Measures
The financial data contained in the Investor Reference Book attached hereto as Exhibit 99.1 includes non-GAAP financial measures, including the Company’s adjusted earnings per share, leverage ratio, Adjusted EBITDA, and adjusted free cash flow.
The Company is providing adjusted earnings per share from continuing operations attributable to HealthSouth (“adjusted earnings per share”). The Company believes the presentation of adjusted earnings per share provides useful additional information to investors because it provides better comparability of ongoing performance to prior periods given that it excludes the impact of government, class action, and related settlements, professional fees—accounting, tax, and legal, mark-to-market adjustments for stock appreciation rights, gains or losses related to hedging instruments, loss on early extinguishment of debt, adjustments to its income tax provision (such as valuation allowance adjustments and settlements of income tax claims), items related to corporate and facility restructurings, and certain other items the Company believes to be non-indicative of its ongoing operations. It is reasonable to expect that one or more of these excluded items will occur in future periods, but the amounts recognized can vary significantly from period to period and may not directly relate to the Company’s ongoing operations. Accordingly, they can complicate comparisons of the Company’s results of operations across periods and comparisons of the Company’s results to those of other healthcare companies. Adjusted earnings per share should not be considered as a measure of financial performance under generally accepted accounting principles in the United States (“GAAP”) as the items excluded from it are significant components in understanding and assessing financial performance. Because adjusted earnings per share is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, it may not be comparable as presented to other similarly titled measures of other companies. The Company reconciles adjusted earnings per share to earnings per share in the Investor Reference Book attached hereto as Exhibit 99.1.
The leverage ratio referenced therein is defined as the ratio of consolidated total debt to Adjusted EBITDA for the trailing four quarters. The Company believes its leverage ratio and Adjusted EBITDA are measures of its ability to service its debt and its ability to make capital expenditures. Additionally, the leverage ratio is a standard measurement used by investors to gauge the creditworthiness of an institution. The Company’s credit agreement also includes a maximum leverage ratio financial covenant which allows the Company to deduct up to $75 million of cash on hand from consolidated total debt. The Company reconciles Adjusted EBITDA to net income in the Investor Reference Book attached hereto as Exhibit 99.1 and to net cash
provided by operating activities in the Investor Reference Book attached hereto as Exhibit 99.1 and below. Adjusted EBITDA for the Company’s reportable segments is reconciled to net income from continuing operations before income tax expense in the Investor Reference Book attached hereto as Exhibit 99.1 and below.
The Company uses Adjusted EBITDA on a consolidated basis as a liquidity measure. The Company believes this financial measure on a consolidated basis is important in analyzing its liquidity because it is the key component of certain material covenants contained within the Company’s credit agreement, which is discussed in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” and Note 8, Long-term Debt, to the consolidated financial statements included in its Annual Report on Form 10‑K for the year ended December 31, 2015 (the “2015 Form 10‑K”). These covenants are material terms of the credit agreement. Noncompliance with these financial covenants under the credit agreement—its interest coverage ratio and its leverage ratio—could result in the Company’s lenders requiring the Company to immediately repay all amounts borrowed. If the Company anticipated a potential covenant violation, it would seek relief from its lenders, which would have some cost to the Company, and such relief might be on terms less favorable to those in the Company’s existing credit agreement. In addition, if the Company cannot satisfy these financial covenants, it would be prohibited under the credit agreement from engaging in certain activities, such as incurring additional indebtedness, paying common stock dividends, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to the Company’s assessment of its liquidity.
In general terms, the credit agreement definition of Adjusted EBITDA, therein referred to as “Adjusted Consolidated EBITDA,” allows the Company to add back to consolidated net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated net income (1) all unusual or nonrecurring items reducing consolidated net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations and closed locations, (3) costs and expenses, including legal fees and expert witness fees, incurred with respect to litigation associated with stockholder derivative litigation, and (4) share-based compensation expense. The Company also subtracts from consolidated net income all unusual or nonrecurring items to the extent they increase consolidated net income.
Under the credit agreement, the Adjusted EBITDA calculation does not include net income attributable to noncontrolling interests and includes (1) gain or loss on disposal of assets, (2) professional fees unrelated to the stockholder derivative litigation, and (3) unusual or nonrecurring cash expenditures in excess of $10 million, and (4) pro forma adjustments resulting from debt transactions and development activities. Items falling within the credit agreement’s “unusual or nonrecurring” classification may occur in future periods, but these items and amounts recognized can vary significantly from period to period and may not directly relate to the Company’s ongoing operations. Accordingly, these items may not be indicative of the Company’s ongoing performance, so the Adjusted EBITDA calculation presented here includes adjustments for them.
Adjusted EBITDA is not a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for net income or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the policies and procedures described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2015 Form 10‑K.
The Company also uses adjusted free cash flow as an analytical indicator to assess its performance. Management believes the presentation of adjusted free cash flow provides investors an efficient means by which they can evaluate the Company’s capacity to reduce debt, pursue development activities, and return capital to its common stockholders. The calculation of adjusted free cash flow and a reconciliation of net cash provided by operating activities to adjusted free cash flow are included in the Investor Reference Book attached hereto as Exhibit 99.1. This measure is not a defined measure of financial performance under GAAP and should not be considered as an alternative to net cash provided by operating activities. The Company’s definition of adjusted free cash flow is limited and does not represent residual cash flows available for discretionary spending. Because this measure is not determined in accordance with GAAP and is susceptible to varying calculations, it may not be comparable to other similarly titled measures presented by other companies. See the consolidated statements of cash flows included in the 2015 Form 10-K and the condensed consolidated statements of cash flows included in the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2016 for the GAAP measures of cash flows from operating, investing, and financing activities.
Excluding net operating revenues, the Company does not provide guidance on a GAAP basis because it is unable to predict, with reasonable certainty, the future impact of items that are deemed to be non-indicative of its ongoing operations. Such items include government, class action, and related settlements, professional fees-accounting, tax, and legal, mark-to-
market adjustments for stock appreciation rights, gains or losses related to hedging instruments, loss on early extinguishment of debt, adjustments to its income tax provision (such as valuation allowance adjustments and settlements of income tax claims), items related to corporate and facility restructurings, and certain other items the Company believes to be non-indicative of its ongoing operations. These items are uncertain and will depend on several factors, including industry and market conditions, and could be material to the Company's results computed in accordance with GAAP.
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
Three Months Ended June 30, | Six Months Ended June 30, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
(Millions) | 2016 | 2015 | 2016 | 2015 | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||
Net cash provided by operating activities | $ | 152.2 | $ | 102.9 | $ | 311.9 | $ | 204.9 | $ | 484.8 | $ | 444.9 | $ | 470.3 | $ | 411.5 | $ | 342.7 | ||||||||||||||||||
Provision for doubtful accounts | (15.4 | ) | (10.9 | ) | (31.9 | ) | (22.5 | ) | (47.2 | ) | (31.6 | ) | (26.0 | ) | (27.0 | ) | (21.0 | ) | ||||||||||||||||||
Professional fees—accounting, tax, and legal | 1.7 | 0.1 | 1.9 | 2.3 | 3.0 | 9.3 | 9.5 | 16.1 | 21.0 | |||||||||||||||||||||||||||
Interest expense and amortization of debt discounts and fees | 43.4 | 30.9 | 88.0 | 62.7 | 142.9 | 109.2 | 100.4 | 94.1 | 119.4 | |||||||||||||||||||||||||||
Equity in net income of nonconsolidated affiliates | 2.4 | 2.3 | 4.8 | 3.9 | 8.7 | 10.7 | 11.2 | 12.7 | 12.0 | |||||||||||||||||||||||||||
Net income attributable to noncontrolling interests in continuing operations | (18.6 | ) | (17.3 | ) | (37.3 | ) | (33.8 | ) | (69.7 | ) | (59.7 | ) | (57.8 | ) | (50.9 | ) | (47.0 | ) | ||||||||||||||||||
Amortization of debt-related items | (3.4 | ) | (3.0 | ) | (6.8 | ) | (6.3 | ) | (14.3 | ) | (12.7 | ) | (5.0 | ) | (3.7 | ) | (4.2 | ) | ||||||||||||||||||
Distributions from nonconsolidated affiliates | (1.3 | ) | (1.8 | ) | (3.0 | ) | (3.7 | ) | (7.7 | ) | (12.6 | ) | (11.4 | ) | (11.0 | ) | (13.0 | ) | ||||||||||||||||||
Current portion of income tax expense | 4.0 | 3.4 | 9.0 | 6.9 | 14.8 | 13.3 | 6.3 | 5.9 | 0.6 | |||||||||||||||||||||||||||
Change in assets and liabilities | 36.9 | 45.2 | 55.2 | 101.2 | 147.1 | 90.1 | 48.9 | 58.1 | 41.4 | |||||||||||||||||||||||||||
Net premium paid on bond issuance/redemption | 2.0 | 11.8 | 3.9 | 3.8 | 3.9 | 4.3 | 1.7 | 1.9 | 22.8 | |||||||||||||||||||||||||||
Cash used in (provided by) operating activities of discontinued operations | 0.3 | 0.2 | 0.5 | 0.3 | 0.7 | 1.2 | 1.9 | (2.0 | ) | (9.1 | ) | |||||||||||||||||||||||||
Transaction costs | — | 3.3 | — | 3.3 | 12.3 | 9.3 | — | — | — | |||||||||||||||||||||||||||
Other | 0.1 | 2.4 | 0.2 | 2.6 | 3.2 | 1.9 | 1.6 | 0.2 | 0.6 | |||||||||||||||||||||||||||
Adjusted EBITDA | $ | 204.3 | $ | 169.5 | $ | 396.4 | $ | 325.6 | $ | 682.5 | $ | 577.6 | $ | 551.6 | $ | 505.9 | $ | 466.2 | ||||||||||||||||||
For the three months ended June 30, 2016, net cash used in investing activities was $66.0 million and resulted primarily from capital expenditures. Net cash used in financing activities during the three months ended June 30, 2016 was $89.1 million and resulted primarily from the redemption of $50 million of 7.75% Senior Notes due 2022 in May 2016, cash dividends paid on common stock, distributions paid to noncontrolling interests of consolidated affiliates, and repurchases of common stock.
For the three months ended June 30, 2015, net cash used in investing activities was $81.0 million and resulted primarily from acquisitions of businesses, capital expenditures, and the net change in restricted cash. Net cash used in financing activities during the three months ended June 30, 2015 was $184.7 million and resulted primarily from the redemption of the Company's 8.125% Senior Notes due 2020.
For the six months ended June 30, 2016, net cash used in investing activities was $105.5 million and resulted primarily from capital expenditures. Net cash used in financing activities during the six months ended June 30, 2016 was $197.7 million and resulted primarily from cash dividends on common stock, distributions paid to noncontrolling interests of consolidated affiliates, common stock repurchases, and net debt payments
For the six months ended June 30, 2015, net cash used in investing activities was $126.7 million and resulted primarily from capital expenditures and acquisitions of businesses. Net cash used in financing activities during the six months ended June 30, 2015 was $99.4 million and resulted primarily from cash dividends on common stock, distributions paid to noncontrolling interests of consolidated affiliates, and net debt payments.
For the year ended December 31, 2015, net cash used in investing activities was $1,129.8 million and resulted primarily from the acquisitions of Reliant and CareSouth. Net cash provided by financing activities during the year ended December 31, 2015 was $639.9 million and resulted primarily from net debt issuances associated with the funding of the Reliant acquisition.
For the year ended December 31, 2014, net cash used in investing activities was $876.9 million and resulted primarily from the acquisition of Encompass. Net cash provided by financing activities during the year ended December 31, 2014 was $434.2 million and resulted primarily from draws under the revolving and expanded term loan facilities of the Company's credit agreement to fund the acquisition of Encompass offset by the redemption of the Company's existing 7.25% Senior Notes due 2018.
For the year ended December 31, 2013, net cash used in investing activities was $226.2 million and resulted primarily from increased capital expenditures and acquisition activity. Net cash used in financing activities during the year ended December 31, 2013 was $312.4 million and resulted primarily from repurchases of common stock as part of the tender offer completed in the first quarter of 2013.
For the year ended December 31, 2012, net cash used in investing activities was $178.8 million and resulted primarily from capital expenditures. Net cash used in financing activities during the year ended December 31, 2012 was $130.0 million and resulted primarily from distributions paid to noncontrolling interests of consolidated affiliates, repurchases of 46,645 shares of the Company's convertible perpetual preferred stock, dividends paid on the Company's convertible perpetual preferred stock, and net principal payments on debt offset by capital contributions from consolidated affiliates.
For the year ended December 31, 2011, net cash used in investing activities was $24.6 million and resulted primarily from capital expenditures, net settlement payments related to interest rate swaps, and purchases of restricted investments offset by proceeds from the sale of five long-term acute care hospitals in August 2011. Net cash used in financing activities during the year ended December 31, 2011 was $336.3 million and resulted primarily from net debt payments, including the optional redemption of the Company’s 10.75% Senior Notes due 2016, distributions paid to noncontrolling interests of consolidated affiliates, and dividends paid on the Company’s convertible perpetual preferred stock.
Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense
Q2 2016 | Q1 2016 | Q4 2015 | Q3 2015 | Q2 2015 | Q1 2015 | Full Year 2015 | ||||||||||||||||||||||
In Millions | ||||||||||||||||||||||||||||
Total segment Adjusted EBITDA | $ | 230.1 | $ | 219.5 | $ | 216.4 | $ | 186.9 | $ | 189.5 | $ | 181.3 | $ | 774.1 | ||||||||||||||
General and administrative expenses | (34.4 | ) | (31.9 | ) | (36.0 | ) | (30.6 | ) | (32.1 | ) | (34.6 | ) | (133.3 | ) | ||||||||||||||
Depreciation and amortization | (42.9 | ) | (42.4 | ) | (41.4 | ) | (33.7 | ) | (32.7 | ) | (31.9 | ) | (139.7 | ) | ||||||||||||||
(Loss) gain on disposal or impairment of assets | (0.2 | ) | (0.2 | ) | (2.4 | ) | (0.9 | ) | (0.8 | ) | 1.5 | (2.6 | ) | |||||||||||||||
Government, class action, and related settlements | — | — | 0.5 | — | — | (8.0 | ) | (7.5 | ) | |||||||||||||||||||
Professional fees - accounting, tax, and legal | (1.7 | ) | (0.2 | ) | (0.3 | ) | (0.4 | ) | (0.1 | ) | (2.2 | ) | (3.0 | ) | ||||||||||||||
Loss on early extinguishment of debt | (2.4 | ) | (2.4 | ) | (2.4 | ) | — | (18.8 | ) | (1.2 | ) | (22.4 | ) | |||||||||||||||
Interest expense and amortization of debt discounts and fees | (43.4 | ) | (44.6 | ) | (44.6 | ) | (35.6 | ) | (30.9 | ) | (31.8 | ) | (142.9 | ) | ||||||||||||||
Net income attributable to noncontrolling interests | 18.6 | 18.7 | 18.8 | 17.1 | 17.3 | 16.5 | 69.7 | |||||||||||||||||||||
Gain related to SCA equity interest | — | — | — | 0.6 | 2.6 | — | 3.2 | |||||||||||||||||||||
Income from continuing operations before income tax expense | $ | 123.7 | $ | 116.5 | $ | 108.6 | $ | 103.4 | $ | 94.0 | $ | 89.6 | $ | 395.6 | ||||||||||||||
Forward-Looking Statements
Statements contained in this document and the Investor Reference Book attached hereto as Exhibit 99.1, which are not historical facts, such as those relating to the financial performance, guidance and assumptions, anticipated acquisitions, dispositions and other development activities, business strategy, legislative and regulatory developments and their related impacts on HealthSouth, capital expenditures, cyber security, dividend strategies, repurchases of securities, effective tax rates, business model, and the positioning of services for the system of healthcare delivery in the future are forward-looking statements. In addition, HealthSouth, through its senior management, may from time to time make forward-looking public statements concerning the matters described herein. All such estimates, projections, and forward-looking information speak only as of the date hereof, and HealthSouth undertakes no duty to publicly update or revise such forward-looking information, whether as a result of new information, future events, or otherwise. Such forward-looking statements are necessarily estimates based upon current information, involve a number of risks and uncertainties, and relate to, among other things, future events, HealthSouth’s plan to repurchase its debt or equity securities, dividend strategies, effective income tax rates, HealthSouth’s business strategy, its financial plans, its future financial performance, its projected business results or model, its ability to return value to shareholders, its projected capital expenditures, its leverage ratio, its acquisition opportunities, and the impact of future legislation or regulation. Actual events or results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors which could cause actual events or results to differ materially from those estimated by HealthSouth include, but are not limited to, the price of HealthSouth’s common stock as it affects the Company’s willingness and ability to repurchase shares and the financial and accounting effects of any repurchases; any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings involving HealthSouth, including its pending DOJ and HHS-OIG investigations and any matters related to yet undiscovered issues, if any, at Reliant or CareSouth; any adverse effects on operating performance of HealthSouth’s stock price resulting from the integration of those acquisitions; potential disruptions, breaches, or other incidents affecting the proper operation, availability, or security of HealthSouth’s information systems, including unauthorized access to or theft of patient, business associate, or other sensitive information or inability to provide patient care because of system unavailability as well as unforeseen issues, if any, related to integration of systems of any acquired companies; the ability to successfully integrate acquired companies, including realization of anticipated tax benefits, revenues, and cost savings, minimizing the negative impact on margins arising from the changes in staffing and other operating practices, and avoidance of unforeseen exposure to liabilities; significant changes in HealthSouth’s management team; HealthSouth’s ability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with its growth strategy; changes, delays in (including in connection with resolution of Medicare payment reviews or appeals), or suspension of reimbursement for HealthSouth’s services by governmental or private payors; changes in the regulation of the healthcare industry at either or both of the federal and state levels, including as part of national healthcare reform and deficit reduction; competitive pressures in the healthcare industry and HealthSouth’s response thereto; HealthSouth’s ability to obtain and retain favorable arrangements with third-party payors; HealthSouth's ability to control costs, particularly labor and employee benefit costs, including group medical expenses; adverse effects resulting from coverage determinations made by Medicare Administrative Contractors regarding its Medicare reimbursement claims and lengthening delays in HealthSouth's ability to recover improperly denied
claims through the administrative appeals process on a timely basis; HealthSouth's ability to adapt to changes in the healthcare delivery system, including involvement in coordinated care initiatives or programs that may arise with its referral sources and related impacts on volume or pricing; HealthSouth’s ability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and the impact on HealthSouth’s labor expenses from potential union activity and staffing shortages; general conditions in the economy and capital markets, including any crisis resulting from uncertainty in the sovereign debt market; the increase in the costs of defending and insuring against alleged professional liability claims and HealthSouth’s ability to predict the estimated costs related to such claims; and other factors which may be identified from time to time in HealthSouth’s SEC filings and other public announcements, including HealthSouth’s Form 10‑K for the year ended December 31, 2015 and Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.
ITEM 9.01. Financial Statements and Exhibits.
(d) Exhibits
99.1 | HealthSouth Corporation Investor Reference Book. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
HEALTHSOUTH CORPORATION
By: | /s/ DOUGLAS E. COLTHARP | |
Name: | Douglas E. Coltharp | |
Title: | Executive Vice President and Chief Financial Officer | |
Dated: August 19, 2016
INVESTOR
REFERENCE
BOOK
Last updated August 19, 2016
HealthSouth is a leading provider of post-acute healthcare services, offering both facility-based
and home-based post-acute services in 34 states and Puerto Rico through its network of
inpatient rehabilitation hospitals, home health agencies, and hospice agencies.
2
The information contained in this presentation includes certain estimates, projections and other forward-
looking information that reflect HealthSouth's current outlook, views and plans with respect to future events,
including legislative and regulatory developments, strategy, capital expenditures, acquisition and other
development activities, cyber security, dividend strategies, repurchases of securities, effective tax rates,
financial performance, financial assumptions, and business model. These estimates, projections and other
forward-looking information are based on assumptions HealthSouth believes, as of the date hereof, are
reasonable. Inevitably, there will be differences between such estimates and actual events or results, and
those differences may be material.
There can be no assurance any estimates, projections or forward-looking information will be realized.
All such estimates, projections and forward-looking information speak only as of the date hereof.
HealthSouth undertakes no duty to publicly update or revise the information contained herein.
You are cautioned not to place undue reliance on the estimates, projections and other forward-looking
information in this presentation as they are based on current expectations and general assumptions and are
subject to various risks, uncertainties and other factors, including those set forth in HealthSouth's Form
10‑K for the year ended December 31, 2015, Form 10-Q for the quarters ended March 31, 2016 and
June 30, 2016, and in other documents HealthSouth previously filed with the SEC, many of which are
beyond HealthSouth's control, that may cause actual events or results to differ materially from the views,
beliefs and estimates expressed herein.
Note Regarding Presentation of Non-GAAP Financial Measures
The following presentation includes certain “non-GAAP financial measures” as defined in Regulation G
under the Securities Exchange Act of 1934, including Adjusted EBITDA, leverage ratios, adjusted earnings
per share, and adjusted free cash flow. Schedules are attached that reconcile the non-GAAP financial
measures included in the following presentation to the most directly comparable financial measures
calculated and presented in accordance with Generally Accepted Accounting Principles in the United
States. HealthSouth's Form 8-K, dated August 19, 2016 to which the following supplemental information is
attached as Exhibit 99.1, provides further explanation and disclosure regarding HealthSouth's use of non-
GAAP financial measures and should be read in conjunction with this supplemental information.
