Encompass Health (EHC) 8-K Morgan Stanley Healthcare Conference

Page 1

IRH

LTCH

Sites under construction

Morgan Stanley Healthcare Conference

September 14, 2010

96 Rehabilitation Hospitals

38Outpatient Rehab Satellite Clinics

6Long-Term Acute Care Hospitals

25Hospital-Based Home Health
Agencies

22,000 Employees

Portfolio

Largest Provider of Inpatient Rehabilitative Healthcare Services in the U.S.

Sugar Land, Texas acquisition

expected to close late Q3 2010

Exhibit 99.1

Exhibit 99.1

Page 2

The information contained in this presentation includes certain estimates, projections and other forward-
looking information that reflect our current views with respect to future events and financial performance.
These estimates, projections and other forward-looking information are based on assumptions that
HealthSouth believes, as of the date hereof, are reasonable. Inevitably, there will be differences between
such estimates and actual results, and those differences may be material.

There can be no assurance that 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 the Form 10-K for
the year ended December 31, 2009, our Form 10-Q for the quarters ended March 31, 2010, and June 30,
2010, and in other documents we previously filed with the SEC, many of which are beyond our control, that
may cause actual 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. 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. Our Form 8-K, dated September 14, 2010, to which the following supplemental slides are attached
as Exhibit 99.1, provides further explanation and disclosure regarding our use of non-GAAP financial
measures and should be read in conjunction with these supplemental slides.

Forward-Looking Statements

Exhibit 99.1

Page 3

Business Outlook

Business Model:

•5 - 8 % annual Adjusted Consolidated EBITDA growth(1)

•15 - 20% annual Adjusted EPS growth(1)(2)

Strategy

(1)Reconciliation to GAAP provided on slides 29 and 30.

(2)Adjusted income from continuing operations per diluted share.

(3)Exclusive of any E&Y recovery.

Exhibit 99.1

Page 4

“The Basics”:Our Industry

Sources:FY 2011 CMS Rate Setting File, MedPAC Data Book 2009 and The Advisory Board Company

(1) Does not include HealthSouth Rehabilitation Hospital of Northern Virginia; Rehabilitation Hospital of Southwest Virginia; Rehabilitation Hospital
    of Mesa, AZ; Rehabilitation Hospital of Fredericksburg, VA; Desert Canyon Rehabilitation Hospital.

(2) In 2009 HealthSouth averaged 1,177 total Medicare and non-Medicare discharges in it’s 90 consolidatedhospitals and 6 LTCHs.

~ 17% of Licensed Beds

~ 22% of Patients Served

HealthSouth Market Share

~ 4 out of 5 industry
discharges are Medicare

Exhibit 99.1

Page 5

Source:Centers for Medicare and Medicaid Services, Office of the Actuary (MedPAC June 2010 Data Book - Page 130), 2009 and 2010 Medical
              Trustee Report

Inpatient rehabilitation
spending as a % of
Medicare has been
declining.

($ Billions)

Exhibit 99.1

Page 6

Adjusted Income from Continuing

Operations per Diluted Share (1)

Adjusted Consolidated EBITDA (1)

($ Millions)

+9.2%

(1)Reconciliation to GAAP provided on slides 29 and 30.

Performance Highlights

Solid EBITDA and EPS Growth

+10.3%

+16.5%

+12.8%

Improvements driven by:

•   Pricing, volume and disciplined expense management

Improvements benefited from:

•   Lower bad debt expense

•$4.9 million charge to equity in net income of
nonconsolidated affiliates in Q2 2009

Offset by:

•   $4.6 million increase in professional liability reserves

Improvements driven by:

•Higher Adjusted Consolidated EBITDA

•Lower interest expense

Offset by:

•   5 million shares issued on September 30, 2009,
     related to the 2006 securities litigation settlement

•   Higher provision for income tax

Exhibit 99.1

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Adjusted Free Cash Flow

Exhibit 99.1

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Capital Structure Strategy:Objectives

•Ensure the Company maintains adequate liquidity to:

-Support the execution of its operating and strategic plans

-Weather temporary disruptions in the capital/credit markets and/or general
business environment

•Enhance the flexibility of the capital structure:

-Reduce refinancing risks within any 24 months interval

-Allow for debt prepayment with excess cash flow (including existing high coupon
debt)

-Loosen or eliminate the existing credit agreement (which governs the Credit Facility
and Term Loans).It has been amended and restated multiple times and is
cumbersome to navigate.

Exhibit 99.1

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Capital Structure:Priorities

=Term Loan maturities

=10.75% Fixed

=8.125% Fixed

=Capital leases & term
loan amortization

3 month

LIBOR

plus

225 bps

3 month

LIBOR

plus

375 bps

Call Schedule

DatePrice

June 15, 2011 105.375

June 15, 2012 103.583

June 15, 2013101.792

June 15, 2014 100.000

and thereafter

$400.0

1.Extend the maturity date of the $400
million Revolving Credit Facility to 2014
or beyond

2.Refinance all or substantially all of the
approximately $450 million Term Loan
due in March 2013

-Serves as “gating” item to the extension
of the Revolving Credit Facility maturity

-Can be addressed via a combination of:

üPay down with cash-on-hand

üNew issuance(s) of Senior Notes

üNew or extended Term Loan

3.Opportunistically retire/refinance the Term Loan
due 2015 and the 10.75% Senior Notes due
2016

-Excess free cash flow can be directed towards
these obligations once the above items have been
addressed

-Capitalize on attractive refinancing alternatives as
they arise

-10.75% Senior Notes become callable in June 2011

Subject to market conditions, execution

of objectives could begin fall of 2010.

