BIRMINGHAM, Ala., Oct. 28, 2015 /PRNewswire/ -- HealthSouth Corporation HLS, -1.10% one of the nation’s largest providers of post-acute healthcare services, offering both facility-based and home-based post-acute services, today reported its results of operations for the third quarter ended September 30, 2015.
“Both segments experienced strong volume and net revenue growth in the third quarter with inpatient discharges increasing 9.6% and home health admissions from agencies owned by Encompass prior to 2014 increasing 17.1% year over year,” said Jay Grinney, President and Chief Executive Officer of HealthSouth. “We acquired Reliant Hospital Partners on October 1st, and we expect to close our acquisition of CareSouth on November 1st. These acquisitions are expected to contribute between $20 million and $25 million of incremental Adjusted EBITDA in the fourth quarter and, along with new hospitals and home health agencies that are expected to open in 2016, establish a solid foundation for continued, future growth.”
Third Quarter Consolidated Results
- The Company’s consolidated net operating revenues increased by $181.7 million, or 30.4%, in the third quarter of 2015 compared to the third quarter of 2014. Approximately $125 million of this increase resulted from the Company’s acquisition of Encompass Home Health and Hospice (“Encompass”) on December 31, 2014. The remainder of the increase predominantly came from the Company’s inpatient rehabilitation hospitals. Net operating revenues from the Company’s inpatient rehabilitation segment were 10.5% higher for the third quarter of 2015 compared to the same quarter of 2014.
- Income from continuing operations attributable to HealthSouth per diluted share for the third quarter of 2015 was $0.52 per share compared to $0.53 per share for the third quarter of 2014. Earnings per share for the third quarter of 2015 were negatively impacted by (1) lower pricing growth and expense headwinds in the inpatient rehabilitation segment (as discussed below), (2) higher interest expense due to the debt used to fund the acquisitions of Encompass and Reliant Hospital Partners, LLC and affiliated entities (“Reliant”), (3) increased depreciation and amortization resulting from the Company’s capital expenditures and development activities throughout 2014 and 2015, and (4) a higher effective income tax rate. The Company’s effective income tax rate in 2014 was reduced as a result of the nontaxable gain related to its acquisition of an additional 30% equity interest in Fairlawn Rehabilitation Hospital and the election to claim certain tax credits.
- Cash flows provided by operating activities were $368.2 million for the nine months ended September 30, 2015 compared to $374.7 million for the nine months ended September 30, 2014. This decrease primarily resulted from increases in working capital and cash interest expense, as well as transaction costs related to the Company’s acquisition of Reliant and pending acquisition of the home health agency operations of CareSouth Health System, Inc. (“CareSouth”).
- Adjusted EBITDA (see attached supplemental information) for the third quarter of 2015 was $165.4 million compared to $140.0 million for the third quarter of 2014, an increase of 18.1%.
- Adjusted free cash flow (see attached supplemental information) for the third quarter of 2015 was $132.0 million compared to $103.3 million for the third quarter of 2014 primarily due to the Company’s growth in Adjusted EBITDA.
Third Quarter Results — Home Health and Hospice Segment
The Company’s home health and hospice segment reported $127.0 million of net operating revenues and $20.7 million of Adjusted EBITDA for the third quarter of 2015. The results of operations for the home health and hospice segment in 2014 include only HealthSouth’s legacy hospital-based home health agencies. The increase in net operating revenues and Adjusted EBITDA (see attached supplemental information) for the Company’s home health and hospice segment in 2015 resulted from its acquisition of Encompass on December 31, 2014.
Within Encompass, revenue and volume growth were driven both by locations owned prior to 2014 and those acquired during 2014. In the third quarter of 2015, for those locations owned by Encompass prior to 2014, admissions increased 17.1%, recertifications increased 8.7%, and episodes increased 11.9%, all as compared to the third quarter of 2014. This growth includes volumes resulting from Encompass’ integration of 12 HealthSouth legacy home health agencies that were relocated or merged into existing Encompass locations (i.e., market consolidations).
Third Quarter Results — Inpatient Rehabilitation Segment
- Net operating revenues for the inpatient rehabilitation segment were $651.6 million for the third quarter of 2015 compared to $589.9 million for the third quarter of 2014, an increase of 10.5%. This increase was attributable to a 9.6% increase in patient discharges and a 1.2% increase in net patient revenue per discharge. Discharge growth included a 3.9% increase in same-store discharges and a 5.7% increase in new-store discharges. Discharge growth from new stores resulted from three de novo hospitals that opened in the fourth quarter of 2014 (Altamonte Springs, Florida; Newnan, Georgia; and Middletown, Delaware), the Company’s acquisitions of Quillen Rehabilitation Hospital in Johnson City, Tennessee (November 2014) and Cardinal Hill Rehabilitation Hospital in Lexington, Kentucky (May 2015), and the Company’s joint venture with Memorial Health in Savannah, Georgia (April 2015). Similar to the second quarter of 2015, pricing growth was impacted by proportionally higher discharge growth in Medicaid and managed care payors, where the Company’s reimbursement is lower. Pricing for the third quarter of 2015 was also impacted by lower average acuity of the patients treated. Additional information regarding payor mix trends can be found on page 10 of the supplemental slides posted on the Company’s website at http://investor.healthsouth.com.
- Adjusted EBITDA (see attached supplemental information) from the inpatient rehabilitation segment for the third quarter of 2015 was $166.2 million compared to $161.5 million for the third quarter of 2014. This segment’s Adjusted EBITDA was impacted in the third quarter of 2015 by (1) deleveraging of salaries and benefits as a percent of revenue (inclusive of a $4.5 million increase to group medical insurance reserves), (2) increased bad debt expense from continued pre-payment claims denials predominantly by one of the Company’s Medicare Administrative Contractors, and (3) incremental investments in the Company’s operating platform, as previously disclosed. Increases in group medical costs resulted from an increase in the number and size of large claims (claims >$100,000) and an increase in the cost and use of specialty pharmaceuticals. Additional information regarding group medical costs and pre-payment claims denials can be found on pages 12 through 14 of the supplemental slides posted on the Company’s website at http://investor.healthsouth.com.
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