Forward-Looking Statements
3
Table of Contents
Guidance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-8
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-25
Business Outlook: 2016 to 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-32
Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-45
Alternative Payment Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-59
Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60-65
Information Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-69
Operational Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70-75
Industry Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76-88
Segment Operating Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89-94
Reconciliations to GAAP and Share Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95-118
End Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119-122
4
Guidance
(as of August 19, 2016)
5 Refer to pages 119-122 for end notes.
Revised Guidance - as of August 19, 2016
Adjusted EBITDA
Adjusted Earnings per Share
from Continuing Operations
Attributable to HealthSouth(1)
Net Operating Revenues
Previous Full-Year
Guidance
(Provided on April 26, 2016)
Revised 2016 Full-Year
Guidance
(Provided Initially on July 28, 2016) -
Net Operating Revenues
$3,600 million to $3,700 million
Adjusted EBITDA
$775 million to $795 million
Adjusted Earnings per Share
from Continuing Operations
Attributable to HealthSouth(1)
$2.44 to $2.56
Projected
Growth
Over 2015
$3,580 million to $3,680 million
$770 million to $790 million
$2.37 to $2.49
13%
to
17%
13%
to
17%
8%
to
14%
+$20
million
+$5
million
+$0.07
per
share
6
Inpatient Rehabilitation
u Full-year contribution from Reliant and other
2015 acquisitions and openings
Ÿ Transitioning to HLS business model
u Continued evolution of payor mix
Ÿ Managed care and Medicaid increases expected
to moderate in 2016 as compared to 2015
u Estimated 1.6% increase in Medicare pricing for
Q1 through Q3; 1.9% for Q4
u Merit increase of 2.5% to 3.0% effective
October 1, 2016
u Moderating increase in group medical expense
compared to increase experienced in 2015
u Bad debt expense of 1.8% to 2.0% of net
operating revenues in 2016
Guidance Considerations
Home Health and Hospice
u Full-year contribution from CareSouth
and other 2015 acquisitions and
openings
Ÿ Transitioning to Encompass business
model
u Estimated 1.7% decrease in Medicare
pricing (effective January 1, 2016)
u Estimated $1.5 million negative impact
in Q4 2016 based on 2017 proposed rule
(applicable to all episodes that end after
December 31st) - See page 28.
u Increase in administrative costs related
to pre-claim review demonstration
u Clinical collaboration with HealthSouth
IRFs
Consolidated
u Redemption of 2022 Notes
Ÿ Redemption of remaining outstanding principal balance of $76 million in September 2016
u Diluted share count of 100.0 million shares
u Tax rate of approximately 41%
7
Adjusted Free Cash Flow(2) and Tax Assumptions
Reconciliations to GAAP provided on pages 95-117.
Refer to pages 119-122 for end notes.
Certain Cash Flow Items
(millions)
6 Months
2016 Actual
2016
Assumptions
2015
Actual
• Cash interest expense
(net of amortization of debt discounts and fees) $81.2 $160 to $165 $128.6
• Cash payments for taxes, net of
refunds $7.7 $15 to $30 $9.4
• Working Capital and Other $22.1 $60 to $80 $69.2
• Maintenance CAPEX $40.6 $95 to $105 $83.1
• Dividends paid on preferred
stock(3) $— $— $3.1
• Adjusted Free Cash Flow $244.8 $395 to $465 $389.0
Quarterly free cash flow for the remainder of 2016 will be impacted by the timing
of income tax payments and maintenance capital expenditures, as well as
changes in working capital.
u Revised cash interest
expense assumptions due
to the redemptions of the
2022 Notes
u Decreased estimated cash
payments for federal taxes
based on current tax
planning opportunities
u Lowered upper end of
range for maintenance
capital expenditures due
to revised expectations
around timing of projects
u GAAP Tax Considerations:
Ÿ Gross federal NOL of
~ $72 million as of
June 30, 2016
Ÿ Remaining valuation
allowance of ~$28 million
related to state NOLs
8 Note: 2015 amounts for debt borrowings include ~$208 million related to the Reliant hospitals' capital lease obligations.See the debt schedule on page 64. Refer to pages 119-122 for end notes.
Free Cash Flow Priorities
(In Millions)
6 Months 2016 2016 2015
Actuals Assumptions Actuals
IRF bed expansions $10.5 $20 to $30 $20.8
New IRF’s
- De novos 37.5 70 to 90 47.8
- Acquisitions — 0 to 20 786.2
New home health and hospice acquisitions 9.4 30 to 40 200.2
$57.4 $120 to $180 $1,055.0
6 Months 2016 2016 2015
Actuals Assumptions Actuals
Debt redemptions (borrowings), net $85.0 $TBD $(1,060.3)
Leased property purchases — TBD —
Cash dividends on common stock(4) 41.9 84 77.2
Common stock repurchases 24.1 TBD 45.3
$151.0 $TBD $(937.8)
Shareholder
Distributions
Growth
in Core
Business
Debt
Reduction
Highest Priorit
y
• Redeemed $100 million of 2022 Notes
in first half of 2016
• Issued notice for redemption of
remaining outstanding principal balance
of $76 million of 2022 Notes to be
completed in September 2016
Increased quarterly cash dividend to
$0.24 per common share
~$137 million authorization
remaining as of June 30, 2016
9
The Company
10 Note: One of the 121 IRFs and two of the 182 adult home health locations are nonconsolidated.
These locations are accounted for using the equity method of accounting.
HealthSouth: A Leading Provider of Post-Acute Care
58% of HealthSouth's IRFs
are located within a 30-mile
radius of an Encompass
location.
Inpatient Rehabilitation
Portfolio - As of June 30, 2016
121
Inpatient Rehabilitation Hospitals
• 34 operate as joint ventures with
acute care hospitals
29 Number of States (plus Puerto Rico)
~ 27,900 Employees
Key Statistics - Trailing 4 Quarters
~ $2.9 Billion Revenue
160,100 Inpatient Discharges
628,650 Outpatient Visits
Encompass
Home Health and Hospice
Portfolio – As of June 30, 2016
182 Home Health Locations
7 Pediatric Home Health Locations
29 Hospice Locations
24 Number of States
~ 7,600 Employees
Key Statistics - Trailing 4 Quarters
~ $609 million Revenue
165,857 Home Health Episodes
2,743 Hospice Admissions
IRF Marketshare
11% of IRFs
21% of Licensed Beds
28% of Patients Served
Home Health and
Hospice Marketshare
4th largest provider of
Medicare-certified
skilled home health
services
11
Inpatient Rehabilitation Segment
Major Services
• Rehabilitation Physicians: manage and treat medical conditions and oversee rehabilitation program
• Rehabilitation Nurses: provide personal care and oversee treatment plan for patients
• Physical Therapists: address physical function, mobility, strength, balance, and safety
• Occupational Therapists: promote independence through activities of daily living (ADLs)
• Speech-Language Therapists: address speech/voice functions, swallowing, memory/cognition, and
language/communication
• Case Managers: coordinate care plan with physician, caregivers and family
• Post-Discharge Services: outpatient therapy and Encompass home health and hospice
Inpatient Rehabilitation
Hospitals ("IRFs")
Refer to pages 119-122 for end notes.
102 of HealthSouth's hospitals hold one or more disease-
specific certifications from The Joint Commission’s
Disease-Specific Care Certification Program.(5)
12
Major Services
• Skilled Nurses: comprehensively assess, teach, train, and manage care related to injury or illness
• Home Health Aides: provide personal care and assistance with ADLs
• Physical Therapists: address physical function, mobility, strength, balance, and safety
• Occupational Therapists: promote independence through training on self-management of ADLs
• Speech-Language Therapists: address speech/voice functions, swallowing, memory/cognition, and
language/communication
• Medical Social Workers: provide assessment of social and emotional factors; assist with obtaining
community resources
Home Health and Hospice Segment (Encompass)
Home Health Agencies
("HHAs")
Encompass offers a number of evidence-based specialty
programs related to: Post-Operative Care, Fall Prevention,
Chronic Disease Management, and Transitional Care.
13
States with an Encompass presence
Encompass Partnership
• 4th largest provider of Medicare-focused (83%
Medicare) skilled home health services in the U.S.
with 218 locations across 24 states
• Approx. 7,600 employees making 3.8 million total
patient visits annually
• Approx. revenue of $609 million for trailing 4
quarters*
* CareSouth acquired on November 2, 2015.
Equity Structure
HealthSouth EncompassManagement
Encompass
16.7%83.3%
Partnership formed December 31, 2014
14
IRF-Home Health Clinical Collaboration (all discharges)
* Generally defined as a HealthSouth IRF located within a 30-mile radius of an Encompass location.
All Markets
Q2 2015 Q2 2016
17,907
19,977
2,116
3,23810.6%Collaboration Rate
13.9%
Collaboration Rate
Overlap Markets*
Q2 2015 Q2 2016
9,041
10,307
2,037
3,191
18.4%
Collaboration Rate
23.6%
Collaboration Rate
HealthSouth IRF Discharges to
non-Encompass Home Health
HealthSouth IRF Discharges to
Encompass Home Health
15
Managed Care
Per Diem/Visit or CMG/Episodes
- Negotiated rate
- Some are “tiered” for acuity/severity
Per Diem/Visit or CMG/Episodes
- Negotiated rate
- Some are “tiered” for acuity/severity
Other Variety of methodologies
Prospective Payment System (“PPS”)
- IRF: Paid per discharge by Case Mix Group (“CMG”)
- Home Health: Paid per 60-day episode of care by
Home Health Resource Group (“HHRG”)
• An episode is paid in two installments:
1) Request for Anticipated Payment (“RAP”)
2) Final bill after episode is complete
Medicare
Varies by state
Medicare Advantage
Medicaid
Payors (Q2 2016)
Payor Source Payment Methodology% of Revenues
82.3%73.1%
9.0%
7.8%
3.7%
11.5%
2.9%
4.8%4.7%
0.2%
Inpatient
Rehab
Segment
Home
Health &
Hospice
Segment
16
Acute Care Hospitals -- 37%
Physician Offices / Community -- 34%
IRFs / LTCHs / SNFs -- 29%
IRF Patient Mix
Referral Sources:
Rehabilitation Impairment Category* (Q2 2016):
• Physicians and acute care hospital case managers are key
decision makers.
• All IRF patients must meet reasonable and necessary criteria and
must be admitted by a physician.
• All IRF patients must be medically stable and have potential to
tolerate three hours of therapy per day (minimum).
• IRF patients receive 24-hour, 7 days a week nursing care.
• Average length of stay = 12.8 days
Admission to an IRF:
Average Age of a HealthSouth Patient:
All Patients = 71 Medicare FFS = 76
RIC 01 Stroke 17.4%
RIC 02/03 Brain dysfunction 9.1%
RIC 04/05 Spinal cord dysfunction 3.9%
RIC 06 Neurological conditions 20.8%
RIC 07 Fracture of lower extremity 8.0%
RIC 08 Replacement of lower extremity joint 5.3%
RIC 09 Other orthopedic 10.0%
RIC 10/11 Amputation 2.5%
RIC 14 Cardiac 4.8%
RIC 17/18 Major multiple trauma 5.1%
RIC 20 Other disabling impairments 9.8%
— All other RICs 3.3%
Home Health Patient Mix
Acute Care Hospitals -- 92%
Physician Offices / Community -- 7%
Skilled Nursing Facilities -- 1%
Referral Sources:
• For Medicare, a patient must be confined to the home and need
skilled services.
• The patient must be under the care of a physician and receive
services under a home health plan of care established and
periodically reviewed by a physician.
• Medicare also requires a face-to-face encounter related to the
primary reason the patient requires home health services with a
physician or an allowed non-physician practitioner.
Admission to home health:
Average Age of an Encompass Patient:
All Patients = 76 Medicare FFS = 77
100
90
80
70
60
50
40
30
20
10
Pe
rc
en
ta
ge
24.0%
36.7% 31.9%
85.1%
Age 85+ Lives
alone
Has 2 or
more ADL
limitations
Has 3 or
more chronic
conditions
Demographics of all Medicare Home Health Users**:
* Rehabilitation Impairment Categories (RICs) represent how HealthSouth admitted the patient; BPCI/CJR (pages 51-58)
uses Diagnostic-Related Groups (DRGs) which represent how the acute care hospital discharged the patient.
** Source: Avalere Health and Alliance for Home Health Quality and Innovation Home Health Chart Book 2015
17
2014 2015 YTD 2016
10.6% 10.6% 10.5%
10.7% 10.6% 10.7%
2014 2015 YTD 2016
14.5% 13.9% 13.0%
11.4% 10.7% 10.2%
2014 2015 YTD 2016
74.4% 75.2%
75.7%
77.1% 78.0%
78.5%
Home Health QualityIRF Quality
Discharge to Community
Discharge to Skilled Nursing
Discharge to Acute Hospital
Percent of cases
discharged to
the community,
including home
or home with
home health.
Higher is better.
Percent of
patients
discharged to a
skilled nursing
facility.
Lower is better.
Percent of
patients
discharged to an
acute care
hospital.
Lower is better.
Refer to pages 119-122 for end notes.
3.8
3.2
Quality of Care
Star Ratings(7)
99% of Encompass' home
health agencies are
3 Stars or higher
3.8
3.7
Patient Satisfaction
Star Ratings(7)
97% of Encompass' home
health agencies are
3 Stars or higher
Encompass National Average
15.1%
16.9%
30-Day
Readmission Rate
Percent of patients readmitted
to an acute care hospital.
Lower is better.
180 bps bette
r
UDSMR(6) HealthSouth
18
Independent Research Concludes IRFs are a Better
Rehabilitation Option than SNFs
“If the hospital suggests sending your loved one to
a skilled nursing facility after a stroke, advocate
for the patient to go to an inpatient
rehabilitation facility instead…”*
“Whenever possible, the American Stroke
Association strongly recommends that stroke
patients be treated at an inpatient rehabilitation
facility rather than a skilled nursing facility. While in
an inpatient rehabilitation facility, a patient participates in at least
three hours of rehabilitation a day from physical therapists,
occupational therapists, and speech therapists. Nurses are
continuously available and doctors typically visit daily.”*
*
**
AHA/ASA press release, "Inpatient rehab recommended over nursing homes for stroke rehab,"
issued May 4, 2016 (newsroom.heart.org)
"Guidelines for Adult Stroke Rehabilitation and Recovery," issued May 2016 (stroke.ahajournals.org)
“The studies that have compared outcomes in hospitalized stroke
patients first discharged to an IRF, a SNF, or a nursing home have
generally shown that IRF patients have higher rates of return
to community living and greater functional recovery,
whereas patients discharged to a SNF or a nursing home have higher
rehospitalization rates and substantially poorer survival.”**
100 of HealthSouth's IRFs hold The Joint
Commission's Disease-Specific Care
Certification in Stroke Rehabilitation.
19
Solution:
Utilize extensive proprietary
database of IRF patients to
engage in predictive modelling to
identify patients at risk
for acute care transfer and
implement intervention strategies
as part of the plan of care.
Solution:
Implement a multidisciplinary
reconciliation process using
HealthSouth's electronic medical
records to further reduce the
risk of medication errors upon
admission to and discharge from
a HealthSouth IRF.
Solution:
Develop clinical protocols/
coordinated discharge planning
between IRFs and home health
agencies.
Problem:
Acute care transfers can
negatively influence patient
outcomes and result in
unnecessary health care
expenditures and penalties.
Problem:
Medication errors are a common
cause of adverse drug events
which significantly increase a
patient's risk of being readmitted
to an acute care hospital.**
Problem:
Poor coordination between
healthcare providers can result in
low-quality care, unnecessary
duplication of services, and
avoidable medical errors.
Clinical Initiatives to Further Improve Quality
Reduce Acute Care Transfers
(tracked in the IRF QRP*)
Medication Reconciliation
(tracked in the IRF QRP*) Clinical Collaboration
*
**
IRF Quality Reporting Program
Sources: http://archive.ahrq.gov/research/findings/factsheets/errors-safety/aderia/ade.html
https://www.ismp.org/newsletters/acutecare/showarticle.aspx?id=36
20
Total Inpatient Rehabilitation Facilities: 1,133
IRF Cost Effectiveness(8) The Avg. Est. Total
Payment per
Discharge has not
been reduced by
2% for
sequestration.(12)
Medicare pays
HealthSouth less
per discharge, on
average, and
HealthSouth treats
a higher acuity
patient.
Avg.
Beds
per IRF
Avg.
Medicare
Discharges
per IRF(10)
Case
Mix
Index(11)
Avg. Est.
Total Cost
per
Discharge
for FY 2017
Avg. Est.
Total
Payment
per
Discharge
for FY 2017
HLS(9) = 119 68 956 1.25 $12,645 $19,371
Free-
Standing
(Non-HLS) =
144 57 582 1.23 $16,653 $20,248
Hospital
Units = 870 24 234 1.18 $19,879 $20,551
Total 1,133 33 354 1.21 $17,152 $20,153
Refer to pages 119-122 for end notes.
HealthSouth differentiates
itself by:
ü “Best Practices” clinical
protocols
ü Supply chain
efficiencies
ü Sophisticated
management information
systems
ü Economies of scale
21
2015 AverageRevenue Visits
Effective
Revenue Cost
Episodes per Episode per Episode per Visit per Visit
Encompass 137,568 $3,072 19 $162 $72
Public Peer
Average 259,215 $2,732 17* $161 $84*
Encompass
Compared to
Peer Average
12.4% 11.8% 0.6% (14.3)%
Home Health Cost Effectiveness
Average revenue per
episode 12.4% higher
due to higher acuity
patient mix
Cost per visit 14.3%
lower due to market
density & operational
efficiency:
ü Caregiver
optimization
ü Full utilization of
Homecare
Homebase (HCHB)
ü Employee culture
of excellence
ü ~76% of visits
conducted
by full-time staff
ü Daily monitoring of
productivity
Public peer average represents 2015 data from four publicly traded home health providers.
* Only three of the four publicly traded companies reported visit counts.
22
IRF New-Store/Same-Store Growth
25.0
20.0
15.0
10.0
5.0
0.0
Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016Discharges Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Fairlawn(13) 0.6% 1.9% 1.9% 2.0% 1.1%
St. Vincent’s(14) 1.3%
New Store 1.7% 2.5% 2.5% 2.0% 1.0% —% 0.6% 1.8% 4.4% 5.7% 15.6% 14.2% 11.7%
Same Store* 3.3% 3.2% 1.3% 0.4% 1.4% 1.9% 2.2% 2.9% 2.8% 3.9% 3.0% 2.8% 1.9%
Total by Qtr. 6.3% 5.7% 3.8% 2.4% 3.0% 3.8% 4.7% 6.7% 8.3% 9.6% 18.6% 17.0% 13.6%
Total by Year 5.0% 3.5% 10.9%
Same-Store
Year* 2.5% 1.3% 3.2%
Same-Store
Year UDS(15) (0.7)% (0.2)% 1.3%
Altamonte Springs, FL (50 beds)
Johnson City, TN (26 beds)
Newnan, GA (50 beds)
Middletown, DE (34 beds)
Augusta, GA (58 beds)
Littleton, CO (40 beds)
Stuart, FL (34 beds)
Reliant (857 beds)
Franklin, TN (40 beds)
Lexington, KY (158 beds)
Savannah, GA (50 beds)
Hot Springs, AR (27 beds)
* Includes consolidated HealthSouth inpatient rehabilitation hospitals classified as same store during each period
Refer to pages 119-122 for end notes.
23
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Home Health New-Store/Same-Store Growth
Admissions Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
New Store 11.9% 13.6% 15.7% 37.4% 43.5% 41.6%
Same Store* —% —% —% —% 12.6% 11.1%
Encompass owned
locations** 10.9% 8.7% 10.3% 15.0% —% —%
Total by Qtr. 22.8% 22.3% 26.0% 52.4% 56.1% 52.7%
Total by Year 31.4%
Same-Store Year* —%
Encompass owned
locations Year** 11.2%
* Includes consolidated Encompass home health agencies classified as same store during each period
** Includes admissions for locations Encompass owned prior to HealthSouth
acquisition on December 31, 2014, and HealthSouth's legacy agencies
Acquired CareSouth
(44 HHAs in 7 states)
Note: In addition to completing the CareSouth acquisition, in 2015, Encompass opened four home health locations and acquired ten home
health locations. In the first six months of 2016, Encompass opened two home health locations and acquired two home health locations.
24
• Largest provider of inpatient rehabilitation services
• 4th largest provider of Medicare-certified skilled home health services
• Consistent delivery of high-quality, cost-effective care
• Enhanced utilization of technology (e.g., clinical, data management,
and technology-enabled business processes)
HLS: Strong and Sustainable Business Fundamentals
• Effective labor management
• Continued improvements in supply chain
• Economies related to scale and market density
Cost-Effectiveness
• Strong balance sheet and liquidity, no significant near-term maturities
(credit agreement matures in 2020; bonds mature in 2022** and beyond)
• Substantial free cash flow generation
• Attractive organic growth opportunities in both segments
• Flexible inpatient rehabilitation de novo and acquisition strategy
• Home health and hospice platform with track record of growth through
acquisitions in highly fragmented industry segments
• Portfolio of 121* IRFs as of June 30, 2016
P 84 owned and 37 leased
Real Estate Portfolio
Attractive Healthcare Sectors
Growth Opportunities
Cost-Effectiveness
• Favorable demographic trends
• Nondiscretionary nature of many conditions treated
• Highly fragmented post-acute industries
Industry Leading Position
Financial Strength
* Includes one nonconsolidated entity.
** Issued notice for redemption of remaining outstanding principal balance
of $76 million of 2022 Notes to be completed in September 2016
25
Adjusted EPS(1)
Track Record
2011 2012 2013 2014 2015 Trailing
4 Qtrs
$2,027
$2,162
$2,273
$2,406
$3,163
$3,488($ millions)
2011 2012 2013 2014 2015 Trailing
4 Qtrs
$466
$506
$552
$578
$683
$753
’11-’15 CAGR = 10.0
%($ millions)
’11-’15 CAGR =
11.8
%
Adjusted EBITDA
2011 2012 2013 2014 2015 Trailing
4 Qtrs
$1.20
$1.61
$1.94
$2.06
$2.24
$2.43
’11-’15 CAGR = 16.9
%
2011 2012 2013 2014 2015 Trailing
4 Qtrs
$243
$268
$331
$311
$389
$460
Adjusted Free Cash Flow(2)
($ millions)
’11-’15 CAGR = 12.5
%
Revenue
CAGR = Compound annual growth rate; the average growth rate over a period of years.
Reconciliations to GAAP provided on pages 95-117; Refer to pages 119-122 for end notes.
