Encompass Health closed the first half of 2026 with a 9.6 percent year-over-year increase in second quarter net operating revenues to $1,597.4 million and a 10.5 percent increase in pre-tax income from continuing operations to $261.6 million. Adjusted EBITDA for the quarter reached $348.0 million, up 9.2 percent, while diluted earnings per share from continuing operations climbed to $1.55 from $1.40. The story is the same one Encompass has been telling for several years: a high-quality, low-volatility volume curve combined with steady price improvement, with the operating mix tilting toward a higher-acuity Medicare population.
The setup heading into the back half of 2026 is unusually constructive. CMS released the fiscal 2027 IRF final rule on July 30, 2026, with a 3.2 percent market basket update net of a 0.9 percent productivity adjustment, which Encompass estimates will translate into a roughly 2.3 percent net increase to its Medicare payment rates effective October 1. That update, combined with three new hospital openings already in the books and a pipeline of eleven additional projects announced or under construction, supports a continued mid-single-digit revenue trajectory. Discharge growth of 5.6 percent in the second quarter, with 2.8 percent coming from the same-store base and the remainder from new units, indicates that the development engine is converting into in-period volume rather than sitting on the balance sheet as work in progress.
The principal counterweight is the operational complexity of scaling an owned-real-estate hospital model at this pace. Salaries and benefits per occupied bed remain a watchpoint, and the second quarter included a step-up in other operating expense, driven largely by provider taxes associated with higher Medicaid supplemental payments. Management is also navigating the gradual expansion of the Review Choice Demonstration to Texas and California, and the eventual RCD coverage of two new Pennsylvania hospitals in January 2027. None of these items is destabilizing on its own, but together they raise the bar for execution.
Encompass common shares closed the period at $116.19, valuing the company at roughly $11.5 billion in market equity on 98.8 million diluted shares. On trailing-twelve-month earnings, the stock trades at approximately 17.4 times diluted EPS and 9.6 times trailing Adjusted EBITDA, a moderate premium to the company's own multi-year average but well within the range a scaled, asset-rich, Medicare-skewed franchise has historically commanded. The combination of demographic tailwinds, a clear development runway, and a balance sheet with $746 million of revolver availability argues for a constructive read, even with a multi-year reimbursement cycle that is finally turning supportive.