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Basis of Presentation
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
Basis of Presentation
Encompass Health Corporation, incorporated in Delaware in 1984, including its subsidiaries, is one of the nation’s largest providers of post-acute healthcare services, offering both facility-based and home-based patient services in 37 states and Puerto Rico through its network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. We manage our operations and disclose financial information using two reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. See also Note 13, Segment Reporting.
The accompanying unaudited condensed consolidated financial statements of Encompass Health Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes contained in Encompass Health’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 27, 2019 (the “2018 Form 10‑K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in these interim statements, as allowed by such SEC rules and regulations. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited financial statements, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading.
The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. In our opinion, the accompanying condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state the financial position, results of operations, and cash flows for each interim period presented.
Net Operating Revenues
Our Net operating revenues disaggregated by payor source and segment are as follows (in millions):
 
Inpatient Rehabilitation
 
Home Health and Hospice
 
Consolidated
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Medicare
$
629.0

 
$
607.1

 
$
221.1

 
$
199.2

 
$
850.1

 
$
806.3

Medicare Advantage
97.0

 
78.7

 
26.7

 
21.8

 
123.7

 
100.5

Managed care
86.5

 
86.6

 
8.0

 
8.7

 
94.5

 
95.3

Medicaid
27.1

 
26.8

 
4.6

 
2.7

 
31.7

 
29.5

Other third-party payors
10.5

 
12.7

 

 

 
10.5

 
12.7

Workers’ compensation
6.5

 
6.8

 
0.3

 
0.2

 
6.8

 
7.0

Patients
5.6

 
4.4

 
0.1

 
0.3

 
5.7

 
4.7

Other income
11.7

 
11.5

 
0.3

 
0.2

 
12.0

 
11.7

Total
$
873.9

 
$
834.6

 
$
261.1

 
$
233.1

 
$
1,135.0

 
$
1,067.7


 
Inpatient Rehabilitation
 
Home Health and Hospice
 
Consolidated
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Medicare
$
1,268.4

 
$
1,231.6

 
$
436.1

 
$
376.1

 
$
1,704.5

 
$
1,607.7

Medicare Advantage
181.5

 
151.2

 
52.2

 
41.8

 
233.7

 
193.0

Managed care
170.1

 
171.6

 
16.3

 
16.3

 
186.4

 
187.9

Medicaid
53.4

 
51.5

 
8.9

 
3.2

 
62.3

 
54.7

Other third-party payors
20.5

 
24.7

 

 

 
20.5

 
24.7

Workers’ compensation
14.7

 
14.2

 
0.4

 
0.3

 
15.1

 
14.5

Patients
11.7

 
8.8

 
0.5

 
0.7

 
12.2

 
9.5

Other income
23.7

 
21.3

 
0.6

 
0.4

 
24.3

 
21.7

Total
$
1,744.0

 
$
1,674.9

 
$
515.0

 
$
438.8

 
$
2,259.0

 
$
2,113.7


See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the
2018 Form 10-K for our policy related to Net operating revenues.
Leases—
We determine if an arrangement is a lease or contains a lease at inception and perform an analysis to determine whether the lease is an operating lease or a finance lease. We measure right-of-use assets and lease liabilities at the lease commencement date based on the present value of the remaining lease payments. As most of our leases do not provide a readily determinable implicit rate, we estimate an incremental borrowing rate based on the credit quality of the Company and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease. We use this rate to discount the remaining lease payments in measuring the right-of-use asset and lease liability. We use the implicit rate when readily determinable. We recognize lease expense for operating leases on a straight-line basis over the lease term. For our finance leases, we recognize amortization expense from the amortization of the right-of-use asset and interest expense on the related lease liability. Certain of our lease agreements contain annual escalation clauses based on changes in the Consumer Price Index. The changes to the Consumer Price Index, as compared to our initial estimate at the lease commencement date, are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. We do not account for lease and nonlease components separately for purposes of establishing right-of-use assets and lease liabilities.
Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and has subsequently issued supplemental and/or clarifying ASUs (collectively “ASC 842”), in order to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. We adopted ASC 842 using the modified retrospective approach and applied the transition provisions with an effective date as of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting originally in effect for such periods. ASC 842 provides optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permits us to not reassess under ASC 842 our prior conclusions about lease identification, lease classification and initial direct costs, and the practical expedient to not reassess certain land easements. We did not elect the use-of-hindsight practical expedient during the transition to ASC 842. The adoption of ASC 842 resulted in the addition of approximately $349 million in assets and $347 million in liabilities to our condensed consolidated balance sheet as of January 1, 2019, with the remaining $2 million being recorded as an adjustment to Capital in excess of par value. The adoption of ASC 842 also resulted in increased disclosure, including qualitative and quantitative disclosures about the nature, amount,
timing and uncertainty of cash flows arising from leases. See the “Leases” section of this note and Note 4, Leases, and Note 6, Long-term Debt, for additional information about our leases.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326),” which provides guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance is effective for us beginning January 1, 2020, including interim periods within that reporting period. Early adoption is permitted beginning January 1, 2019. We continue to review the requirements of this standard and any potential impact it may have on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance in determining when the arrangement includes a software license. It requires entities to account for such costs consistent with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The new guidance is effective for us beginning January 1, 2020, including interim periods within that reporting period. Early adoption is permitted. We continue to review the requirements of this standard and any potential impact it may have on our condensed consolidated financial statements.
We do not believe any other recently issued, but not yet effective, accounting standards will have a material effect on our condensed consolidated financial position, results of operations, or cash flows.
Revision of Previously Issued Financial Statements
During the preparation of our December 31, 2018 financial statements, an error was identified in the accounting for deferred tax assets related to fair value adjustments to redeemable noncontrolling interests. At that time, we assessed the materiality of the errors in deferred tax assets and related balances and concluded they were not material to any previously issued financial statements or disclosures. However, we revised our previously issued annual financial statements in connection with the issuance of our 2018 financial statements to correct for such errors. In addition, we have revised our condensed consolidated statement of shareholders’ equity for the six months ended June 30, 2018 presented herein to reflect the correction of these errors, which originated in years prior to 2018, as disclosed in the table below. For additional information on this revision, see Note 1, Summary of Significant Accounting Policies, “Revision of Previously Issued Financial Statements” to the consolidated financial statements accompanying the 2018 Form 10-K.
 
For the Six Months Ended June 30, 2018
 
As Reported
 
Adjustment
 
As Revised
 
(In Millions)
Fair value adjustments to redeemable noncontrolling interests
$
(58.2
)
 
$
(8.1
)
 
$
(66.3
)
Capital in excess of par value
2,698.0

 
(52.1
)
 
2,645.9

Accumulated deficit
(1,016.7
)
 
14.8

 
(1,001.9
)
Total shareholders’ equity
1,501.3

 
(37.3
)
 
1,464.0