26
Business Outlook
2016 to 2018
(as of August 19, 2016)
27
• Same-store IRF growth
• New-store IRF growth (de novos, acquisitions/JVs)
• Same-store home health and hospice growth
• New-store home health and hospice growth (acquisitions)
Core
Growth
Strong
Balance Sheet
Key
Operational
Initiatives
Shareholder
Distributions
Opportunistic
Growth
Business Outlook: 2016 to 2018(16) (as of August 19, 2016)
2016 2017 2018
Business Model
• Adjusted EBITDA CAGR: 5% - 9% (2015 base-year Adjusted EBITDA includes
a full-year estimate for Reliant and CareSouth)*
• Continued strong free cash flow generation
• Quarterly cash dividends
• Opportunistic repurchases
- (~$137 million authorization remaining as of June 30, 2016)
• Implement CIS: installed in 92 IRFs as of June 2016
• Utilize information from CIS (ACE-IT & HCHB) to enhance outcomes, continuity of care, and patient
experience (e.g., establish clinical protocols, reduce acute care transfers, and enhance medication
reconciliation)
• Participate in new delivery and payment models (ACOs; BPCI; CJR/SHFFT; CABG)
• Target financial leverage
of 4.0x or below by year-
end 2016
Strategy Componen
t
* This is a multi-year CAGR; annual results may fall outside the range.
Reconciliations to GAAP provided on slides 95-117.
Refer to pages 119-122 for end notes.
• Consider acquisitions of other complementary businesses
• Target leverage of approx.
3.0x, subject to opportunities
for creating shareholder value
• Target financial leverage
of 3.5x or below by year-
end 2017
28 * Outpatient and hospice, which services accounted for 4.4% of total operating revenues as of December 31, 2015,are not included in the pricing assumptions.
Refer to pages 119-122 for end notes.
• 10% to15% annual episode
growth
• Includes $35-$40 million per
annum in agency acquisitions
Volume
Inpatient Rehabilitation* Home Health & Hospice*
Medicare Pricing
Approx. 73% of Revenue Approx. 83% of Revenue
FY 2016
Q415-Q316
FY 2017
Q416-Q317
Final Rule
FY 2018
Q417-Q318(17)
CY 2016
Q116-Q416
CY 2017
Q117-Q417
Proposed Rule
CY 2018
Q118-Q418(17)
Market basket update 2.4% 2.7% 1.0% 2.3% 2.8% 1.0%
Healthcare reform reduction (20) bps (75) bps - - - -
Healthcare reform rebasing
adjustment - - - (2.4%) (2.3%) -
Healthcare reform coding intensity
reduction - - - (0.9%) (0.9%) (0.9%)
Outlier fixed dollar loss adjustment - - - - (0.1%) -
Expiration of rural add-on - - - - -
Approx.
(0.7%)
Healthcare reform productivity
adjustment (50) bps (30) bps - (40) bps (50) bps -
Net impact - all providers 1.7% 1.65% 1.0% (1.4%) (1.0%) (0.6%)
Impact from case mix re-weighting - - - - (1.0%) -
Impact from change in outlier
calculation - - - - (1.0% to 2.0%) -
Estimated impact to HealthSouth(18) 1.6% 1.9% (1.7%) (3.0% to 4.0%)
Medicare Advantage
& Managed Care Pricing Approx. 19% of Revenue Approx. 12% of Revenue
Expected Increases 2-4% 2-4% 2-4% 0-2% 0-2% 0-2%
Business Outlook: Revenue Assumptions
2% Sequestration(12)
• 3+% annual discharge growth • 10+% annual episode growth• Includes $30-$40 million per
annum in agency acquisitions
29
Inpatient Rehabilitation Home Health and Hospice
Business Outlook: Labor and Other Expense Assumptions
Salaries
& Benefits
~70%
Hospital
Expenses
~30%
Salaries and Benefits 2016 2017 2018
Merit increases 2.5-3.0% 2.75-3.25% 2.75-3.25%
Benefit costs increases 5-10% 5-10% 5-10%
Hospital Expenses
• Other operating expenses and
supply costs tracking with inflation
Salaries
& Benefits
~85%
Other
Expenses
~15%
Home Health Expenses
• Other operating expenses and supply
costs tracking with inflation
Percent of Salaries & Benefits
Salaries ~ 90%
Benefits ~10%
30
CMS:
• Adopted four new claims-based quality reporting measures beginning
October 1, 2016 to satisfy the reporting requirements of the IMPACT Act:
– Discharge to Community;
– Medicare Spending Per Beneficiary (MSPB);
– Potentially Preventable 30-Day Post-Discharge Readmission
Measure for IRFs; and
– Potentially Preventable Within Stay Readmission Measure for IRFs.
• Adopted one new assessment-based quality measure beginning
October 1, 2018: Drug Regimen Review Conducted with Follow-Up for
Identified Issues.
IRF-PPS Fiscal Year 2017 Final Rule: Key Provisions
New Quality Reporting
Update to Payment Rates
Company Observations
Pricing:
• Net pricing impact to HealthSouth
expected to be approx. +1.9% for
FY 2017 before sequestration(12)
(see page 28)
• Because of its efficient cost
structure, HealthSouth receives
very few outlier payments despite
higher acuity patients
(see page 88)
Quality:
• HealthSouth will supplement
existing quality reporting systems
to meet the new requirements.
The final rule:
• Implemented a net 1.65% market basket increase
– 2.7% market basket increase
– (75 bps) Affordable Care Act reduction
– (30 bps) Affordable Care Act productivity reduction
• Updated the outlier threshold
• Updated wage index values and continued the second year of a 3-year
phase in for IRFs transitioning from rural to urban designations.
Source: https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-18196.pdf
Refer to pages 119-122 for end notes.
31
Pricing:
• Net pricing impact to Encompass
expected to be a reduction of approx.
3.0% - 4.0% for CY 2017 before
sequestration(12)
(see page 28)
• The recalibration of case-mix weights
and the conversion of outlier
payments to a cost-per-unit
methodology are considered budget
neutral in the proposed rule.
However, these changes are
expected to have a disproportionate
impact on agencies, like Encompass,
that treat higher acuity patients.
Quality:
• Encompass will supplement
existing processes and systems to
meet the new requirements
HH-PPS Calendar Year 2017 Proposed Rule: Key Provisions
New Quality Reporting
Update to Payment Rates
Company ObservationsThe proposed rule would:
• Implement a net 2.3% market basket increase
– 2.8% market basket increase
– (50 bps) Affordable Care Act productivity reduction
• Implement the final year of the four-year phase-in of the ACA mandated
rebasing adjustment. The net rebasing reduction is approximately (2.3%).
• Implement the second year of a three-year nominal case-mix coding
intensity reduction adjustment of (0.9%)
• Update the outlier fixed-dollar loss ratio from 0.45 to 0.56 resulting in an
estimated reduction in payments of (0.1%)
• Recalibrate the case-mix weights to reflect current home health resource
use and changes in utilization patterns
• Convert outlier payments from a cost-per-visit to a cost-per-unit
methodology, with “per-visit” rates converted into 15 minute “per-unit” rates
CMS proposes to:
• Adopt, for the CY 2018 payment determination, four measures to meet the
requirements of the IMPACT Act:
– Total Estimated Medicare Spending per Beneficiary (Claims Based);
– Discharge to Community (Claims Based);
– Potentially Preventable 30-Day Post-Discharge Readmission Measure
(Claims Based); and
– Drug Regimen Review Conducted with Follow-Up for Identified Issues
(Patient Assessment Based)
• Remove 28 quality measures, beginning with CY 2017, and 6 process
measures, beginning with CY 2018, due to CMS determining these measures
have been “topped-out.”
Source:https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-15448.pdf
Refer to pages 119-122 for end notes.
32
IMPACT Act of 2014 - Enacted October 6, 2014
Company observations and considerations with respect to the IMPACT Act:
▪ It was developed on a bi-partisan basis by the House Ways and Means and Senate Finance Committees and
incorporated feedback from healthcare providers and provider organizations that responded to the
Committees’ solicitation of post-acute payment reform ideas and proposals.
▪ It directs the United States Department of Health and Human Services (“HHS”), in consultation with healthcare
stakeholders, to implement standardized data collection processes for post-acute quality and resource use
measures.
▪ Although the IMPACT Act does not specifically call for the implementation of a new post-acute payment
system, the Company believes this act will lay the foundation for possible future post-acute payment policies
that would be based on patients’ medical conditions and other clinical factors rather than the setting where the
care is provided.
▪ It will create additional data reporting requirements for the Company’s hospitals(19) and home health agencies.
The precise details of these new reporting requirements, including timing and content, will be developed and
implemented by the Centers for Medicare and Medicaid Services through the regulatory process that the
Company expects will take place over the next several years.
▪ While the Company cannot quantify the potential financial effect of the IMPACT Act on HealthSouth, the
Company believes any post-acute payment system that is data driven and focuses on the needs and
underlying medical conditions of post-acute patients will be positive for providers who offer high-quality, cost-
effective care. HealthSouth believes it is doing just that and expects this act will be positive for the Company.
▪ However, it will likely take years for the quality data to be gathered, standardized patient assessment data to
be assembled and disseminated, and potential payment policies to be developed, tested and promulgated. As
the nation’s largest owner and operator of inpatient rehabilitation hospitals, HealthSouth looks forward to
working with HHS, the Medicare Payment Advisory Commission and other healthcare stakeholders on these
initiatives.
Source: https://www.govtrack.us/congress/bills/113/hr4994/text
Refer to pages 119-122 for end notes.
33
Growth
34
Key Demographic Tailwind:
Expanding Medicare Beneficiary Population
Key Observations:
• The growth rate of Medicare beneficiaries
increased in 2011 to an approx. 3% CAGR
as “baby boomers” started turning 65.
• In 2030, the Medicare population is projected
to increase to 81 million beneficiaries from
55 million beneficiaries today.
Source: www.census.gov/population/projections/files/summary/NP2014-T9.xls; Center for Medicare &
Medicaid Services, Medicare Trustees Report - June 2016 - pages 186, 191
Average Age of HealthSouth Patients
IRF Home Health
< 65 years 29% 11%
65 to 69 years 13% 11%
70 to 74 years 13% 13%
75 to 79 years 14% 15%
80 to 84 years 14% 17%
85 to 89 years 11% 17%
> 90 years 6% 16%
35
1,600
1,400
1,200
1,000
800
600
400
200
0
125
120
115
110
105
100
95
90
85
80
2011 2012 2013 2014 2015 Projected
2016
% Increase in licensed beds 3% 3% 4% 18% 2%
Total number of licensed beds 6,461 6,656 6,825 7,095 8,404 8,531*
Total number of IRFs 99 100 103 107 121 123
Multi-faceted IRF Growth Strategy
2015 total bed count
increase of approx. 18%
Ÿ Reliant (857 IRF beds;
45 SNF beds)
Ÿ Cardinal Hill (158 IRF beds;74 SNF beds)
Ÿ Savannah, GA (50 beds)
Ÿ Franklin, TN (40 beds)
Ÿ Bed expansions, net
(85 beds)
De Novos
Acquisitions/JVs
Bed Expansions
Total IRFsNew Beds
2016 projected bed
count increase
Ÿ Modesto, CA (50 beds)
Ÿ Hot Springs, AR (40 beds)
Ÿ Bryan, TX (49 beds)
Ÿ Broken Arrow, OK (22 beds)
Ÿ Bed expansions (110 beds)
* 2016 projected number of licensed beds includes the disposal of 61 beds at Beaumont, TX (sold June 1, 2016)
and 83 beds at Austin, TX (closed to patients on August 10, 2016 ).
36
Disciplined Approach to
Joint Ventures / De Novos / Acquisitions
Considerations:
– Demographics
– Forecasted growth in the number of patients requiring
rehab-level of care
– Presence of other IRFs; SNFs
– Bed need
– Geographic proximity to other HLS IRFs and
Encompass agencies
– Willingness of seller; interest of joint venture partners
– HLS confidence in ability to close
CA = confidentiality agreement
IRF Growth Pipeline
Typical Development Pipeline
Factors:
• CON process/timeline
• Fair market valuation of contributed assets (joint
ventures only)
• Partnership complexities
HLS Value Proposition
CAPEX to build free-standing IRF, freeing up space for
medical/surgical beds
Enhance the position of the acute care hospital to meet
quality requirements and effectively participate in bundled
payment initiatives
Increased acute care hospital flow-through by taking
appropriate higher acuity patients faster than other post-
acute settings
Proprietary rehabilitation-specific clinical information
system ("ACE-IT") integrated with acute care hospitals'
clinical information systems to facilitate patient transfers,
reduce readmissions, and enhance outcomes
Proprietary real-time performance management systems
(care management, labor productivity, quality reporting,
therapy analysis and expense management) to ensure
appropriate clinical oversight and improve profitability
Proven track record of efficient management of regulatory
process (CON, licensure, occupancy, etc.)
Experienced transaction/integration team
National leader in post-acute policy activities
Partnership with Encompass facilitates clinical
collaboration
No. of Projects
Exploratory /
CA Executed
40 - 50
Actively
Working
10 - 12
Near-term
Actionable
4 - 6
37
•
• HealthSouth's IRF joint ventures began in 1991.
• HealthSouth's joint venture hospital partners own equity that ranges from 2.5% to 50%.
• 33 of 34 hospitals are consolidated joint ventures, with one accounted for under the equity
method.
IRF Acute Care Joint Venture Partnerships
34* joint venture hospitals in place with major healthcare systems such as:
Joint ventures with acute care hospitals establish a solid foundation for clinical collaboration
and alternative payment models.
• Barnes-Jewish • Monmouth Medical Center (Barnabas Health)
• University of Virginia Medical Center • Yuma Regional Medical Center
• Vanderbilt University • Mercy Health System
• Geisinger Health System • Maine Medical Center
• Martin Health System
* Excludes joint venture hospitals that have been announced but were not operational as of June 30, 2016: Jackson, TN;
Westerville, OH; Broken Arrow, OK; Bryan, TX; Midland, TX; and Winston-Salem, NC.
38
New IRFs: Illustrative De Novo Timeline
Day 1
With CON Permitting
& Design
Planning
& Zoning Groundbreaking
Permitting
& Design
Planning
& Zoning Groundbreaking
Day 1
Without CON
6 months to 3 years 20 months
CON Process Construction
Construction
Opening
Month 20
Opening
In California, the design and permitting process can take more than 12 months.
39
Investment Considerations
• IRR objective of 13% (after tax)
• Includes CON costs (where applicable)
• Includes cost of CIS installation
• May be structured through a joint venture
• Prototype includes all private rooms
• Minimum of 30 patients treated for zero revenue
(Medicare certification)
• Core infrastructure of building anticipates future
expansion; potential to enhance returns with future
bed expansion
Capital Cost (millions) Low High Operational Date Location Beds
Construction, design, permitting, etc. $17 $21
2018 Murrieta, CA 50
2017 Bryan, TX 30
2017 Jackson, TN(34) 48
Land 2 3 Q1 2017 Westerville, OH 60Q4 2016 Broken Arrow, OK(34) 40
Equipment (Including CIS) 3 4
Q2 2016 Hot Springs, AR(34) 40
Q2 2016 Savannah, GA(34) 50
Q2 2016 Modesto, CA 50
$22 $28
Q4 2015 Franklin, TN 40
Q4 2014
Q4 2014
Q4 2014
Middletown, DE
Newnan, GA
Altamonte Springs, FL
34
50
50
Pre-Opening Expenses(20) (millions) Low High Q2 2013
Q2 2013
Littleton, CO
Stuart, FL
40
34Operating $0.5 $1.0 Q4 2012 Ocala, FL 40
Salaries, wages, benefits 0.4 1.0 Q4 2011 Cypress, TX 40
$0.9 $2.0
New IRFs: De Novo (40-50 beds) Assumptions and Timing
* The joint venture will own and operate an existing hospital/unit while it builds or renovates a free-standing hospital.
Refer to pages 119-122 for end notes.
Operational Date Location Beds
2018 Shelby County, AL 34
2018 Murrieta, CA 50
Q4 2017 Pearland, TX 40
Q3 2017 Jackson, TN 48
Q3 2017 Broken Arrow, OK* 40
Q2 2017 Westerville, OH 60
Q3 2016 Bryan, TX* 49
Q3 2016 Hot Springs, AR 40
Q3 2016 Modesto, CA 50
Q2 2016 Savannah, GA 50
Q4 2015 Franklin, TN 40
Q4 2014
Q4 2014
Q4 2014
Middletown, DE
Newnan, GA
Altamonte Springs, FL
34
50
50
Q2 2013
Q2 2013
Littleton, CO
Stuart, FL
40
34
40
Cypress (10/2011) Ocala (12/2012) Littleton (05/2013) Stuart (06/2013)
Altamonte
Springs (10/2014)
Newnan (12/2014) Middletown (12/2014) Franklin (12/2015)
HLS average 2015
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8 9 10 11 12
Months
IRF De Novo Occupancy and EBITDA* Trends
Occupancy
Sustained Positive EBITDA
* Hospital EBITDA = earnings before interest, taxes, depreciation, and amortization
directly attributable to the related hospital.
occupancy, excluding Reliant
41
New IRFs: Assumptions for Individual Hospital Acquisitions
Unit/Equity Acquisitions
Location Beds DateAcquired
Worcester, MA(13) 110 Q2 2014
San Antonio, TX 34 Q3 2012
Ft. Smith, AR 30 Q3 2010
Little Rock, AR 23 Q1 2010
Altoona, PA 18 Q4 2009
Arlington, TX 30 Q3 2008
IRF Acquisitions
Location Date Acquired Beds AcquiredCensus
One Year
Later Census
Broken Arrow, OK* Q3 2016 22 15 TBD
Bryan, TX* Q3 2016 19 18 TBD
Hot Springs, AR Q1 2016 20 5 TBD
Lexington, KY Q2 2015 232 140 125
Savannah, GA Q2 2015 50 31 33
Johnson City, TN Q4 2014 26 6 21
Augusta, GA Q2 2013 58 31 39
Investment Considerations Value Added
• IRR objective of 13% (after tax)
• May be structured as a joint venture
• Purchase price excludes cost of CIS installation
• TeamWorks approach to sales/marketing
• Labor management tools and best practices
• Clinical expertise
• Clinical technology and programming (CIS installation)
• Supply chain efficiencies
• Medical leadership and clinical advisory boards
• Partnership with Encompass (where applicable)
* The joint venture will own and operate an existing hospital/unit while it builds or renovates a free-standing hospital.
Refer to pages 119-122 for end notes.
42
• Highly complementary business to core home health services
• Prioritization of Encompass home health markets
* No Encompass hospice offering in over 84% of Encompass' current home
health locations
• Ability to leverage existing EHHI infrastructure
• Strong demand due to cost effectiveness of home-based care and
implementation of bundled payments
• Strong organic growth from existing agencies
• Located in markets with attractive demographics
* Encompass currently located in states that represent approx. 58% of total
Medicare home health and hospice spend
Organic Growth
• Attractive partner due to quality of outcomes, data management, scale and
market density, and willingness/ability to treat high acuity and/or chronic
patients
• Plan of care coordination with HealthSouth IRFs
• Care Transition Coordinators (CTCs) serve as representatives in transitional
care activities and strategic relationships with other healthcare providers
• Highly fragmented market
• Prioritization of HealthSouth IRF markets
• Proven ability to consummate and integrate acquisitions
• Sustainable and replicable culture
• Implementation of Encompass' best practices and technology
Home Health
Acquisitions
Hospice
Acquisitions
Clinical
Collaboration
Multi-faceted Home Health & Hospice Growth Strategy
43
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
#
of
Ag
en
ci
es
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Home Health Growth Pipeline
Ÿ Approx. $18 billion home
health market is highly
fragmented with over 12,400
home health agencies.
Ÿ Approx. 94% of these have
annual revenue of less than
$5 million.
Ÿ Top 5 public companies
represent approx. 18% of the
Medicare market.
Ÿ Encompass represents 2.4%
of the Medicare home health
market.
Prioritize acquisitions in
HLS IRF markets to enhance
clinical collaboration
Number of Home Health Agencies Over Time
Cost-
Based
Interim
Payment
Systems
(IPS)
Prospective Payment System (PPS)
The number of home health agencies
is near an all-time high and presents
significant consolidation opportunities.
Source: MedPAC - Report to Congress: Medicare Payment Policy - March 2016, page 214, March 2015, page 218,
March 2014, page 221, March 2013, page 194, and March 2003, page 112; MedPAC - Healthcare spending
and the Medicare program, June 2006, page 131; Health Market Science
44
Freestanding
Hospital/SNF
based
Home Health
based
4,000
3,000
2,000
1,000
0
2000 2007 2011 2012 2013 2014
1,069
2,103 2,491
2,643 2,844 3,027807
704
608 591
578 559
378
443
486 492
503 506
Hospice Growth Pipeline
Ÿ In 2014, Medicare hospice spending totaled approx.
$15 billion.
Ÿ More than 1.3 million Medicare beneficiaries received
hospice services from over 4,000 providers in 2014.
Ÿ Between 2000 and 2012, Medicare spending for hospice
increased more than 400%, driven by greater numbers of
beneficiaries electing hospice.
Ÿ Between 2012 and 2014, Medicare spending has been flat
despite the growth in the number of beneficiaries receiving
hospice care. Flat spending is mostly explained by the 2%
payment reduction from the sequester.
Ÿ Occurring simultaneously since 2000 has been a
substantial increase in the number of for-profit providers.
Acquisition Strategy for
Hospice
Ÿ Build out markets with
existing home health
presence
Ÿ Medicare focus
Ÿ Home-based service
offering
Ÿ Strong clinical practice
and clean compliance
record
Ÿ Highly regarded market
reputation
Ÿ Attractive geography
and demographics
Ÿ Quality people that will
succeed in Encompass
Ÿ Ability to leverage
existing infrastructure to
drive margin
Hospice Providers over Time
Source: MedPAC, Medicare Payment Policy, March 2016, pages 299, 301, and 306.
45
Summary: Multiple Avenues Available for Sustained Growth
in Both Segments
• The Company continues to have excellent
organic growth opportunities in inpatient
rehabilitation, home health, and hospice.
— Track record of consistent market share gains
— IRF organic growth supplemented by bed
additions
— Maturation of acquired agencies for Encompass
• Target four to six new IRFs per year to
complement organic growth
— De novos and IRF acquisitions will allow entry
into, and growth in, new markets.
— Proven track record of success
• Target $30 to $40 million per year toward home
health and hospice acquisitions to complement
organic growth
— Home health acquisitions and new-store growth
prioritized in HealthSouth IRF markets
— Hospice acquisitions and new-store growth
prioritized in Encompass home health markets
• Longer term, consider acquisitions of other
complementary businesses
As the 1946-1965 baby boom
generation reaches 65, the growth in
the number of beneficiaries increases
from 2% to about 3%.
Source: Centers for Medicare & Medicaid Services, Medicare Trustee's Report - June 2016 - page 191
The IRF, home health, and hospice
patient population is experiencing
favorable long-term demographic
trends:
• Aging of baby boomer generation
• Increased average life expectancy
46
Alternative Payment Models
47
CMS: Driving Change Toward Integrated Delivery Payment
Models, Value-Based Purchasing
Future Post-Acute Providers (Timing?)
Inpatient Rehabilitation Facilities
• Full range: low acuity g high acuity
• 24/7 nursing coverage
• Eliminates payment silos
Home-Based Post-Acute Services
• More care in the home
(lowest cost setting)
• Differentiator: Ability to care for high-acuity,
poly-chronic patients
>> 50% of Medicare fee-for-service
payments via integrated delivery
payment models
>> 90% of Medicare fee-for-service
payments tied to quality/value
Ÿ Integrated Delivery
Payment Models
Ÿ Value-Based
Payments
Current Post-Acute Providers
• Medicare payments/regulations will be
outcome focused.
• Many existing regulations will become
obsolete.
Facility-Based Post Acute Services
>> 30% of Medicare fee-for-service
payments via integrated delivery
payment models (e.g., bundled
payments; accountable care
organizations (ACOs))
>> 85% of Medicare fee-for-service
payments tied to quality/value (i.e.,
value-based purchasing,
readmissions reduction programs)
20172016
Source: Health and Human Services Fact Sheet announcing new reimbursement goals - January 26, 2015
CMS
Goals
2018 2019
CMS
Goals
Skilled Nursing Facilities
Home Health
• Medicare payments/regulations are site
specific (e.g., 60% Rule, 3-Hour Rule,
"preponderance" of one-to-one therapy).
Long-Term Acute Care Hospitals
48
Degree of Provider Integration and Accountability
Level of Financial Ris
k
Both segments are
highly competitive
TODAY
Position both segments
to be highly competitive
TOMORROW
Fee-for-service
Value-based purchasing
(payments tied to outcomes)
Capitation
Population health management
(Accountable Care Organizations)
Episodic payments
(bundled payments - shared savings/risks)
Strategy: Position HealthSouth as the post-acute provider
of choice through the provision of comprehensive,
coordinated facility-based and home-based post-
acute services
49
• HCHB manages entire patient work flow (pg 69).
• Full utilization of capabilities in leading-edge technology are
embedded in culture, driving superior clinical, operational and
financial outcomes (pg 69).
• Electronic clinical information system in 92 IRFs allows for
interfacing with all major acute electronic medical record
systems (pg 67).
• Facilitates patient information exchange (pg 67).
Coordinated Care Models: Positioned to succeed by offering
both "facility-based" and "home-based" post-acute services
• Lower re-hospitalization rates than national average (pg 17).
• Higher star ratings and patient satisfaction scores than the
national average (pg 17).
• Scale and operating leverage contribute to low cost per visit
(pg 21).
• Consistent use of evidence based clinical pathways.
• Outcome-based "Clinical Specialty Programs".
• Discharge to community rate consistently exceeds industry
average (see page 17).
• Scale and operating leverage contribute to low cost per
discharge (pg 20).
• Medicare pays HealthSouth less per discharge, on average,
and HealthSouth treats a higher acuity patient (pg 20).
• HealthSouth has lower outlier payments than average (pg 88).
• 8 IRFs are participating in Model 3. Under Model 3, an
episode is triggered by a PAC admission (pg 52).
• HealthSouth has 34 IRF joint venture partnerships with acute
care hospitals. Joint ventures establish a solid foundation for
clinical collaboration and alternative payment models (pg 37).
• 36 IRFs are located in CJR markets; 17 with Encompass
overlap (pg 52)
• Encompass is Premier's exclusive preferred home health
provider.
• Premier ACO includes approximately 20,000 covered lives in
north Texas and southern Oklahoma.
• Exploring ACO participation in several other markets.
• Active participant in BPCI and CJR markets (pg 53).
Commitment to Coordinated Care is Enhanced by Technology
High-Quality, Cost-Effective IRF Provider High-Quality, Cost-Effective Home Care Provider
IRF Participation with Bundling Initiatives Encompass Participation with ACOs/Bundling Initiatives
50
Accountable Care Organizations (ACOs)
As of
January 2016,
there were
477
Medicare ACOs
serving approx.
9 million
Medicare
beneficiaries.
Performance
results so far
have been
mixed.
Pioneer ACOs
(9 ACOs / ~275,000 Medicare beneficiaries)
• 32 Pioneer ACOs launched since program’s inception; 9 remain in the program (some voluntarily transferred to
the Next Generation ACO program - see below).
• Fewer than half that participated in 2012, 2013, and 2014 earned shared savings.
• Shared savings CMS paid to Pioneer ACOs totaled $77 million in 2012, $68 million in 2013, and $82 million in
2014 (an average of $6.4 million per ACO each year).
• Estimates suggest ACO start-up and annual administrative costs significantly reduce or exceed the shared
savings generated from ACOs.
Medicare Shared Savings Program (MSSP)
(433 ACOs / 7.7 million Medicare beneficiaries)
• Year 2 performance for 333 MSSP ACOs:
◦ 86 ACOs (26%) held spending below their benchmark and earned ~$341 million of shared savings (an
average of $4.0 million per ACO).
◦ 95 ACOs (28%) reduced health costs compared to their benchmark, but did not meet the minimum savings
threshold for shared savings.
◦ 152 ACOs (46%) did not reduce costs compared to their benchmark.
Source: CMS/HHS press releases; Government Accountability Office (GAO) Report to the House Ways and Means –
April 2015; AHA/McManis report - April 2011; NAACOS National ACO Survey - November 2013
Encompass serves as Premier ACO's (~20,000 covered lives in north Texas and
southern Oklahoma) exclusive preferred home health provider.
Ÿ Receives increased referrals for Medicare home health patients from the ACO
Ÿ Eligible to receive a portion of the ACO's shared savings
Ÿ Total shared savings achieved by ACO in 2014 was $5.8 million.
- Ranked 17th out of all MSSP ACOs
- Did not meet minimum savings rate for Encompass to qualify for shared savings
Next Generation ACOs - Announced by CMS in January 2016
• Initiative for ACOs that are experienced in coordinating care for populations of patients; 18 ACO participants
• Allows providers to assume higher levels of financial risk and reward than are available under Pioneer ACOs
and MSSP
51
Bundled Payments
How the Retrospective Models Work
Ÿ The BPCI “convener” is responsible for bringing
providers together to provide a continuum of services
throughout an episode of care. The BPCI "awardee" is
the entity that bears the financial risk and receives the
shared savings from CMS.
Ÿ Each participating provider in the care sequence
continues to receive its traditional reimbursement from
Medicare.
Ÿ The sum of all payments made to each provider for
selected DRGs is then retroactively reconciled to a
target payment determined by CMS. Payment
reconciliations are performed quarterly, typically with a
9- to 12-month lag.
Ÿ Payment reconciliations: If actual spending exceeds
the target, the awardee is responsible for paying a
portion of the difference to CMS. If actual spending is
less than the target, the awardee keeps a portion of
the savings.
Ÿ The convener can choose to partner with other
providers in shared savings agreements and allocate
the savings, or “rebates,” across the providers who
participated in providing the continuum of care.
Ÿ Shared savings agreements must be reviewed and
approved by the Center for Medicare and Medicaid
Innovation.
Model 1
All acute patients (all DRGs)
The Bundled Payments for Care Improvement
(BPCI) initiative currently tests
four types of bundles
(i.e. "Models"):
Models 2 & 3 have the most impact on post-acute providers.
Model 2
Hospital plus post-acute period (selected DRGs)
Model 3
Post acute only (selected DRGs)
Model 4
Hospital plus readmissions
(selected DRGs)
Notes: Models 1, 2, and 3 are retrospective models; model 4 is a prospective model.
The convener and awardee can be, but may not be, the same entity.
52
Model 2
HLS Referral Source Bundle Type % of HLS MedicareDischarges % of Total HLS Discharges
127 acute care hospitals
participating in Model 2 / Phase 2
in 82 HLS IRF markets(21)
Bundles selected for Model 2
participation are chosen from a
list of 48 BPCI-eligible bundles.
3.6% 2.6%
Approx. 800 acute care hospitals
in 67 geographic areas included in
the Comprehensive Care for Joint
Replacement Model ("CJR")
Lower extremity joint
replacement ("LEJR") 2.1% 1.5%
HealthSouth has 36 IRFs located in
CJR markets; 17 overlap with Encompass
Bundling Participation - Inpatient Rehabilitation
HealthSouth IRF Participation in Model 3
BPCI Bundle /
Number of IRFs Bundle Length
% of HLS Medicare
Discharges % of Total HLS Discharges
Stroke (3 IRFs) 60 days 0.18% 0.13%
Simple Pneumonia (1 IRF) 60 days 0.02% 0.02%
Sepsis (1 IRF) 60 days 0.03% 0.02%
Double-lower extremity joint
replacement (2 IRFs) 60 days 0.03% 0.02%
Upper extremity joint replacement
(1 IRF) 60 days 0.01% 0.01%
Data on this page is based on 2014 discharges excluding Reliant.
Refer to pages 119-122 for end notes.
~40% of these patients have complicating comorbidities
~35% of these discharges are LEJR episodes and ~40% of
these LEJR patients have complicating comorbidities
Note - The above data does not incorporate the proposed cardiac bundles or proposed CJR changes.
This information will be considered once the proposed rule is finalized.
53
Bundling Participation - Home Health and Hospice
The CJR Model represents a significant opportunity for Encompass because home
health agencies are expected to capture additional share as discharges bypass
SNFs altogether or lower the length of stay in a SNF.
52 Encompass providers have selected the
following bundle types for participation in
Model 3.
Number of BPCI
Bundles Selected
Anticipated Home
Health Episodes per
Year
% of Total
Encompass
Episodes per
Year
Major joint replacement of the lower extremity 13 925 0.56%
Simple pneumonia and respiratory infections 8 207 0.13%
Spinal fusion (non-cervical) 4 117 0.07%
Revision of the hip or knee 6 99 0.06%
Sepsis 5 96 0.06%
Urinary tract infection 3 82 0.05%
Chronic obstructive pulmonary disease 4 74 0.05%
Other respiratory 8 64 0.04%
Major joint replacement of the upper extremity 4 60 0.04%
Congestive heart failure 5 60 0.04%
All Other Episode Types 40 244 0.14%
Total 100 2,028 1.2%
Note: Data represents Encompass projections using 2014 data.
Note - The above data does not incorporate the proposed cardiac bundles or proposed CJR changes.
This information will be considered once the proposed rule is finalized.
54
Comprehensive Care for Joint Replacement Model -
Background
Source: https://innovation.cms.gov/initiatives/cjr
The Comprehensive Care for Joint Replacement Model (“CJR”) is a payment
model for episodes of care related to knee and hip replacements under
Medicare. This five-year model began April 1, 2016 in 67 geographic areas.
Acute care hospital patients are categorized by Medicare Severity Diagnostic-Related
Groups (“MS-DRGs”); the CJR model covers two MS-DRGs:
MS-DRG 469 Major joint replacement or reattachment of lower extremity with major complications orcomorbidities (These comorbidities are specific to acute care hospitals and are defined differently than IRFs' comorbidities.)
MS-DRG 470 Major joint replacement or reattachment of lower extremity without major complications orcomorbidities (These comorbidities are specific to acute care hospitals and are defined differently than IRFs' comorbidities.)
IRF patients are categorized by Rehabilitation Impairment Categories (“RICs”);
CJR model patients are a subset of two RICs:
RIC 07 Lower extremity fractures (~30% are MS-DRG 469 and 470)
RIC 08 Lower extremity joint replacements (~75% are MS-DRG 469 and 470)
Since the implementation of the 60% Rule, the relative amount of RIC 07 patients treated in
HealthSouth IRFs has declined moderately while the amount of RIC 08 patients treated has
declined significantly.
RIC
% of HealthSouth Medicare Discharges
2005 2007 2009 2011 2013 2015
Total RIC 07(Fractures) 13.1% 14.8% 13.6% 11.6% 10.2% 9.8%
Total RIC 08 (Replacements) 17.9% 11.8% 9.0% 7.6% 6.7% 5.5%
Note - The above data does not incorporate the proposed CJR changes.
This information will be considered once the proposed rule is finalized.
55
If episode spending <
target price, acute care
hospital receives
additional payment
from Medicare*.
If episode spending >
target price, acute care
hospital returns a
portion of the Medicare
episode payment.
CJR Model - How Does It Work?
POST-ACUTE CARE
PROVIDERS
Acute care hospitals are accountable for
expenditures and quality of care for entire "episode."
Episode = hospitalization + 90 days post discharge
Begins with an
admission to an
acute care
hospital for a
patient who is
ultimately
discharged
under MS-DRG
469 or 470.
Acute care hospitals receive separate episode target prices each year reflecting the differences in spending for each MS-DRG.
Target prices:
ü are based on three years of historical data;
ü include a 3% discount* vs. expected episode spending; and
ü incorporate a blend of historical, hospital-specific spending and regional spending for CJR episodes, with the regional
component of the blend increasing over time.
Years 1 and 2 =
2/3 hospital-specific; 1/3 regional
Year 3 =
1/3 hospital-specific; 2/3 regional
Years 4 and 5 =
100% regional
RETROSPECTIVE
RECONCILIATION
PERFORMED BY CMS
At the end of each
performance year,
actual spending for
each episode is
compared to each
acute care hospital's
target price.
There is no downside risk in year one. Repayment
responsibility will be phased in during year two.
All providers are paid under the usual Medicare payment system rules and procedures.
Patients are
discharged to a
post-acute care
provider or to
home self-care.
Source: CMS
*Subject to quality of care attainment
56
CJR Model - How Does It Work? - Collaborators
Reconciliation Payment Limit Repayment Limit
Payment Limits for CJR Acute Care Hospitals
20
10
0
-10
-20
%
of
Ta
rg
et
Pr
ic
e
D
iff
er
en
ce
2016 2017 2018 2019 2020
Year of Implementation
5% 5%
10%
20% 20%
(5)%
(10)%
(20)% (20)%
Risk Sharing is Allowed in CJR with “Collaborators”
Acute care hospitals participating in CJR may choose to engage in risk-sharing financial arrangements
with other care providers for CJR episodes. A provider participating in these risk-sharing arrangements
with a CJR acute care hospital is deemed a "collaborator."
There are eight types of providers eligible to
be CJR Collaborators, including IRFs and
home health agencies.
CJR acute care hospitals must establish
eligibility criteria for Collaborators to meet,
including quality of care criteria.
Gain sharing payments must be actually and
proportionally related to the care of
beneficiaries in a CJR episode.
No one Collaborator may make an alignment
payment greater than 25% of the CJR acute
care hospital's repayment amount. In
aggregate, a CJR acute care hospital may
not collect alignment payments for more than
50% of its repayment amount.
There is no ceiling on the portion of the
reconciliation payments received by a
hospital from Medicare that the hospital may
distribute to non-physician Collaborators.
Source: DHG Healthcare and CMS
The corridors for risk sharing phase-in over time.
57
CJR Model - What's the Potential Impact to HealthSouth?
Source: 2014 Medicare claims data
* Complicating comorbidities include conditions such as diabetes, morbid obesity, and congestive heart failure.
~30% of HealthSouth's fractures
and ~40% of HealthSouth's
replacements have complicating
comorbidities* that require the
intensity of care delivered in an IRF.
HealthSouth
Discharges in CJR
Markets
Fractures
~580 discharges
Replacements
~1,450 discharges
Σ = ~2,030
Discharges,
or ~2.1% of Total
HLS Medicare
Discharges
(~1.5% of Total HLS
Discharges)
90-Day Episode Spend
Fractures
HLS cost ≤ SNF cost HLS cost > SNF cost
~400 discharges ~180 discharges
Replacements
HLS cost ≤ SNF cost HLS cost > SNF cost
~200 discharges ~1,250 discharges
Fractures
(average revenue
per discharge of
~$19,300)
Replacements
(average revenue
per discharge of
~$14,400)
Total CJR
discharges ~580 ~1,450
CJR discharges with
HLS cost ≤ SNF cost (~400) (~200)
Discharges with
complicating
comorbidities (~50) (~500)
Residual CJR
discharges ~130 ~750
Note - The above data does not incorporate the proposed CJR changes.
This information will be considered once the proposed rule is finalized.
58
CJR Model - HealthSouth's Strategies
Opportunities Outweigh the Risks
Increase the
number of CJR
discharges in all
markets where
HealthSouth has a
cost advantage
ü
Present the
empirical data to
referral sources
ü
Further improve
advantage by
reducing acute
care transfers and
discharges to
SNFs through
tools such as
predictive
modeling
Increase the
number of
Encompass
home health
CJR episodes
ü
Lower length
of stay or
bypass SNFs
and go directly
to Encompass
home health
ü
Increase
clinical
collaboration
efforts
between
HealthSouth's
IRFs and
Encompass
Average revenue
per episode of
~$3,300
Increase the number
of stroke discharges
in all markets
ü
New guidelines for
adult stroke
rehabilitation and
recovery favoring
IRFs over SNFs
released by the
American Heart
Association and the
American Stroke
Association
ü
100 of
HealthSouth's IRFs
hold The Joint
Commission's
Disease-Specific
Care Certification in
Stroke
Rehabilitation.
Average revenue per
discharge of ~$22,700
Serve as a
collaborator
ü
Enhance value
proposition to
CJR acute care
hospitals by
engaging in risk-
sharing financial
arrangements
Ÿ Individually
negotiated
with each
acute care
hospital based
on
circumstances
in each
market
Ÿ Risk capped
at 25% of
acute care
hospital's
repayment
amount
Improve value
proposition for CJR
discharges in markets in
which HealthSouth does
not currently have a cost
advantage
ü
Import best practices
from other HealthSouth
IRFs
ü
Reduce acute-care
transfers and
discharges to SNFs
through tools such as
predictive modeling
ü
Increase clinical
collaboration between
HealthSouth's IRFs and
Encompass
59
Medicare-certified home health agencies
that provide services in the following states
will be required to participate in the model:
1. Arizona 3
2. Florida 15
3. Iowa —
4. Maryland 1
5. Massachusetts 2
6. Nebraska —
7. North Carolina 6
8. Tennessee 5
9. Washington —
Encompass Agencies 32
In the calendar year 2016 HH-PPS final rule,
CMS finalized a Home Health Value-Based
Purchasing (HHBVP) Model that covers five
performance years beginning January 1, 2016
and concluding on December 31, 2022.
Home Health Value-Based Purchasing Model
Based on its industry-leading quality and patient satisfaction scores, Encompass
is positioned to benefit from its payments being directly connected to its
objective performance versus its peers via value-based payments (see page 17).
• Six process measures from existing Outcome and
Assessment Information Set (OASIS) data collection
• Eight outcome measures from existing OASIS data
collection and two outcome measures from claims
data
• Five HHCAHPS** consumer satisfaction measures
• Three New Measures:
◦ points are achieved for merely reporting data
◦ will be submitted through the HHVBP Portal
Total Performance Scores (a numeric score ranging
from 0 to 100 based on each agency's performance)
will be calculated from the following set of measures*:
Performance Years Calendar Year forPayment Adjustment
Maximum Payment
Adjustment (-/+)
2016 2018 3%
2017 2019 5%
2018 2020 6%
2019 2021 7%
2020 2022 8%
Source: https://innovation.cms.gov/initiatives/home-health-value-based-purchasing-model
* The 2017 HH-PPS proposed rule included a provision that would revise the set of measures included in the HHVBP model.
** Home Health Care Consumer Assessment of Healthcare Providers and Systems
– Approximately 19% of Encompass' Medicare revenue –
1st Adjustment
60
Capital Structure
61
Debt Maturity Profile - Face Value
* This chart does not include ~$284 million of capital lease obligations or ~$43 million of other notes payable.
See the debt schedule on page 64.
2015 2019 2020 2020 2021 2022 2023 2024 2025 2043
$350 Senior
Notes 5.75%
$1,200
Senior
Notes
5.75%
$320 Conv.
Sr. Sub.
Notes 2.0%
$300 Senior
Notes
5.125%
$150
Drawn +
$35
reserved
for LC’s
Holders have a
put option in 2020
As of June 30, 2016*
($ in millions)
$415
Available
$76 Senior
Notes 7.75%
Callable beginning
November 2017
HealthSouth is positioned with a cost-efficient, flexible capital structure.
Callable beginning March 2018
Revolver
Revolver
Capacity $434
Term
Loans
Fully callable; redeemed $100 million
in first half of 2016; redemption price
decreases from 103.875% to
102.583% in September 2016
Callable beginning
September 2020
The Company will complete the redemption of its 7.75% Senior Notes due 2022 in September 2016.
• Expect to fund using cash on hand and capacity under revolving credit facility
• Q3 2016 loss on early extinguishment of debt of ~$3 million
• Estimated cash interest savings of ~ $1 million in 2016
62
S&P Moody's
Corporate Rating BB- Ba3
Outlook Negative Stable
Revolver Rating BB+ Baa3
Senior Notes Rating B+ B1
Financial Leverage and Liquidity
(1)
Liquidity
Credit Ratings
2011 2012 2013 2014 2015 Trailing
4 Qtrs
$1.25 $1.25
$1.52
$2.11
$3.17 $3.09
(billions)
Leverage Ratio(22)
Total Debt
4.1x
June 30,
2016
Dec. 31,
2015
Cash Available $ 70.3 $ 61.6
Revolver $ 600.0 $ 600.0
Less:
- Draws (150.0) (130.0)
- Letters of Credit (35.0) (34.2)
Available $ 415.0 $ 435.8
Total Liquidity $ 485.3 $ 497.4
Reconciliations to GAAP provided on pages 95-117.
Refer to pages 119-122 for end notes. See also the debt schedule on page 64.
2.7x
63
37 Lease Building and Land
A CON (Certificate of Need) is a regulatory requirement in
approx. 50% of states and some federal jurisdictions that
require state authorization prior to proposed acquisitions,
expansions, or construction of new hospitals.
56 Own Building and Land*
28 Own Building Only
* The joint venture with CHI St. Vincent in Hot Springs, AR is operating under a short-term lease until a replacement
hospital is completed in 2016. The replacement hospital will be owned by the respective joint venture and is included
in the "Own Building and Land" category.
IRF Real Estate Portfolio
121 Inpatient Rehabilitation Hospitals: 8,430 Licensed Beds
4,380 Licensed Beds
in CON States
4,050 Licensed Beds
in Non-CON States
1 of the 121 HealthSouth hospitals is nonconsolidated. For that
hospital, the Company owns the building only. The Company's
licensed bed count does not include the 51 beds associated
with the nonconsolidated hospital.
As of June 30, 2016
64
Debt Schedule
Reconciliations to GAAP provided on pages 95-117.
Change in
June 30, Dec. 31, Debt vs.
($millions) 2016 2015 YE 2015
Advances under $600 million revolving credit facility,
July 2020 - LIBOR +200bps $ 150.0 $ 130.0 $ 20.0
Term loan facility, July 2020 - LIBOR +200bps 432.3 443.3 (11.0)
Bonds Payable:
7.75% Senior Notes due 2022 75.3 174.3 (99.0)
5.125% Senior Notes due 2023 294.9 294.6 0.3
5.75% Senior Notes due 2024 1,192.9 1,192.6 0.3
5.75% Senior Notes due 2025 343.6 343.4 0.2
2.0% Convertible Senior Subordinated Notes due 2043 270.7 265.9 4.8
Other notes payable 43.3 39.2 4.1
Capital lease obligations 283.5 288.2 (4.7)
Long-term debt $ 3,086.5 $ 3,171.5 $ (85.0)
Debt to Adjusted EBITDA(22) 4.1x 4.6x
Note: The Company redeemed $100 million of the 2022 Notes in the first half of 2016 and will complete the redemption of the
remainder of these notes in September 2016.
65
2.0% Convertible Senior Subordinated Notes Due 2043
Background
• In November 2013, the Company issued $320 million of 2.0% Convertible Senior Subordinated Notes
due 2043 in exchange for 257,110 shares of its 6.5% Series A Convertible Perpetual Preferred Stock.
• The Company viewed the Convertible Perpetual Preferred Stock as having a high cost of capital with
limited alternatives for redemption.
• Investors were willing to trade the 6.5% dividend on the Convertible Perpetual Preferred Stock for the
2.0% coupon on the Convertible Senior Subordinated Notes in large part due to the liquidity offered via
the investor put option (a protection against downside credit risk).
Terms
• Issued - $320 million (recorded as approx. $249 million of debt and $71 million of equity)
• Coupon - 2.0%
• Underlying shares - approx. 8.5 million common shares (8.3 million included in 2015 weighted average
diluted share count)
• Current conversion price - $37.59
• Current conversion rate - 26.6011
• Convertible, by the holder, at any time into shares of the Company's common stock
ü At the Company's option, settlement can be made in cash, shares, or any combination thereof.
Options
Holders'
Option
• Put option effective December 1, 2020 at 100% of principal amount, plus accrued
and unpaid interest which must be settled in cash
Company's
Option
• Right to redeem, prior to December 2018, at 100% of the principal amount (plus a
make-whole premium) if volume weighted average price of Company's common
stock is at least 120% (currently $45.11) of the conversion price of the convertible
notes for at least 20 trading days during any 30 consecutive trading day period
• Holders may elect to convert their notes in lieu of redemption and receive any make-
whole premium due
• After December 2018, fully redeemable, at par, for cash
66
Information Technology
67
IRF Clinical Information System (“CIS”): Improved
Patient Safety and Streamlined Operational Efficiencies
Pre-Admission Assessment
& Approval
Discharge Planning
and Patient Education
•Patient History
•Problems and Diagnoses
•Orders and Results
•Plan of Care
•Workflow Alerts and Reminders
•Treatment and Interventions
Document
Imaging
Charge and
Registration Services
•Registration
•Census
•Coding
•Billing
Quality Reporting
•Uniform Data Systems
•Clinical Data Warehouse
•Clinical Intelligence
Referral Hospitals
Ancillary Services
Clinical Notes
• Physician
• Nursing
• Therapy
• Care Mgmt.
Integrated and
Bar-coded Point of Care
Medication Administration
Treatment Plan
• Computerized
Physician Order
Entry (CPOE)
• Clinical Decision
Support (CDS)
Coordinate Care
and Engage Patients
68
IRF Proprietary Management System: Beacon
69
Home Health Information System: Homecare Homebase
Clinical
Ÿ HCHB manages the entire patient
workflow and provides field clinicians
with access to patient records,
diagnostic information, and notes from
prior visits via a mobile application.
Ÿ Real-time, customized feedback and
instructions provided on-site
Ÿ Enhances patient data capture and
database management which aids in
the development of algorithms that
can improve the plan of care
Sales
Ÿ Provides real-time market
intelligence to sales area managers,
allowing them to quickly identify the
most valuable referral sources
Ÿ Specialty programs integrate
individual physician protocols into
HCHB.
– Creates loyalty and incentives for
physicians and facilities,
generating additional future
referrals
Ÿ Web-based portal allows referring
physicians to easily monitor the care
and progress of patients and to sign
orders electronically
Compliance
Ÿ Field clinicians are required to adhere
to clinical protocols and physician
orders, ensuring that proper regulatory
and compliance procedures are
followed.
Ÿ Internal branch-level audits completed
quarterly
– HCHB-generated outputs reviewed
by management and board of
directors to identify any branches
requiring additional oversight
Ÿ Compliance program also involves
extensive internal training
Management and Operations
Ÿ Best-in-class data management and
reporting ensures managers have
access to relevant data needed to make
correct decisions.
Ÿ Rules-based algorithms ensure
accountability by escalating tasks and
notifying management when processes
are delayed.
Ÿ Seamless billing with processes in
place to ensure claim completeness
Homecare Homebase
(“HCHB”) was born
out of the Encompass
operating model;
HCHB is a leading IT
platform provider in
the home health and
hospice industry.
Full utilization of
capabilities in leading-
edge technology
embedded in culture,
driving superior
clinical, operational
and financial
outcomes.
70
Operational Metrics
71
Salaries and Benefits Hospital-Related Expenses Provision for Doubtful Accounts
48.4
21.5
1.0
48.6
20.8
1.2
47.9
20.7
1.1
48.3
20.7
1.3
49.4
20.9
1.7
49.0
20.4
2.0
• Salaries and Benefits includes group medical costs and is impacted by
staffing levels based on patient volumes.
◦ Salaries and Benefits in 2016 will be impacted by staffing changes at
former Reliant hospitals.
• Hospital-related Expenses includes other operating expenses (excluding
loss on disposal or impairment of assets), supplies, and occupancy costs.
• Provision for Doubtful Accounts is impacted by reserve activity related to
the level of pre-payment denials by Medicare Administrative Contractors.
(see page 72)
• Employees per Occupied Bed (“EPOB”) is calculated by dividing the
number of full-time equivalents, including an estimate of full-time
equivalents from the utilization of contract labor, by the number of occupied
beds during each period. The number of occupied beds is determined by
multiplying the number of licensed beds by the Company’s occupancy
percentage.
IRF Operational Metrics: Expense Efficiencies
2011 2012 2013 2014 2015 1H 16 2011 2012 2013 2014 2015 1H 16 2011 2012 2013 2014 2015 1H 16
3.47 3.43 3.44 3.40 3.41 3.39
EPOB
(Percent of Net Operating Revenues)
72
Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Background
Ÿ For several years, under programs designated as “widespread
probes,” certain Medicare Administrative Contractors (“MACs”)
have conducted pre-payment claim reviews and denied
payment for certain diagnosis codes.
– Pre-payment claim denials increased during 2014 and 2015
due to an announced widespread review of IRF neurological
billing codes and expansion of the ongoing lower extremity
code denials.
Ÿ HealthSouth appeals most of these denials. On claims it takes to
an administrative law judge (“ALJ”), the highest level of appeal,
HealthSouth historically has experienced an approximate 70%
success rate.
– MACs identify medical documentation issues as a leading
basis for denials.
– HealthSouth's investment in clinical information systems and
its medical services department has further improved its
documentation and reduced technical denials.
Ÿ By statute, ALJ decisions are due within 90 days of a request for
hearing, but appeals are taking years. A federal court is
considering remedies to address the backlog.
Ÿ All providers continue to experience delays in the adjudication
process.
– For YTD June 2016, 91 of HealthSouth's appeals were heard
at the ALJ level. Most of the appeals are of claims denied in
2011 and 2012.
– During the same period, HealthSouth had 2,311 new claim
denials. At current rates, appeals from these denials may not
be heard for four years or more.
Ÿ Reserves for pre-payment claim denials are recorded via the
provision for doubtful accounts when HealthSouth receives the
request for additional documents for review from the MAC.
Impact to Income Statement
Period New Denials
Collections of
Previously
Denied
Claims
Bad Debt
Expense for
New Denials
Update of
Success
Rate
(In Millions)
Q2 2016 $18.7 $(4.9) $4.6 $—
Q1 2016 22.7 (8.4) 6.0 —
Q4 2015 22.5 (4.1) 5.6 (1.3)
Q3 2015 22.0 (4.1) 5.9 (1.1)
Q2 2015 18.2 (3.8) 4.9 —
Q1 2015 16.3 (3.0) 4.2 —
Q4 2014 22.0 (6.6) 6.2 (3.2)
Q3 2014 15.8 (0.5) 1.7 —
Q2 2014 7.1 (1.7) 3.0 —
Impact to Balance Sheet
June 30,
2016
Dec. 31,
2015
June 30,
2015
Dec. 31,
2014
(In Millions)
Pre-payment claims denials $ 140.9 $ 114.8 $ 86.6 $ 59.3
Recorded reserves (40.1) (31.2) (32.2) (22.8)
Net accounts receivable
from pre-payment claims
denials $ 100.8 $ 83.6 $ 54.4 $ 36.5
73
Inpatient Rehabilitation Operational and Labor Metrics
Q2 Q1 Q4 Q3 Q2 Q1 Full Year
2016 2016 2015 2015 2015 2015 2015
(In Millions)
Net patient revenue-inpatient $ 721.2 $ 719.4 $ 696.8 $ 625.1 $ 618.7 $ 606.6 $ 2,547.2
Net patient revenue-outpatient and other revenues 31.4 29.8 29.1 26.5 26.6 23.7 105.9
Net operating revenues $ 752.6 $ 749.2 $ 725.9 $ 651.6 $ 645.3 $ 630.3 $ 2,653.1
(Actual Amounts)
Discharges(23) 41,365 41,098 40,891 36,746 36,408 35,116 149,161
Net patient revenue per discharge $ 17,435 $ 17,505 $ 17,040 $ 17,011 $ 16,994 $ 17,274 $ 17,077
Outpatient visits 164,761 162,649 163,119 138,121 144,914 131,353 577,507
Average length of stay 12.6 12.9 12.6 12.9 13.0 13.3 12.9
Occupancy % 68.2% 68.9% 66.4% 69.6% 70.4% 72.8% 62.8%
# of licensed beds* 8,430 8,481 8,404 7,422 7,374 7,100 8,404
Occupied beds 5,749 5,843 5,580 5,166 5,191 5,169 5,278
Full-time equivalents (FTEs)(24) 19,503 19,352 19,136 17,782 17,601 17,002 17,880
Contract labor 205 194 152 141 118 116 132
Total FTE and contract labor 19,708 19,546 19,288 17,923 17,719 17,118 18,012
EPOB(25) 3.43 3.35 3.46 3.47 3.41 3.31 3.41
* The decrease in licensed beds from Q1 2016 to Q2 2016 was due to the sale of the hospital in Beaumont, TX (61 beds).
Refer to pages 119-122 for end notes.
74
Home Health and Hospice Operational Metrics
Q2 Q1 Q4 Q3 Q2 Q1 Full Year
2016 2016 2015 2015 2015 2015 2015
(In Millions)
Net home health revenue $ 157.1 $ 150.9 $ 144.4 $ 118.3 $ 111.5 $ 103.9 $ 478.1
Net hospice and other revenue 11.0 9.7 9.0 8.7 7.6 6.4 31.7
Net operating revenues $ 168.1 $ 160.6 $ 153.4 $ 127.0 $ 119.1 $ 110.3 $ 509.8
Home Health: (Actual Amounts)
Admissions(26) 25,753 25,763 22,892 18,076 16,862 16,499 74,329
Recertifications 20,432 19,453 18,909 16,542 15,103 14,485 65,039
Episodes 45,774 43,844 42,697 33,542 31,817 29,512 137,568
Average revenue per episode $ 3,033 $ 3,035 $ 3,005 $ 3,123 $ 3,082 $ 3,102 $ 3,072
Episodic visits per episode 18.9 19.1 18.2 19.6 19.4 19.6 19.1
Total visits 967,968 937,804 862,224 721,055 675,095 630,999 2,889,373
Cost per visit $ 73 $ 73 $ 73 $ 72 $ 71 $ 71 $ 72
Hospice:
Admissions(27) 785 724 614 620 594 624 2,452
Patient days 71,277 63,431 59,100 55,627 49,272 40,898 204,898
Revenue per day $ 154 $ 153 $ 155 $ 156 $ 154 $ 156 $ 155
Refer to pages 119-122 for end notes.
75
Payment Sources (Percent of Revenues)
Inpatient
Rehabilitation
Segment
Home Health
and Hospice
Segment
Consolidated
Q2 Q2 Q2 6 Months Full Year
2016 2015 2016 2015 2016 2015 2016 2015 2015
Medicare 73.1% 72.7% 82.3% 83.9% 74.7% 74.5% 75.1% 74.7% 74.9%
Medicare Advantage 7.8% 7.8% 9.0% 7.2% 8.1% 7.7% 7.9% 8.0% 7.9%
Managed care 11.5% 11.4% 3.7% 2.9% 10.0% 10.1% 9.8% 10.0% 9.8%
Medicaid 2.9% 2.6% 4.8% 5.8% 3.2% 3.1% 3.3% 2.9% 3.0%
Other third-party payors 1.7% 2.1% —% 0.1% 1.4% 1.8% 1.4% 1.6% 1.7%
Workers’ compensation 0.8% 1.1% —% —% 0.7% 0.9% 0.8% 0.9% 0.9%
Patients 0.6% 0.7% 0.1% 0.1% 0.5% 0.6% 0.5% 0.6% 0.6%
Other income 1.6% 1.6% 0.1% —% 1.4% 1.3% 1.2% 1.3% 1.2%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
76
Industry Structure
77
Overall Healthcare Spending
Hospital Care
Includes Inpatient Rehabilitation, Long-Term Care Hospitals
$801.6
$150.4
$83.2
$401.0
Nursing Care Facilities and Continuing Care Retirement Communities
Professional Services
Other Health, Residential and Personal Care
Home Health Care
Retail of Medical Products
$153.9
(billions)
Health Consumption Spend: $2,877.4
Personal Healthcare: $2,563.
6
Investment
Net Cost of Health InsuranceGovernment Public Health
Government Administration
$971.8
$155.6
Source: Center for Medicare & Medicaid Services, National Health Expenditure Data for
calender year 2014 - Table 2, historical expenditures
National Healthcare Spending: $3,031.3 billion in 2014
$40.2
$79.0
78
Source: Centers for Medicare & Medicaid Services, Medicare Trustee’s Report July 2016 – page 10 and MedPAC,
Medicare Payment Policy, June 2016 Data Book - pages 110 and 185
Medicare 2015 Spending = $647.6 Billion
$ 29.8B Skilled Nursing
$141.7B Inpatient Hospital
$70.3B Physician Payments
$46.5B Outpatient Hospital
$17.7B Home Health
$79.8B Other Services
$172.3B Medicare Managed
Care
$89.5B Outpatient Rx
$7.1B (1%)
Inpatient Rehabilitation Hospitals
(Included in Inpatient Hospitals)
14%
3%
7%
12%
11%
26%
22%
Medicare Part A
Medicare Part B
Medicare Parts A&B
Medicare Part C
Medicare Part D
5%
Inpatient hospital includes spending for acute care hospitals along with inpatient rehabilitation and long-term acute care hospital services.
In 2014, Medicare spent $7.1 billion and $5.1 billion, respectively for inpatient rehabilitation and long-term acute care hospital services.
Other services include spending for hospice and various outpatient services. In 2014, Medicare spent $15.1 billion for hospice services.
79
Continuum of Healthcare Services
Preventive
Routine health care
that includes
screenings, check-
ups, and patient
counseling to
prevent illnesses,
disease, or other
health problems
Acute
Medical treatment
of diseases for
which a patient is
treated for a brief
but severe
episode of illness
Ambulatory
Medical care
delivered on an
outpatient basis.
e.g., blood tests,
X-rays,
endoscopy,
certain biopsies,
certain surgical
procedures
Post-Acute
Medical care
provided after a
period of acute
care. e.g., inpatient
rehabilitation
hospitals, long-
term acute care,
hospice, skilled
nursing homes,
home health
80
Post-Acute Care Services
Acute Care
Hospital
Home
Health
Long-Term
Acute Care
Hospital
Inpatient
Rehabilitation
Facility
Skilled
Nursing
Facility
Discharge
Medicare Spending (billions) $5.1 $7.1 $29.1 $17.9
# of Discharges 134,000 376,000 2,344,173 3,400,000
Length of Stay 26.3 days 12.8 days 40 days N/A
# of Providers 426 1,182 15,223 12,346
Facility Ownership Mix
For-Profit (77%)
Non-Profit (19%)
Gov't (4%)
For-Profit (29%)
Non-Profit (58%)
Gov't (13%)
For-Profit (70%)
Non-Profit (25%)
Gov't (5%)
For-Profit (89%)
Non-Profit (11%)
Hospital vs. Free-standing Free-Standing (62%)Hospital Based (38%)
Free-Standing (21%)
Hospital Based (79%)
Free-Standing (95%)
Hospital Based (5%)
Free-Standing (85%)
Hospital Based (15%)
Rural vs. Urban Urban (93%)Rural (7%)
Urban (86%)
Rural (14%)
Urban (72%)
Rural (28%)
Urban (85%)
Rural (15%)
(Lowest Acuity)(Highest Acuity)
Source: MedPAC, Payment Policy, March 2012 - page 266; MedPAC, Payment Policy,
March 2016 - pages 179, 194, 213, 214, 228, 241, 246, 247, 273, 280, and 283;
and MedPAC, June 2016 Data Book - pages 109, 110, 115, 119, and 120
81
$35
$30
$25
$20
$15
$10
$5
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Medicare Spending on Post-Acute Services
Post-Acute
Settings
2014
Medicare
Margin
Projected
2016
Medicare
Margin
12.5% 10.7%
10.8% 8.8%
12.5% 13.9%
4.9% 4.6%
Skilled nursing facilities
Home health agencies
Inpatient rehabilitation
hospitals
Long-term acute care
hospitals
Inpatient rehabilitation
spending (% of total
Medicare spending)
6
3
0
(P
er
ce
nt
)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
1.8 2.1 2.2 2.1 1.9 1.5 1.4 1.3 1.2 1.2 1.2 1.2 1.2 1.1
3.2
3.6 3.6 3.5 3.7
3.2 3.6 3.6 3.8 3.7 3.4 3.3 3.1 2.9
Home Health spending
(% of total Medicare
spending)
Total Medicare Spending on Post-Acute Services ~$59 billion in 2014
Source: MedPAC Healthcare Spending and the Medicare Program, June 2015 – page 114.
MedPAC Payment Policy, March 2016 – pages 176, 210, 238, 274, and 275
82
Different Levels of Services
Rehab Hospital Nursing Home
Average length of stay = 12.8 days Average length of stay = 40 days
Discharge to community = 76.1% Discharge to community = 37.6%
Requirements: Requirements:
Rehab hospitals must also satisfy regulatory/policy requirements for
hospitals, including Medicare hospital conditions of participation.
No similar requirement; Nursing homes are regulated as nursing
homes only
All patients must be admitted by a rehab physician. No similar requirement
Rehab physicians must re-confirm each admission w/n 24 hours. No similar requirement
All patients, regardless of diagnoses/condition, must demonstrate need
and receive at least three hours of daily intensive therapy.
No similar requirement
All patients must see a rehabilitation physician “in person” at least three
times weekly.
No similar requirement; some SNF patients may go a week or
longer without seeing a physician, and often a non-rehabilitation
physician.
Rehab hospitals required to provide 24 hour, 7 days per week nursing
care; many nurses are RNs and rehab nurses. No similar requirement
Rehab hospitals are required to use a coordinated interdisciplinary team
approach led by a rehab physician; includes a rehab nurse, a case
manager, and a licensed therapist from each therapy discipline who must
meet weekly to evaluate/discuss each patient’s case.
No similar requirement; Nursing homes are not required to
provide care on a interdisciplinary basis and are not required to
hold regular meetings for each patient.
Rehab hospitals are required to follow stringent admission/coverage
policies and must carefully document justification for each admission;
further restricted in number/type of patients (60% Rule)
Nursing homes have comparatively few policies governing the
number or types of patients they treat.
Source: MedPAC, Medicare Payment Policy, March 2016 - Pages 182, 186, 247, and 250;
MedPAC, June 2016 Data Book - page 115.
83
Supply of IRFs is Relatively Stable
Average Annual Change
Share of
Medicare
DischargesType of IRF 2004 2006 2008 2010 2012 2013 2014 2006-2013 2013-2014
All IRFs 100% 1,221 1,225 1,202 1,179 1,166 1,161 1,177 -0.9% 1.4%
Urban 93 1,024 1,018 1,001 981 973 977 1,013 -0.7 3.7
Rural 7 197 207 201 198 193 184 164 -1.9 -10.9
Freestanding 48 217 217 221 233 239 243 251 1.9 3.3
Hospital based 52 1,004 1,008 981 946 927 918 926 -1.5 0.9
Nonprofit 43 768 758 738 729 698 677 681 -1.9 0.6
For profit 50 292 299 291 294 307 322 338 1.2 5.0
Government 7 161 168 173 156 157 155 149 -1.3 -3.9
Source: MedPAC, Medicare Payment Policy, March 2016 - page 246
84
Inpatient Rehabilitation Sector Margins
Share of
Medicare
discharges Margins
Type of IRF 2014 2004 2006 2008 2010 2011 2012 2013 2014
All IRFs 100% 16.7% 12.4% 9.3% 8.7% 9.7% 11.2% 11.6% 12.5%
Urban 93 17.0 12.6 9.5 9.0 10.2 11.6 12.0 13.0
Rural 7 13.2 10.1 6.9 4.7 4.8 6.5 6.5 6.4
Freestanding 48 24.7 17.5 18.2 21.4 23.1 23.9 24.4 25.3
Hospital based 52 12.2 9.6 3.8 -0.5 -0.6 0.8 0.2 1.0
Nonprofit 43 12.8 10.6 5.2 2.1 2.6 2.4 1.4 2.1
For profit 50 24.4 16.3 16.9 19.6 20.7 23.1 23.6 24.3
Government 7 N/A N/A N/A N/A N/A N/A N/A N/A
Number of beds
1 to 10 2 3.7 -3.5 -4.9 -10.1 -7.2 -6.7 -10.7 -10.7
11 to 24 22 10.5 7.3 1.2 -3.3 -3.4 -1.0 -0.5 -0.5
25 to 64 47 18.3 13.7 10.1 10.6 11.5 12.4 13.1 14.4
65 or more 28 21.5 17.2 17.2 17.5 19.0 20.8 20.2 21.0
Source: MedPAC, Medicare Payment Policy, March 2016 - page 255
85
Inpatient Rehabilitation Standardized Comparison of Costs
Type of IRF
Mean Adjusted Cost
Per Discharge
All IRFs $15,330
Hospital based 16,325
Freestanding 11,883
Nonprofit 16,565
For profit 13,044
Government 16,317
Urban 15,034
Rural 17,036
Number of beds
1 to 10 18,875
11 to 24 15,606
25 to 64 14,867
65 or more 12,164
Quartile
Characteristic Low Cost High Cost
Percent:
Hospital based 43% 95%
Freestanding 57 5
Nonprofit 30 65
For profit 66 18
Government 4 17
Urban 94 70
Rural 6 30
Median Medicare Margin:
All 26.1% -21.3%
Hospital based 19.5 -21.3
Freestanding 31.1 -21.7
Median:
Number of beds 42 18
Occupancy rate 70% 50%
Case-mix index 1.29 1.21
Median costs per discharge:
All $10,583 $18,888
Hospital based 10,992 18,881
Freestanding 10,437 19,833
Mean adjusted costs per
discharge are lower for
freestanding IRFs and
larger facilities.
High margin IRFs
(both hospital-based
and freestanding) are
concentrated in the
low-cost quartile of
standardized costs.
Source: MedPAC, Medicare Payment Policy, March 2016 - page 253 and 254
86
“60% Rule”: Medicare Regulation for Rehabilitation Hospitals
1983
1983: 75% Rule
established --
Requires 75% of IRF
patients to have a
qualifying condition if
the IRF is to maintain
reimbursement on a
“cost plus” basis vs.
“prospective”
( i.e., fixed) basis.
2002 2004 2007
2002: IRF
reimbursement
transitions to
prospective
payment system
(“PPS”)
2002: CMS suspends
75% Rule
implementation
2004: “New” 75%
Rule initiated with a
“new” list of
“qualifying
conditions”
2007: 75% Rule
permanently changed to
“60% Rule” with passage
of “Medicare, Medicaid &
SCHIP Extension Act of
2007”
Paid for through a
Medicare price rollback &
18-month freeze from
4/1/2008 to 9/30/2009
The 60% Rule requires at least 60% of all patients admitted must have at least
one medical diagnosis or functional impairment from a list of 13 compliant
conditions (a.k.a "compliant conditions" or "CMS-13").
87
1. Stroke
2. Brain injury
3. Amputation
4. Spinal cord
5. Fracture of the femur
6. Neurological disorder
7. Multiple trauma
8. Congenital deformity
9. Burns
IRF Qualifying Conditions
1. Stroke
2. Brain injury
3. Amputation
4. Spinal cord
5. Fracture of the femur
6. Neurological disorder
7. Multiple trauma
8. Congenital deformity
9. Burns
10. Osteoarthritis (after less intensive setting)
11. Rheumatoid arthritis (after less intensive setting)
12. Joint replacement
13. Systemic vasculidities (after less intensive
setting)
Original Qualifying Conditions Current Qualifying Conditions
§ Bilateral
§ Age ≥ 85
§ Body Mass Index >50
10. Polyarthritis (includes "joint
replacement")
Became
88
Inpatient Rehabilitation Outlier Payments(8)
# of Hospitals Total Outlier Payments Avg Outlier Payment per Discharge
Hospital
Deciles HLS
Non-
HLS Total HLS Non-HLS Total % HLS Non-HLS Total
90-100 — 113 113 $ — $ 120,926,079 $ 120,926,079 49.9% N/A $ 2,368 $ 2,368
80-90 — 113 113 $ — $ 45,316,044 $ 45,316,044 18.7% N/A $ 1,634 $ 1,634
70-80 1 112 113 $ 250,953 $ 27,325,898 $ 27,576,851 11.4% $ 171 $ 862 $ 831
60-70 2 111 113 $ 308,157 $ 17,778,491 $ 18,086,648 7.5% $ 130 $ 516 $ 491
50-60 5 109 114 $ 466,754 $ 11,873,691 $ 12,340,445 5.1% $ 111 $ 422 $ 381
40-50 19 95 114 $ 1,359,722 $ 6,961,929 $ 8,321,651 3.4% $ 78 $ 314 $ 210
30-40 16 97 113 $ 768,273 $ 4,665,606 $ 5,433,879 2.2% $ 48 $ 183 $ 131
20-30 18 95 113 $ 481,278 $ 2,504,414 $ 2,985,692 1.2% $ 26 $ 111 $ 73
10-20 33 80 113 $ 346,434 $ 863,878 $ 1,210,312 0.5% $ 13 $ 37 $ 24
0-10 25 89 114 $ 19,912 $ 87,190 $ 107,102 —% $ 1 $ 4 $ 2
Totals 119 1,014 1,133 $ 4,001,483 $ 238,303,220 $ 242,304,703 100.0%
Refer to pages 119-122 for end notes.
More Efficient Less
Outlier Observations:
• 10% of IRFs receive 50% of the outlier payments; None of the 10% are HealthSouth.
• HealthSouth receives approx. 1.65% of the IRF outlier payments despite treating approx. 28.4% of
the Medicare patients/discharges.
• As a result of outlier payments, CMS pays HealthSouth approx. $795 less per discharge than other
providers.
• Capping IRF outlier payments at 10% could save Medicare approx. $548 million over 10 years.
89
Segment Operating Results
90
Inpatient Rehabilitation Segment Adjusted EBITDA
Q2 Q1 Q4 Q3 Q2 Q1 Full Year
2016 2016 2015 2015 2015 2015 2015
Net operating revenues: (In Millions)
Inpatient $ 721.2 $ 719.4 $ 696.8 $ 625.1 $ 618.7 $ 606.6 $ 2,547.2
Outpatient and other 31.4 29.8 29.1 26.5 26.6 23.7 105.9
Total segment revenue 752.6 749.2 725.9 651.6 645.3 630.3 2,653.1
Less: Provision for doubtful accounts (14.5) (15.6) (13.3) (10.2) (10.2) (11.0) (44.7)
Net operating revenues less provision for
doubtful accounts 738.1 733.6 712.6 641.4 635.1 619.3 2,608.4
Operating expenses:
Salaries and benefits (366.1) (369.9) (359.8) (326.8) (317.6) (306.4) (1,310.6)
% of revenue 48.6% 49.4% 49.6% 50.2% 49.2% 48.6% 49.4%
Other operating expenses(a) (106.8) (104.8) (103.2) (95.8) (93.5) (95.2) (387.7)
Supplies (31.8) (32.4) (32.3) (28.9) (29.9) (29.8) (120.9)
Occupancy costs (15.4) (15.6) (14.5) (10.6) (10.7) (10.4) (46.2)
(154.0) (152.8) (150.0) (135.3) (134.1) (135.4) (554.8)
% of revenue 20.5% 20.4% 20.7% 20.8% 20.8% 21.5% 20.9%
Equity in nonconsolidated affiliates 2.2 2.2 2.3 2.4 2.3 1.6 8.6
Other income 0.7 0.6 1.3 0.1 0.4 0.5 2.3
Noncontrolling interests (16.8) (16.8) (16.5) (15.6) (15.6) (15.2) (62.9)
Segment Adjusted EBITDA $ 204.1 $ 196.9 $ 189.9 $ 166.2 $ 170.5 $ 164.4 $ 691.0
In arriving at Adjusted EBITDA, the following
was excluded:
(a) Loss (gain) on disposal or impairment of assets $ 0.2 $ 0.5 $ 2.5 $ 0.9 $ 0.9 $ (1.5) $ 2.8
91
Home Health and Hospice Segment Adjusted EBITDA
Q2 Q1 Q4 Q3 Q2 Q1 Full Year
2016 2016 2015 2015 2015 2015 2015
Net operating revenues: (In Millions)
Home health revenue $ 157.1 $ 150.9 $ 144.4 $ 118.3 $ 111.5 $ 103.9 $ 478.1
Hospice revenue 11.0 9.7 9.0 8.7 7.6 6.4 31.7
Total segment revenue 168.1 160.6 153.4 127.0 119.1 110.3 509.8
Less: Provision for doubtful accounts (0.9) (0.9) (0.7) (0.5) (0.7) (0.6) (2.5)
Net operating revenues less provision for
doubtful accounts 167.2 159.7 152.7 126.5 118.4 109.7 507.3
Operating expenses(a)
Cost of services (81.6) (78.4) (73.0) (61.7) (56.7) (53.4) (244.8)
% of revenue 48.5% 48.8% 47.6% 48.6% 47.6% 48.4% 48.0%
Support and overhead costs (58.0) (57.0) (51.0) (42.6) (41.0) (38.1) (172.7)
% of revenue 34.5% 35.5% 33.2% 33.5% 34.4% 34.5% 33.9%
(139.6) (135.4) (124.0) (104.3) (97.7) (91.5) (417.5)
% of revenue 83.0% 84.3% 80.8% 82.1% 82.0% 83.0% 81.9%
Equity in net income of nonconsolidated
affiliates 0.2 0.2 0.1 — — — 0.1
Noncontrolling interests (1.8) (1.9) (2.3) (1.5) (1.7) (1.3) (6.8)
Segment Adjusted EBITDA $ 26.0 $ 22.6 $ 26.5 $ 20.7 $ 19.0 $ 16.9 $ 83.1
In arriving at Adjusted EBITDA, the following
was excluded:
(a) Gain on disposal or impairment of assets $ — $ (0.3) $ (0.1) $ — $ (0.1) $ — $ (0.2)
92
Segment Operating Results
Q2 2016 Q2 2015
IRF
Home
Health and
Hospice
Reclasses HealthSouthConsolidated IRF
Home
Health and
Hospice
Reclasses HealthSouthConsolidated
Net operating revenues $ 752.6 $ 168.1 $ — $ 920.7 $ 645.3 $ 119.1 $ — $ 764.4
Less: Provision for doubtful accounts (14.5) (0.9) — (15.4) (10.2) (0.7) — (10.9)
738.1 167.2 — 905.3 635.1 118.4 — 753.5
Operating Expenses:
Inpatient Rehabilitation:
Salaries and benefits (366.1) — (120.0) (486.1) (317.6) — (84.2) (401.8)
Other operating expenses(a) (106.8) — (14.5) (121.3) (93.5) — (9.9) (103.4)
Supplies (31.8) — (2.6) (34.4) (29.9) — (1.8) (31.7)
Occupancy (15.4) — (2.5) (17.9) (10.7) — (1.8) (12.5)
Home Health and Hospice:
Cost of services sold (excluding
depreciation and amortization) — (81.6) 81.6 — — (56.7) 56.7 —
Support and overhead costs — (58.0) 58.0 — — (41.0) 41.0 —
(520.1) (139.6) — (659.7) (451.7) (97.7) — (549.4)
Other income 0.7 — — 0.7 0.4 — — 0.4
Equity in net income of nonconsolidated
affiliates 2.2 0.2 — 2.4 2.3 — — 2.3
Noncontrolling interest (16.8) (1.8) — (18.6) (15.6) (1.7) — (17.3)
Segment Adjusted EBITDA $ 204.1 $ 26.0 $ — 230.1 $ 170.5 $ 19.0 $ — 189.5
General and administrative expenses(b)(c) (25.8) (22.6)
Gain related to SCA equity interest — 2.6
Adjusted EBITDA $ 204.3 $ 169.5
In arriving at Adjusted EBITDA, the following were excluded:
(a) Loss (gain) on disposal or
impairment of assets
$ 0.2 $ — $ — $ 0.2 $ 0.9 $ (0.1) $ — $ 0.8
(b) Transaction costs — — — — — — — 3.3
(c) Stock-based compensation — — — 8.6 — — — 6.2
Reconciliations to GAAP provided on pages 95-117.
93
Segment Operating Results
Reconciliations to GAAP provided on pages 95-117.
Six Months Ended June 30, 2016 Six Months Ended June 30, 2015
IRF
Home
Health and
Hospice
Reclasses HealthSouthConsolidated IRF
Home
Health and
Hospice
Reclasses HealthSouthConsolidated
Net operating revenues $ 1,501.8 $ 328.7 $ — $ 1,830.5 $ 1,275.6 $ 229.4 $ — $ 1,505.0
Less: Provision for doubtful accounts (30.1) (1.8) — (31.9) (21.2) (1.3) — (22.5)
1,471.7 326.9 — 1,798.6 1,254.4 228.1 — 1,482.5
Operating Expenses: —
Inpatient Rehabilitation: —
Salaries and benefits (736.0) — (236.2) (972.2) (624.0) — (162.9) (786.9)
Other operating expenses(a) (211.6) — (28.7) (240.3) (188.7) — (19.4) (208.1)
Supplies (64.2) — (5.2) (69.4) (59.7) — (3.4) (63.1)
Occupancy (31.0) — (4.9) (35.9) (21.1) — (3.5) (24.6)
Home Health and Hospice: —
Cost of services sold (excluding
depreciation and amortization) — (160.0) 160.0 — — (110.1) 110.1 —
Support and overhead costs — (115.0) 115.0 — — (79.1) 79.1 —
(1,042.8) (275.0) — (1,317.8) (893.5) (189.2) — (1,082.7)
Other income 1.3 — — 1.3 0.9 — — 0.9
Equity in net income of nonconsolidated
affiliates 4.4 0.4 — 4.8 3.9 — — 3.9
Noncontrolling interest (33.6) (3.7) — (37.3) (30.8) (3.0) — (33.8)
Segment Adjusted EBITDA $ 401.0 $ 48.6 $ — 449.6 $ 334.9 $ 35.9 $ — 370.8
General and administrative expenses(b)(c) (53.2) (47.8)
Gain related to SCA equity interest — 2.6
Adjusted EBITDA $ 396.4 $ 325.6
In arriving at Adjusted EBITDA, the following were excluded:
(a) Loss (gain) on disposal or
impairment of assets
$ 0.7 $ (0.3) $ — $ 0.4 $ (0.6) $ (0.1) $ — $ (0.7)
(b) Transaction costs — — — — — — — 3.3
(c) Stock-based compensation — — — 13.1 — — — 15.6
94
Segment Operating Results
Year Ended December 31, 2015
IRF
Home
Health and
Hospice Reclasses
HealthSouth
Consolidated
Net operating revenues $ 2,653.1 $ 509.8 $ — $ 3,162.9
Less: Provision for doubtful accounts (44.7) (2.5) — (47.2)
2,608.4 507.3 — 3,115.7
Operating Expenses:
Inpatient Rehabilitation:
Salaries and benefits (1,310.6) — (360.2) (1,670.8)
Other operating expenses(a) (387.7) — (41.8) (429.5)
Supplies (120.9) — (7.8) (128.7)
Occupancy (46.2) — (7.7) (53.9)
Home Health and Hospice:
Cost of services sold (excluding depreciation and amortization) — (244.8) 244.8 —
Support and overhead costs — (172.7) 172.7 —
(1,865.4) (417.5) — (2,282.9)
Other income 2.3 — — 2.3
Equity in net income of nonconsolidated affiliates 8.6 0.1 — 8.7
Noncontrolling interest (62.9) (6.8) — (69.7)
Segment Adjusted EBITDA $ 691.0 $ 83.1 $ — 774.1
General and administrative expenses(b)(c) (94.8)
Gain related to SCA equity interest 3.2
Adjusted EBITDA $ 682.5
In arriving at Adjusted EBITDA, the following were excluded:
(a) Loss (gain) on disposal or impairment of assets $ 2.8 $ (0.2) $ — $ 2.6
(b) Stock-based compensation expense — — — 26.2
(c) Transaction costs — — — 12.3
Reconciliations to GAAP provided on pages 95-117.
95
Reconciliations to GAAP
96
Reconciliation of Net Income to Adjusted EBITDA(28)
2016
Q1 Q2 6 Months
(in millions, except per share data) Total Per Share Total Per Share Total Per Share
Net Income $ 76.7 $ 81.2 $ 157.9
Loss from disc ops, net of tax, attributable to HealthSouth 0.1 0.1 0.2
Net income attributable to noncontrolling interests (18.7) (18.6) (37.3)
Income from continuing operations attributable to HealthSouth* 58.1 $ 0.61 62.7 $ 0.65 120.8 $ 1.26
Gov’t, class action, and related settlements — — —
Pro fees - acct, tax, and legal 0.2 1.7 1.9
Provision for income tax expense 39.7 42.4 82.1
Interest expense and amortization of debt discounts and fees 44.6 43.4 88.0
Depreciation and amortization 42.4 42.9 85.3
Loss on early extinguishment of debt 2.4 2.4 4.8
Other, including net noncash loss on disposal or impairment of assets 0.2 0.2 0.4
Stock-based compensation expense 4.5 8.6 13.1
Adjusted EBITDA $ 192.1 $ 204.3 $ 396.4
Weighted average common shares outstanding:
Basic 89.5 89.3 89.4
Diluted 99.4 99.4 99.4
* Per share amounts for each period presented are based on diluted weighted-average shares outstanding.
Refer to pages 119-122 for end notes.
97
Reconciliation of Net Income to Adjusted EBITDA(28)
2015
Q1 Q2 Q3 Q4 Full Year
(in millions, except per share data) Total
Per
Share Total
Per
Share Total
Per
Share Total
Per
Share Total
Per
Share
Net Income $ 59.0 $ 60.2 $ 67.8 $ 65.8 $ 252.8
Loss (income) from disc ops, net of tax, attributable
to HealthSouth 0.3 1.6 (0.3) (0.7) 0.9
Net income attributable to noncontrolling interests (16.5) (17.3) (17.1) (18.8) (69.7)
Income from continuing operations attributable
to HealthSouth* 42.8 $ 0.44 44.5 $ 0.47 50.4 $ 0.52 46.3 $ 0.48 184.0 $ 1.92
Gov't, class action, and related settlements 8.0 — — (0.5) 7.5
Pro fees - acct, tax, and legal 2.2 0.1 0.4 0.3 3.0
Provision for income tax expense 30.3 32.2 35.9 43.5 141.9
Interest expense and amortization of debt discounts
and fees 31.8 30.9 35.6 44.6 142.9
Depreciation and amortization 31.9 32.7 33.7 41.4 139.7
Loss on early extinguishment of debt 1.2 18.8 — 2.4 22.4
Noncash (gain) loss on disposal or impairment of
assets (1.5) 0.8 0.9 2.4 2.6
Stock-based compensation expense 9.4 6.2 6.2 4.4 26.2
Transaction costs — 3.3 2.3 6.7 12.3
Adjusted EBITDA $ 156.1 $ 169.5 $ 165.4 $ 191.5 $ 682.5
Weighted average common shares outstanding:
Basic 87.1 89.8 90.6 90.1 89.4
Diluted 101.1 101.5 101.5 100.6 101.0
* Per share amounts for each period presented are based on diluted weighted-average shares outstanding.
Refer to pages 119-122 for end notes.
98
Reconciliation of Net Income to Adjusted EBITDA(28)
2014
Q1 Q2 Q3 Q4 Full Year
(in millions, except per share data) Total
Per
Share Total
Per
Share Total
Per
Share Total
Per
Share Total
Per
Share
Net income $ 61.5 $ 97.9 $ 64.8 $ 57.5 $ 281.7
Loss (income) from disc ops, net of tax,
attributable to HealthSouth 0.1 (3.8) 0.9 (2.7) (5.5)
Net income attributable to noncontrolling
interests (14.8) (14.8) (14.7) (15.4) (59.7)
Income from continuing operations
attributable to HealthSouth* 46.8 $ 0.48 79.3 $ 0.81 51.0 $ 0.53 39.4 $ 0.41 216.5 $ 2.24
Gov't, class action, and related
settlements — (0.8) — (0.9) (1.7)
Pro fees - acct, tax, and legal 1.6 2.0 4.0 1.7 9.3
Provision for income tax expense 32.8 36.5 22.1 19.3 110.7
Interest expense and amortization of
debt discounts and fees 27.9 27.8 27.8 25.7 109.2
Depreciation and amortization 26.4 26.4 27.4 27.5 107.7
Loss on early extinguishment of debt — — — 13.2 13.2
Gain on consolidation of Fairlawn
Rehabilitation Hospital — (27.2) — — (27.2)
Other, including net noncash loss on
disposal of assets 1.3 1.7 2.7 1.0 6.7
Stock-based compensation expense 7.3 7.0 5.0 4.6 23.9
Transaction costs — — — 9.3 9.3
Adjusted EBITDA $ 144.1 $ 152.7 $ 140.0 $ 140.8 $ 577.6
Weighted average common shares
outstanding:
Basic 87.3 86.7 86.5 86.6 86.8
Diluted 100.9 100.6 100.5 100.8 100.7
* Per share amounts for each period presented are based on diluted weighted-average shares outstanding.
Refer to pages 119-122 for end notes.
99
Reconciliation of Net Income to Adjusted EBITDA(28)
2013
Q1 Q2 Q3 Q4 Full Year
(in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share
Net Income $ 65.9 $ 179.0 $ 72.3 $ 64.2 $ 381.4
Loss (income) from disc ops, net of
tax, attributable to HealthSouth 0.4 (0.1) 0.9 (0.1) 1.1
Net income attributable to
noncontrolling interests (14.6) (13.8) (14.1) (15.3) (57.8)
Income from continuing operations
attributable to HealthSouth* 51.7 $ 0.48 165.1 $ 1.66 59.1 $ 0.59 48.8 $ (0.31) 324.7 $ 2.59
Gov't, class action, and related
settlements — (2.0) (21.3) (0.2) (23.5)
Pro fees - acct, tax, and legal 1.4 2.2 4.2 1.7 9.5
Provision for income tax expense
(benefit) 33.5 (86.5) 35.2 30.5 12.7
Interest expense and amortization of
debt discounts and fees 24.2 24.4 25.3 26.5 100.4
Depreciation and amortization 22.1 23.1 24.3 25.2 94.7
Loss on early extinguishment of debt — — — 2.4 2.4
Other, including net noncash loss on
disposal of assets 0.1 1.7 2.5 1.6 5.9
Stock-based compensation expense 6.3 6.5 6.2 5.8 24.8
Adjusted EBITDA $ 139.3 $ 134.5 $ 135.5 $ 142.3 $ 551.6
Weighted average common shares
outstanding:
Basic 94.0 86.1 86.2 86.4 88.1
Diluted 107.1 99.8 100.4 100.8 102.1
* Per share amounts for each period presented are based on diluted weighted-average shares outstanding.
Refer to pages 119-122 for end notes.
100
Reconciliation of Net Income to Adjusted EBITDA(28)
2011 2012
(in millions, except per share data) Total Per Share Total Per Share
Net income $ 254.6 $ 235.9
Income from disc ops, net of tax, attributable to HealthSouth (49.9) (4.5)
Net income attributable to noncontrolling interests (45.9) (50.9)
Income from continuing operations attributable to HealthSouth* 158.8 $ 1.39 180.5 $ 1.62
Gov't, class action, and related settlements (12.3) (3.5)
Pro fees-acct, tax, and legal 21.0 16.1
Provision for income tax expense 37.1 108.6
Interest expense and amortization of debt discounts and fees 119.4 94.1
Depreciation and amortization 78.8 82.5
Net noncash loss on disposal of assets 4.3 4.4
Loss on early extinguishment of debt 38.8 4.0
Gain on consolidation of St. Vincent Rehabilitation Hospital — (4.9)
Stock-based compensation expense 20.3 24.1
Adjusted EBIDTA $ 466.2 $ 505.9
Weighted average common shares outstanding:
Basic 93.3 94.6
Diluted 109.2 108.1
* Per share amounts for each period presented are based on diluted weighted-average shares outstanding.
Refer to pages 119-122 for end notes.
101
Reconciliation of Segment Adjusted EBITDA to Income
from Continuing Operations Before Income Tax Expense
Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31,
2016 2015 2016 2015 2015
(In Millions)
Total segment Adjusted EBITDA $ 230.1 $ 189.5 $ 449.6 $ 370.8 $ 774.1
General and administrative expenses (34.4) (32.1) (66.3) (66.7) (133.3)
Depreciation and amortization (42.9) (32.7) (85.3) (64.6) (139.7)
(Loss) gain on disposal or impairment of assets (0.2) (0.8) (0.4) 0.7 (2.6)
Government, class action, and related settlements — — — (8.0) (7.5)
Professional fees - accounting, tax, and legal (1.7) (0.1) (1.9) (2.3) (3.0)
Loss on early extinguishment of debt (2.4) (18.8) (4.8) (20.0) (22.4)
Interest expense and amortization of debt discounts and fees (43.4) (30.9) (88.0) (62.7) (142.9)
Net income attributable to noncontrolling interests 18.6 17.3 37.3 33.8 69.7
Gain related to SCA equity interest — 2.6 — 2.6 3.2
Income from continuing operations before income tax
expense $ 123.7 $ 94.0 $ 240.2 $ 183.6 $ 395.6
102
For the Three Months Ended June 30, 2016
Adjustments
As
Reported
Professional
Fees -
Accounting,
Tax, and
Legal
Mark-to-
Market
Adjustment
for Stock
Appreciation
Rights
Loss on Early
Extinguishment
of Debt
Sale of
Hospital
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 204.3 $ — $ — $ — $ — $ 204.3
Depreciation and amortization (42.9) — — — — (42.9)
Professional fees - accounting, tax, and legal (1.7) 1.7 — — — —
Loss on early extinguishment of debt (2.4) — — 2.4 — —
Interest expense and amortization of debt
discounts and fees (43.4) — — — — (43.4)
Stock-based compensation (8.6) — 2.8 — — (5.8)
Loss on disposal or impairment of assets (0.2) — — — (0.9) (1.1)
Income from continuing operations
before income tax expense 105.1 1.7 2.8 2.4 (0.9) 111.1
Provision for income tax expense (42.4) (0.7) (1.1) (1.0) 0.4 (44.8)
Income from continuing operations
attributable to HealthSouth $ 62.7 $ 1.0 $ 1.7 $ 1.4 $ (0.5) $ 66.3
Add: Interest on convertible debt, net of tax 2.4 2.4
Numerator for diluted earnings per share $ 65.1 $ 68.7
Diluted earnings per share from continuing
operations** $ 0.65 $ 0.01 $ 0.02 $ 0.01 $ (0.01) $ 0.69
Diluted shares used in calculation 99.4
Adjusted EPS(1) - Q2 2016
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
103
Adjusted EPS(1) - Q1 2016
For the Three Months Ended March 31, 2016
Adjustments
As
Reported
Professional
Fees -
Accounting,
Tax, and
Legal
Mark-to-
Market
Adjustment
for Stock
Appreciation
Rights
Loss on Early
Extinguishment
of Debt
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 192.1 $ — $ — $ — $ 192.1
Depreciation and amortization (42.4) — — — (42.4)
Professional fees - accounting, tax, and legal (0.2) 0.2 — — —
Loss on early extinguishment of debt (2.4) — — 2.4 —
Interest expense and amortization of debt
discounts and fees (44.6) — — — (44.6)
Stock-based compensation (4.5) — (2.4) — (6.9)
Loss on disposal or impairment of assets (0.2) — — — (0.2)
Income from continuing operations before
income tax expense 97.8 0.2 (2.4) 2.4 98.0
Provision for income tax expense (39.7) (0.1) 1.0 (1.0) (39.8)
Income from continuing operations
attributable to HealthSouth $ 58.1 $ 0.1 $ (1.4) $ 1.4 $ 58.2
Add: Interest on convertible debt, net of tax 2.4 2.4
Numerator for diluted earnings per share $ 60.5 $ 60.6
Diluted earnings per share from continuing
operations** $ 0.61 $ — $ (0.01) $ 0.01 $ 0.61
Diluted shares used in calculation 99.4
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
104
Adjusted EPS(1) - YTD 2016
For the Six Months Ended June 30, 2016
Adjustments
As
Reported
Professional
Fees -
Accounting,
Tax, and
Legal
Mark-to-
Market
Adjustment
for Stock
Appreciation
Rights
Loss on Early
Extinguishment
of Debt
Sale of
Hospital
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 396.4 $ — $ — $ — $ — $ 396.4
Depreciation and amortization (85.3) — — — — (85.3)
Professional fees - accounting, tax, and legal (1.9) 1.9 — — — —
Loss on early extinguishment of debt (4.8) — — 4.8 — —
Interest expense and amortization of debt
discounts and fees (88.0) — — — — (88.0)
Stock-based compensation (13.1) — 0.5 — — (12.6)
Loss on disposal or impairment of assets (0.4) — — — (0.9) (1.3)
Income from continuing operations
before income tax expense 202.9 1.9 0.5 4.8 (0.9) 209.2
Provision for income tax expense (82.1) (0.8) (0.2) (1.9) 0.4 (84.6)
Income from continuing operations
attributable to HealthSouth $ 120.8 $ 1.1 $ 0.3 $ 2.9 $ (0.5) $ 124.6
Add: Interest on convertible debt, net of tax 4.8 4.8
Numerator for diluted earnings per share $ 125.6 $ 129.4
Diluted earnings per share from continuing
operations** $ 1.26 $ 0.01 $ — $ 0.03 $ (0.01) $ 1.30
Diluted shares used in calculation 99.4
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
105
For the Three Months Ended December 31, 2015
Adjustments
As
Reported
Gov’t, Class
Action, &
Related
Settlements
Pro.
Fees -
Acct.,
Tax, &
Legal
Income
Tax
Valuation
Allowance
& Other
Adj.
Transaction
Costs
Loss on
Early
Exting.
of Debt
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 191.5 $ — $ — $ — $ — $ — $ 191.5
Depreciation and amortization (41.4) — — — — — (41.4)
Government, class action, and related
settlements 0.5 (0.5) — — — — —
Professional fees - accounting, tax, and legal (0.3) — 0.3 — — — —
Loss on early extinguishment of debt (2.4) — — — — 2.4 —
Interest expense and amortization of debt
discounts and fees (44.6) — — — — — (44.6)
Stock-based compensation (4.4) — — — — — (4.4)
Loss on disposal or impairment of assets (2.4) — — — — — (2.4)
Transaction costs (6.7) — — — 6.7 — —
Income from continuing operations
before income tax expense 89.8 (0.5) 0.3 — 6.7 2.4 98.7
Provision for income tax expense (43.5) 0.2 (0.1) 4.7 (2.1) (1.0) (41.8)
Income from continuing operations
attributable to HealthSouth $ 46.3 $ (0.3) $ 0.2 $ 4.7 $ 4.6 $ 1.4 $ 56.9
Add: Interest on convertible debt, net of tax 2.4 2.4
Numerator for diluted earnings per share $ 48.7 $ 59.3
Diluted earnings per share from continuing
operations** $ 0.48 $ — $ — $ 0.05 $ 0.05 $ 0.01 $ 0.59
Diluted shares used in calculation 100.6
Adjusted EPS(1) - Q4 2015
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
106
For the Three Months Ended September 30, 2015
Adjustments
As
Reported
Professional
Fees -
Accounting,
Tax, and
Legal
Transaction
Costs
Mark-to-Market
Adjustment for
Stock
Appreciation
Rights
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 165.4 $ — $ — $ — $ 165.4
Depreciation and amortization (33.7) — — — (33.7)
Government, class action, and related settlements — — — — —
Professional fees - accounting, tax, and legal (0.4) 0.4 — — —
Loss on early extinguishment of debt — — — — —
Interest expense and amortization of debt discounts and fees (35.6) — — — (35.6)
Stock-based compensation (6.2) — — 1.2 (5.0)
Loss on disposal or impairment of assets (0.9) — — — (0.9)
Transaction costs (2.3) — 2.3 — —
Income from continuing operations before income tax
expense 86.3 0.4 2.3 1.2 90.2
Provision for income tax expense (35.9) (0.2) (0.9) (0.5) (37.5)
Income from continuing operations attributable to
HealthSouth $ 50.4 $ 0.2 $ 1.4 $ 0.7 $ 52.7
Add: Interest on convertible debt, net of tax 2.4 2.4
Numerator for diluted earnings per share $ 52.8 $ 55.1
Diluted earnings per share from continuing operations** $ 0.52 $ — $ 0.01 $ 0.01 $ 0.54
Diluted shares used in calculation 101.5
Adjusted EPS(1) - Q3 2015
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
107
For the Three Months Ended June 30, 2015
Adjustments
As
Reported
Professional
Fees -
Accounting,
Tax, and
Legal
Transaction
Costs
Loss on Early
Extinguishment
of Debt
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 169.5 $ — $ — $ — $ 169.5
Depreciation and amortization (32.7) — — — (32.7)
Professional fees - accounting, tax, and legal (0.1) 0.1 — — —
Loss on early extinguishment of debt (18.8) — — 18.8 —
Interest expense and amortization of debt
discounts and fees (30.9) — — — (30.9)
Stock-based compensation (6.2) — — — (6.2)
Loss on disposal or impairment of assets (0.8) — — — (0.8)
Transaction costs (3.3) — 3.3 — —
Income from continuing operations
before income tax expense 76.7 0.1 3.3 18.8 98.9
Provision for income tax expense (32.2) — (1.3) (7.5) (41.0)
Income from continuing operations
attributable to HealthSouth $ 44.5 $ 0.1 $ 2.0 $ 11.3 $ 57.9
Add: Interest on convertible debt, net of tax 2.3 2.3
Numerator for diluted earnings per share $ 46.8 $ 60.2
Diluted earnings per share from continuing
operations** $ 0.47 $ — $ 0.02 $ 0.11 $ 0.59
Diluted shares used in calculation 101.5
Adjusted EPS(1) - Q2 2015
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
108
For the Three Months Ended March 31, 2015
Adjustments
As
Reported
Government,
Class Action,
and Related
Settlements
Professional
Fees -
Accounting,
Tax, and
Legal
Loss on Early
Extinguishment
of Debt
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 156.1 $ — $ — $ — $ 156.1
Depreciation and amortization (31.9) — — — (31.9)
Government, class action, and related
settlements (8.0) 8.0 — — —
Professional fees - accounting, tax, and legal (2.2) — 2.2 — —
Loss on early extinguishment of debt (1.2) — — 1.2 —
Interest expense and amortization of debt
discounts and fees (31.8) — — — (31.8)
Stock-based compensation (9.4) — — — (9.4)
Gain on disposal or impairment of assets 1.5 — — — 1.5
Income from continuing operations before
income tax expense 73.1 8.0 2.2 1.2 84.5
Provision for income tax expense (30.3) (3.2) (0.9) (0.5) (34.9)
Income from continuing operations
attributable to HealthSouth $ 42.8 $ 4.8 $ 1.3 $ 0.7 $ 49.6
Add: Interest on convertible debt, net of tax 2.3 2.3
Numerator for diluted earnings per share $ 45.1 $ 51.9
Diluted earnings per share from continuing
operations** $ 0.44 $ 0.05 $ 0.01 $ 0.01 $ 0.51
Diluted shares used in calculation 101.1
Adjusted EPS(1) - Q1 2015
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
109
For the Six Months Ended June 30, 2015
Adjustments
As
Reported
Government,
Class
Action, and
Related
Settlements
Professional
Fees -
Accounting,
Tax, and
Legal
Transaction
Costs
Loss on
Early
Exting.
of Debt
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 325.6 $ — $ — $ — $ — $ 325.6
Depreciation and amortization (64.6) — — — — (64.6)
Government, class action, and related settlements (8.0) 8.0 — — — —
Professional fees - accounting, tax, and legal (2.3) — 2.3 — — —
Loss on early extinguishment of debt (20.0) — — — 20.0 —
Interest expense and amortization of debt
discounts and fees (62.7) — — — — (62.7)
Stock-based compensation (15.6) — — — — (15.6)
Gain on disposal or impairment of assets 0.7 — — — — 0.7
Transaction costs (3.3) — — 3.3 — —
Income from continuing operations before
income tax expense 149.8 8.0 2.3 3.3 20.0 183.4
Provision for income tax expense (62.5) (3.2) (0.9) (1.3) (8.0) (75.9)
Income from continuing operations
attributable to HealthSouth $ 87.3 $ 4.8 $ 1.4 $ 2.0 $ 12.0 $ 107.5
Add: Interest on convertible debt, net of tax 4.6 4.6
Numerator for diluted earnings per share $ 91.9 $ 112.1
Diluted earnings per share from continuing
operations** $ 0.91 $ 0.05 $ 0.01 $ 0.02 $ 0.12 $ 1.11
Diluted shares used in calculation 101.3
Adjusted EPS(1) - Six Months 2015
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
110
Adjusted EPS(1) - 2015
For the Year Ended December 31, 2015
Adjustments
As
Reported
Gov’t,
Class
Action, &
Related
Settlements
Pro.
Fees -
Acct.,
Tax, &
Legal
Income Tax
Valuation
Allowance
& Other Adj.
Transaction
Costs
Loss on
Early
Exting. of
Debt
Mark-to-Market
Adjustment for
Stock
Appreciation
Rights
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 682.5 $ — $ — $ — $ — $ — $ — $ 682.5
Depreciation and amortization (139.7) — — — — — — (139.7)
Government, class action, and related
settlements (7.5) 7.5 — — — — — —
Professional fees - accounting, tax, and
legal (3.0) — 3.0 — — — — —
Loss on early extinguishment of debt (22.4) — — — — 22.4 — —
Interest expense and amortization of debt
discounts and fees (142.9) — — — — — — (142.9)
Stock-based compensation (26.2) — — — — — 1.2 (25.0)
Loss on disposal or impairment of assets (2.6) — — — — — — (2.6)
Transaction costs (12.3) — — — 12.3 — — —
Income from continuing operations
before income tax expense 325.9 7.5 3.0 — 12.3 22.4 1.2 372.3
Provision for income tax expense (141.9) (3.0) (1.2) 4.7 (4.1) (9.0) (0.5) (155.0)
Income from continuing operations
attributable to HealthSouth $ 184.0 $ 4.5 $ 1.8 $ 4.7 $ 8.2 $ 13.4 $ 0.7 $ 217.3
Add: Interest on convertible debt, net
of tax 9.4 9.4
Numerator for diluted earnings per
share $ 193.4 $ 226.7
Diluted earnings per share from
continuing operations** $ 1.92 $ 0.04 $ 0.02 $ 0.05 $ 0.08 $ 0.13 $ 0.01 $ 2.24
Diluted shares used in calculation 101.0
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
111
For the Year Ended December 31, 2014
Adjustments
As
Reported
Gov't, Class
Action, and
Related
Settlements
Pro. Fees -
Acct, Tax,
and Legal
Transaction
Costs
Gain on
Consolidation
of Fairlawn
Rehabilitation
Hospital
Loss on
Early
Exting. of
Debt
Income Tax
Valuation
Adjustment
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 577.6 $ — $ — $ — $ — $ — $ — $ 577.6
Depreciation and amortization (107.7) — — — — — — (107.7)
Government, class action, and related
settlements 1.7 (1.7) — — — — — —
Professional fees - accounting, tax, and legal (9.3) — 9.3 — — — — —
Loss on early extinguishment of debt (13.2) — — — — 13.2 — —
Interest expense and amortization of debt
discounts and fees (109.2) — — — — — — (109.2)
Stock-based compensation (23.9) — — — — — — (23.9)
Loss on disposal or impairment of assets (6.7) — — — — — — (6.7)
Gain on consolidation of Fairlawn Rehabilitation
Hospital 27.2 — — — (27.2) — — —
Transaction costs (9.3) — — 9.3 — — — —
Income from continuing operations
before income tax expense 327.2 (1.7) 9.3 9.3 (27.2) 13.2 — 330.1
Provision for income tax expense (110.7) 0.7 (3.7) (2.5) (3.0) (5.3) (7.4) (131.9)
Income from continuing operations
attributable to HealthSouth $ 216.5 $ (1.0) $ 5.6 $ 6.8 $ (30.2) $ 7.9 $ (7.4) $ 198.2
Add: Interest on convertible debt, net of tax 9.0 9.0
Numerator for diluted earnings per share $ 225.5 $ 207.2
Diluted earnings per share from continuing
operations** $ 2.24 $ (0.01) $ 0.06 $ 0.07 $ (0.30) $ 0.08 $ (0.07) $ 2.06
Diluted shares used in calculation 100.7
Adjusted EPS(1) - 2014
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
112
For the Year Ended December 31, 2013
Adjustments
As
Reported
Gov't, Class
Action, and
Related
Settlements
Pro. Fees -
Acct., Tax,
and Legal
Loss on
Early
Exting. of
Debt
Income Tax
Valuation
Allowance
Adjustment
Settlement
of Income
Tax Claims
Repurchase
of Preferred
Stock
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 551.6 $ — $ — $ — $ — $ — $ — $ 551.6
Depreciation and amortization (94.7) — — — — — — (94.7)
Government, class action, and related settlements 23.5 (23.5) — — — — — —
Professional fees - accounting, tax, and legal (9.5) — 9.5 — — — — —
Loss on early extinguishment of debt (2.4) — — 2.4 — — — —
Interest expense and amortization of debt discounts
and fees (100.4) — — — — — — (100.4)
Stock-based compensation (24.8) — — — — — — (24.8)
Loss on disposal or impairment of assets (5.9) — — — — — — (5.9)
Income from continuing operations before
income tax expense 337.4 (23.5) 9.5 2.4 — — — 325.8
Provision for income tax expense (12.7) 9.4 (3.8) (1.0) (9.1) (113.4) — (130.6)
Income from continuing operations
attributable to HealthSouth $ 324.7 $ (14.1) $ 5.7 $ 1.4 $ (9.1) $ (113.4) $ — $ 195.2
Less: Income allocated to participating securities (3.4) (3.4)
Less: Convertible perpetual preferred dividends (21.0) (21.0)
Less: Repurchase of perpetual preferred stock (71.6) 71.6 —
Numerator for basic earnings per share $ 228.7 $ 170.8
Basic earnings per share from continuing
operations** $ 2.59 $ (0.16) $ 0.06 $ 0.02 $ (0.10) $ (1.29) $ 0.81 $ 1.94
Basic shares used in calculation 88.1
Adjusted EPS(1) - 2013
Basic and diluted earnings per share are the same due to antidilution.
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
113
For the Year Ended December 31, 2012
Adjustments
As
Reported
Gov't, Class
Action, and
Related
Settlements
Pro. Fees -
Acct, Tax,
and Legal
Gain on
Consolidation
of St. Vincent
Rehabilitation
Hospital
Loss on
Early
Exting. of
Debt
Income Tax
Valuation
Allowance
Adjustment
Settlement
of Income
Tax Claims
As
Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 505.9 $ — $ — $ — $ — $ — $ — $ 505.9
Depreciation and amortization (82.5) — — — — — — (82.5)
Government, class action, and related settlements 3.5 (3.5) — — — — — —
Professional fees - accounting, tax, and legal (16.1) — 16.1 — — — — —
Loss on early extinguishment of debt (4.0) — — — 4.0 — — —
Interest expense and amortization of debt discounts
and fees (94.1) — — — — — — (94.1)
Stock-based compensation (24.1) — — — — — — (24.1)
Loss on disposal or impairment of assets (4.4) — — — — — — (4.4)
Gain on consolidation of St. Vincent Rehabilitation
Hospital 4.9 — — (4.9) — — — —
Income from continuing operations before
income tax expense 289.1 (3.5) 16.1 (4.9) 4.0 — — 300.8
Provision for income tax expense (108.6) 1.4 (6.4) 2.0 (1.6) (9.5) 1.0 (121.7)
Income from continuing operations
attributable to HealthSouth $ 180.5 $ (2.1) $ 9.7 $ (2.9) $ 2.4 $ (9.5) $ 1.0 $ 179.1
Less: Income allocated to participating securities (2.2) (2.2)
Less: Convertible perpetual preferred dividends (23.9) (23.9)
Less: Repurchase of preferred stock (0.8) (0.8)
Numerator for basic earnings per share $ 153.6 $ 152.2
Basic earnings per share from continuing
operations** $ 1.62 $ (0.02) $ 0.10 $ (0.03) $ 0.03 $ (0.10) $ 0.01 $ 1.61
Basic shares used in calculation 94.6
Adjusted EPS(1) - 2012
Basic and diluted earnings per share are the same due to antidilution.
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
114
For the Year Ended December 31, 2011
Adjustments
As Reported
Gov't, Class
Action, and
Related
Settlements
Pro. Fees -
Acct., Tax,
and Legal
Loss on
Early
Exting. of
Debt
Income Tax
Valuation
Allowance
Adjustment
Settlement
of Income
Tax Claims As Adjusted
(In Millions, Except Per Share Amounts)
Adjusted EBITDA* $ 466.2 $ — $ — $ — $ — $ — $ 466.2
Depreciation and amortization (78.8) — — — — — (78.8)
Government, class action, and related
settlements 12.3 (12.3) — — — — —
Professional fees - accounting, tax, and legal (21.0) — 21.0 — — — —
Loss on early extinguishment of debt (38.8) — — 38.8 — — —
Interest expense and amortization of debt
discounts and fees (119.4) — — — — — (119.4)
Stock-based compensation (20.3) — — — — — (20.3)
Loss on disposal or impairment of assets (4.3) — — — — — (4.3)
Income from continuing operations before
income tax expense 195.9 (12.3) 21.0 38.8 — — 243.4
Provision for income tax expense (37.1) 4.9 (8.4) (15.5) (28.2) (17.5) (101.8)
Income from continuing operations
attributable to HealthSouth $ 158.8 $ (7.4) $ 12.6 $ 23.3 $ (28.2) $ (17.5) $ 141.6
Less: Income allocated to participating
securities (3.2) (3.2)
Less: Convertible preferred stock dividends (26.0) (26.0)
Numerator for basic earnings per share $ 129.6 $ 112.4
Basic earnings per share from continuing
operations** $ 1.39 $ (0.08) $ 0.14 $ 0.25 $ (0.30) $ (0.19) $ 1.20
Basic shares used in calculation 93.3
Adjusted EPS(1) - 2011
Basic and diluted earnings per share are the same due to antidilution.
* Reconciliation to GAAP provided on pages 96-100 ; Refer to pages 119-122 for end notes.
** Adjusted EPS may not sum across due to rounding.
115
Adjusted Free Cash Flow History(2)
Q2 6 Months Full Year
(Millions) 2016 2015 2016 2015 2015 2014 2013 2012 2011
Net cash provided by operating activities $ 152.2 $ 102.9 $ 311.9 $ 204.9 $ 484.8 $ 444.9 $ 470.3 $ 411.5 $ 342.7
Impact of discontinued operations 0.3 0.2 0.5 0.3 0.7 1.2 1.9 (2.0) (9.1)
Net cash provided by operating
activities of continuing operations 152.5 103.1 312.4 205.2 485.5 446.1 472.2 409.5 333.6
Capital expenditures for maintenance (22.9) (18.2) (40.6) (36.5) (83.1) (92.0) (74.8) (83.0) (50.8)
Net settlements on interest rate swaps — — — — — — — — (10.9)
Dividends paid on convertible perpetual
preferred stock — (1.5) — (3.1) (3.1) (6.3) (23.0) (24.6) (26.0)
Distributions paid to noncontrolling interests
of consolidated affiliates (18.0) (13.0) (33.6) (26.2) (54.4) (54.1) (46.3) (49.3) (44.2)
Items non-indicative of ongoing operations:
Transaction costs and assumed liabilities — 1.6 0.8 19.3 28.3 2.0 — — —
Net premium on bond issuance/repayment 2.0 11.8 3.9 3.8 4.0 4.3 1.7 1.9 22.8
Cash paid for professional fees - accounting,
tax, and legal 1.7 2.7 1.9 3.4 4.1 8.6 7.0 16.1 21.0
Cash paid (received) for government, class
action, and related settlements — 8.0 — 8.0 7.7 2.7 (5.9) (2.6) 5.7
Income tax refunds related to prior periods — — — — — — — — (7.9)
Adjusted free cash flow $ 115.3 $ 94.5 $ 244.8 $ 173.9 $ 389.0 $ 311.3 $ 330.9 $ 268.0 $ 243.3
Cash dividends on common stock(4) $ 20.6 $ 18.5 $ 41.9 $ 37.1 $ 77.2 $ 65.8 $ 15.7 $ — $ —
Refer to pages 119-122 for end notes.
116
Adjusted Free Cash Flow(2) - 2015
2015
(Millions) Q1 Q2 Q3 Q4
Full
Year
Net cash provided by operating activities $ 102.0 $ 102.9 $ 163.3 $ 116.6 $ 484.8
Impact of discontinued operations 0.1 0.2 0.5 (0.1) 0.7
Net cash provided by operating
activities of continuing operations 102.1 103.1 163.8 116.5 485.5
Capital expenditures for maintenance (18.3) (18.2) (19.5) (27.1) (83.1)
Dividends paid on convertible perpetual
preferred stock (1.6) (1.5) — — (3.1)
Distributions paid to noncontrolling interests
of consolidated affiliates (13.2) (13.0) (13.4) (14.8) (54.4)
Items non-indicative of ongoing operations:
Encompass transaction costs and related assumed
liabilities 17.7 — 0.2 — 17.9
Reliant/CareSouth transaction costs — 1.6 2.3 6.5 10.4
Net premium on bond issuance/repayment (8.0) 11.8 (1.8) 1.9 4.0
Cash paid for professional fees - accounting, tax,
and legal 0.7 2.7 0.4 0.3 4.1
Cash paid (received) for government, class action,
and related settlements — 8.0 — (0.3) 7.7
Adjusted free cash flow $ 79.4 $ 94.5 $ 132.0 $ 83.0 $ 389.0
Refer to pages 119-122 for end notes.
117
Net Cash Provided by Operating Activities Reconciled
to Adjusted EBITDA
Q2 6 Months Full Year
(Millions) 2016 2015 2016 2015 2015 2014 2013 2012 2011
Net cash provided by operating activities $152.2 $102.9 $311.9 $204.9 $484.8 $444.9 $470.3 $411.5 $342.7
Provision for doubtful accounts (15.4) (10.9) (31.9) (22.5) (47.2) (31.6) (26.0) (27.0) (21.0)
Professional fees—accounting, tax, and legal 1.7 0.1 1.9 2.3 3.0 9.3 9.5 16.1 21.0
Interest expense and amortization of debt discounts
and fees 43.4 30.9 88.0 62.7 142.9 109.2 100.4 94.1 119.4
Equity in net income of nonconsolidated affiliates 2.4 2.3 4.8 3.9 8.7 10.7 11.2 12.7 12.0
Net income attributable to noncontrolling interests in
continuing operations (18.6) (17.3) (37.3) (33.8) (69.7) (59.7) (57.8) (50.9) (47.0)
Amortization of debt discounts and fees (3.4) (3.0) (6.8) (6.3) (14.3) (12.7) (5.0) (3.7) (4.2)
Distributions from nonconsolidated affiliates (1.3) (1.8) (3.0) (3.7) (7.7) (12.6) (11.4) (11.0) (13.0)
Current portion of income tax expense 4.0 3.4 9.0 6.9 14.8 13.3 6.3 5.9 0.6
Change in assets and liabilities 36.9 45.2 55.2 101.2 147.1 90.1 48.9 58.1 41.4
Net premium paid on bond issuance/redemption 2.0 11.8 3.9 3.8 3.9 4.3 1.7 1.9 22.8
Cash used in (provided by) operating activities of
discontinued operations 0.3 0.2 0.5 0.3 0.7 1.2 1.9 (2.0) (9.1)
Transaction costs — 3.3 — 3.3 12.3 9.3 — — —
Other 0.1 2.4 0.2 2.6 3.2 1.9 1.6 0.2 0.6
Adjusted EBITDA $204.3 $169.5 $396.4 $325.6 $682.5 $577.6 $551.6 $505.9 $466.2
118
Share Information
Refer to pages 119-122 for end notes.
Weighted Average for the Period
Q2 6 Months Full Year
(Millions) 2016 2015 2016 2015 2015 2014 2013
Basic shares outstanding(3) 89.3 89.8 89.4 88.4 89.4 86.8 88.1
Convertible perpetual preferred stock(3) — 0.8 — 2.0 1.0 3.2 10.5
Convertible senior subordinated notes(29) 8.5 8.2 8.5 8.2 8.3 8.2 1.0
Restricted stock awards, dilutive stock options,
restricted stock units, and common stock
warrants(30) 1.6 2.7 1.5 2.7 2.3 2.5 2.5
Diluted shares outstanding 99.4 101.5 99.4 101.3 101.0 100.7 102.1
End of Period
Q2 6 Months Full Year
(Millions) 2016 2015 2016 2015 2015 2014 2013
Basic shares outstanding(3) 89.1 90.6 89.1 90.6 89.3 86.6 86.8
Approx. Approx.
Date Conversion Rate Conversion Price
Convertible senior subordinated notes(29) 07/01/16 26.6011 $37.59
119
End Notes
120
End Notes
(1) HealthSouth is providing adjusted earnings per share from continuing operations attributable to HealthSouth (“adjusted earnings per share”), which is a
non-GAAP measure. The Company believes the presentation of adjusted earnings per share provides useful additional information to investors because
it provides better comparability of ongoing performance to prior periods given that it excludes the impact of government, class action, and related
settlements, professional fees - accounting, tax, and legal, mark-to-market adjustments for stock appreciation rights, gains or losses related to hedging
instruments, loss on early extinguishment of debt, adjustments to its income tax provision (such as valuation allowance adjustments and settlements of
income tax claims), items related to corporate and facility restructurings, and certain other items deemed to be non-indicative of ongoing operations. It is
reasonable to expect that one or more of these excluded items will occur in future periods, but the amounts recognized can vary significantly from period
to period and may not directly relate to the Company's ongoing operations. Accordingly, they can complicate comparisons of the Company's results of
operations across periods and comparisons of the Company's results to those of other healthcare companies. Adjusted earnings per share should not
be considered as a measure of financial performance under generally accepted accounting principles in the United States as the items excluded from it
are significant components in understanding and assessing financial performance. Because adjusted earnings per share is not a measurement
determined in accordance with GAAP and is thus susceptible to varying calculations, it may not be comparable as presented to other similarly titled
measures of other companies.*
(2) Definition of adjusted free cash flow, which is a non-GAAP measure, is net cash provided by operating activities of continuing operations minus capital
expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and certain other items deemed to be non-
indicative of ongoing operations. Common stock dividends are not included in the calculation of adjusted free cash flow.
(3) In March 2006, the Company completed the sale of 400,000 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. In Q4 2013, the
Company exchanged $320 million of newly issued 2.0% Convertible Senior Subordinated Notes due 2043 for 257,110 shares of its outstanding
preferred stock. In April 2015, the Company exercised its rights to force conversion of all outstanding shares of preferred stock. On the conversion date,
each outstanding share of preferred stock was converted into 33.9905 shares of common stock, resulting in the issuance of 3,271,415 shares of
common stock.
(4) On July 16, 2015, the board of directors approved a $0.02 per share, or 9.5%, increase to the quarterly cash dividend on the Company’s common stock,
bringing the quarterly cash dividend to $0.23 per common share. On July 21, 2016, the board of directors approved a $0.01 per share, or 4.3%, increase
to the quarterly cash dividend on the Company’s common stock, bringing the quarterly cash dividend to $0.24 per common share.
(5) Under this program, Joint Commission accredited organizations, like the Company's hospitals, may seek certification for chronic diseases or conditions
such as brain injury or stroke rehabilitation by complying with Joint Commission standards, effectively using evidence-based clinical practice guidelines
to manage and optimize patient care, and using an organized approach to performance measurement and evaluation of clinical outcomes. Obtaining
such certifications demonstrates the Company's commitment to excellence in providing disease-specific care.
(6) Data compares HealthSouth hospitals to hospitals comprising the Uniform Data System for Medical Rehabilitation (“UDSMR”), a data gathering and
analysis organization for the rehabilitation industry which represents approximately 70% of the industry, including HealthSouth sites. Data is adjusted by
applying HealthSouth hospital case-mix to non-HealthSouth UDS hospitals.
(7) Source: https://data.medicare.gov/data/home-health-compare. Data on this page was published in July 2016 and reflects OASIS and HHCAHPS Survey
data collected from January 2015 through December 2015 and claims-based data collected from October 2014 through September 2015.
(8) Source: FY 2017 CMS Final Rule Rate Setting File and the last publicly available Medicare cost reports (FYE 2014/2015) or in the case of new IRFs, the
June 2016 CMS Provider of Service File.
a. All data provided was filtered and compiled from the Centers for Medicare and Medicaid Services (CMS) Fiscal Year 2017 IRF Final Rule Rate
Setting File found at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/Downloads/
FY2017_datafiles_final.zip. The data presented was developed entirely by CMS and is based on its definitions which are different in form and
substance from the criteria HealthSouth uses for external reporting purposes. Because CMS does not provide its detailed methodology, HealthSouth
is not able to reconstruct the CMS projections or the calculation.
b.The CMS file contains data for each of the 1,133 inpatient rehabilitation facilities used to estimate the policy updates for the FY 2017 IRF-PPS Final
Rule. Most of the data represents historical information from the CMS fiscal year 2015 period and may or may not reflect the same HealthSouth
hospitals in operation today. The data presented was separated into three categories: Freestanding, Units, and HealthSouth. HealthSouth is a
subset of Freestanding and the Total.
* Reconciliations to GAAP provided on pages 95-117.
121
End Notes, con't.
(9) The 119 for HLS excludes the inpatient rehabilitation hospital at HealthSouth Rehabilitation Hospital of Franklin (opened December 2015); CHI St. Vincent
Hot Springs Rehabilitation Hospital, an affiliate of HealthSouth (opened February 2016); and HealthSouth Rehabilitation Hospital of Beaumont (sold
June 2016).
(10) In 2015, HealthSouth averaged 1,332 total Medicare and non-Medicare discharges per hospital in its then 107 consolidated hospitals that were open the
full year.
(11) Case Mix Index (CMI) from the rate-setting file is adjusted for short-stay transfer cases. HealthSouth’s unadjusted CMI for 2014 was 1.35 versus 1.30 for
the industry as measured by UDSMR.
(12) The Budget Control Act of 2011 included a reduction of up to 2% to Medicare payments for all providers that began on April 1, 2013 (as modified by
H.R. 8). The reduction was made from whatever level of payment would otherwise have been provided under Medicare law and regulation.
(13) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction
increased HealthSouth's ownership interest from 50% to 80% and resulted in a change in accounting for the hospital from the equity method to a
consolidated entity effective June 1, 2014.
(14) In Q3 2012, HealthSouth amended the joint venture agreement related to St.Vincent Rehabilitation Hospital in Sherwood, AR which resulted in a change in
accounting for this hospital from the equity method of accounting to a consolidated entity.
(15) Data provided by UDSMR.
(16) If legislation affecting Medicare is passed, HealthSouth will evaluate its effect on its business model.
(17) The Medicare Access and CHIP Reauthorization Act of 2015 mandated a market basket update of +1.0% in 2018 for post-acute providers including
rehabilitation hospitals as well as home health and hospice agencies.
(18) The Company estimates the expected impact of each rule utilizing, among other things, the acuity of its patients over the 8-month (home health segment)
to 12-month (inpatient rehabilitation segment) period prior to each rule’s release and incorporates other adjustments included in each rule. These
estimates are prior to the impact of sequestration.
(19) Quality reporting requirements and potential penalties were enabled for IRFs as part of the Healthcare Reform Bill (PPACA). The IMPACT Act of 2014
requires additional quality and clinical data reporting for IRFs to be subject to the original 2% penalty.
(20) Pre-opening expenses include expenses for training new employees on the clinical information system, which vary based on the timing of the first
admission.
(21) CMS published an updated Bundled Payments for Care Episode analytic file in January 2016. Among other data, this file provided the most recent listing
of Model 2 awardees and the clinical episodes each participant selected for a bundled payment arrangement.
(22) The leverage ratio is based on trailing four quarters of Adjusted EBITDA of $753.3 million for YTD 2016.
(23) Represents discharges from HealthSouth’s 120 consolidated hospitals in Q2 2016; 121 consolidated hospitals in Q1 2016; 120 consolidated hospitals in
Q4 2015; 108 consolidated hospitals in Q3 and Q2 2015; and 106 consolidated hospitals in Q1 2015.
(24) Excludes approximately 420 full-time equivalents in the 2016 periods and approximately 400 full-time equivalents in the 2015 periods presented who are
considered part of corporate overhead with their salaries and benefits included in general and administrative expenses in the Company’s consolidated
statements of operations. Full-time equivalents included in the table represent HealthSouth employees who participate in or support the operations of the
Company’s hospitals.
(25) Employees per occupied bed, or "EPOB," is calculated by dividing the number of full-time equivalents, including an estimate of full-time equivalents from
the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is determined by multiplying the number
of licensed beds by the Company's occupancy percentage.
122
End Notes, con't.
(26) Represents home health admissions from 187 consolidated locations in Q2 2016; 184 consolidated locations in Q1 2016 and Q4 2015; 141 consolidated
locations in Q3 2015; 139 consolidated locations in Q2 2015; and 143 consolidated locations in Q1 2015.
(27) Represents hospice admissions from 29 locations in Q2 2016; 27 locations in Q1 2016 and Q4 2015; 23 locations in Q3 2015; and 21 locations in Q2 2015
and Q1 2015.
(28) Adjusted EBITDA is a non-GAAP financial measure. The Company’s leverage ratio (total consolidated debt to Adjusted EBITDA for the trailing four
quarters) is, likewise, a non-GAAP measure. Management and some members of the investment community utilize Adjusted EBITDA as a financial
measure and the leverage ratio as a liquidity measure on an ongoing basis. These measures are not recognized in accordance with GAAP and should not
be viewed as an alternative to GAAP measures of performance or liquidity. In evaluating Adjusted EBITDA, the reader should be aware that in the future
HealthSouth may incur expenses similar to the adjustments set forth. Further explanation and disclosure relating to the Adjusted EBITDA amounts
appearing in this presentation are included in the Company's Form 8-K, dated August 19, 2016, to which this presentation is attached as Exhibit 99.1.
(29) In November 2013, the Company closed separate, privately negotiated exchanges in which it issued $320 million of 2.0% Convertible Senior Subordinated
Notes due 2043 in exchange for 257,110 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. The Company recorded ~$249 million as debt
and ~$71 million as equity. The convertible notes are convertible, at the option of the holders, at any time on or prior to the close of business on the
business day immediately preceding December 1, 2043 into shares of the Company’s common stock and is subject to customary antidilution adjustments.
The Company has the right to redeem the convertible notes before December 1, 2018 if the volume weighted-average price of the Company’s common
stock is at least 120% of the conversion price of the convertible notes for a specified period. On or after December 1, 2018, the Company may, at its
option, redeem all or any part of the convertible notes. In either case, the redemption price will be equal to 100% of the principal amount of the convertible
notes to be redeemed, plus accrued and unpaid interest.
(30) The agreement to settle the Company’s class action securities litigation received final court approval in January 2007. The 5.0 million shares of common
stock and warrants to purchase ~8.2 million shares of common stock at a strike price of $41.40 (expire January 17, 2017) related to this settlement were
issued on September 30, 2009. The 5.0 million common shares are included in the basic outstanding shares. The warrants were not included in the diluted
share count prior to 2015 because the strike price had historically been above the market price. In Q2 2016, YTD 2016, full-year 2014, and full-year 2013,
zero shares related to the warrants were included in the diluted share count due to antidilution based on the stock price. In Q2 2015, YTD 2015, and full-
year 2015, 622,224, 470,136, and 80,814 shares, respectively, related to the warrants were included in the diluted share count using the treasury stock
method.
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