Exhibit 99.1

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Growth

~ 100+ beds in 2010

Cash Payback Period

Year 1Year 2Year 3Year 4Year 5Year 6Year 7

Acquisitions

Bed Expansions(2)

De novos(1)

(1)Assumes average investment per bed:~ $450K.

(2)Assumes average investment per bed:$100K to $250K.

•All projects target minimum return of 15%.

•Leased properties are capitalized into
investment for comparable purposes.

•Longer payback on de novos vs.
acquisitions is attributable to:

-12-15 month construction period

-Initial ramp-up of operations on de novos

Exhibit 99.1

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2010 Guidance

(1)Reconciliation to GAAP provided on slides 29 and 30.

(2)Adjusted income from continuing operations per diluted share.

Considerations:

üIT “pilot” investment

üIntegration of acquisitions

üStart-up costs at two new hospitals

üTeamWorks investment

Considerations:

ü$3 million of additional stock-based
compensation expense

ü5 million more diluted shares
(2006 Securities Litigation Settlement)

Additional Considerations:

üThe revised adjusted EPS guidance
does not currently include charges
and increased interest expense
associated with any potential
refinancing.

Additional Considerations:

üIncludes 2nd half 2010 bad debt:
1.5% to 1.8%

Exhibit 99.1

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Appendix

Exhibit 99.1

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•Wellness
Programs

•Disease
Management

•Genetic
research

•O/P Surgery

•O/P Imaging

•O/P
Rehabilitation

•Renal dialysis

•O/P Cardiac

•O/P Laboratory

•General, acute
care hospitals

•Specialty
hospitals (e.g.
Cardiac,
Orthopedic, etc)

•Inpatient
Rehabilitation

•Long-term acute
care

•Home Health

•Hospice

•Skilled Nursing

Preventive

Outpatient

Acute-Care

Post-Acute

“The Basics”:Healthcare Continuum

Exhibit 99.1

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FIM Gain

LOS Efficiency

LOS Efficiency= Functional gain
divided by length of stay

Source:UDSmr Database - On Demand
Report:Q2 2010 Report

FIM Gain= Change in Functional
Independent Measurement (based

on an 18 point assessment) from
Admission to Discharge

** Average = Expected, Risk-adjusted LOS Efficiency

High-Quality Care

* Average = Expected, Risk-adjusted FIM Change Average

Exhibit 99.1

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Cost-Effective Care

CMS Fiscal Year 2011 IRF Rate Setting File Analysis(1)

	Freestanding (2)	Units(2)	Total	HealthSouth
				Hospitals(2)
Number of IRFs	230	941	1,171	91
Average # of Discharges per IRF	708	243	335	942
Outlier Payments as % of Total Payments	1.45%	4.08%	3.00%	0.26%
Average Estimated Total Payment per Discharge for FY 2010	$16,777	$17,231	$17,042	$16,197
Average Estimated Cost per Discharge for FY 2010	$14,202	$17,940	$16,386	$12,347

Notes:

(1) All data provided was filtered and compiled from the Centers for Medicare and Medicaid Services (CMS) Fiscal Year 2011 IRF rate
setting final rule file found at http://www.cms.hhs.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage. 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.

(2)The CMS file contains data for each of the 1,171 inpatient rehabilitation facilities used to estimate the policy updates for the FY 2011 Final IRF-
PPS Rule. Most of the data represents historical information from the CMS fiscal year 2009 period and does 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.

Exhibit 99.1

Page 16

(1)Data provided by UDSMR, a data gathering and analysis organization for the rehabilitation industry; represents ~ 65-70% of industry, including 89 HealthSouth sites.

(2)Includes 89 consolidated HealthSouth inpatient rehab hospitals and six long-term acute-care hospitals.

Discharge Growth - Trend

Quarterly Discharges

üCapacity expansions will
help facilitate organic
growth:

•~ 100+ beds will be added
in 2010

UDS Industry Sites(1)

HLS Same Store(2)

Exhibit 99.1

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Future Regulatory Risk	IRF	SNF	LTCH	HH
1.Re-basing payment system	No	Yes; RUGS IV and MDS 3.0 being implemented FY 2011/2012	No	Yes; would be required as part of PPACA starting in 2014
2.Major outlier payment adjustments	No	No	Yes; will occur when MMSEA relief expires (short stay outliers)	Yes; 10% cap per agency; 2.5% taken out of outlier pool (per PPACA)
3.Upcoding adjustments	No	Yes; occurring in FY 2010	Yes; occurring in FY 2010 and proposed (-2.5%) for FY 2011	Yes; occurring in CYs 2010 (-2.75%), and proposed (-3.79%) for 2011 and 2012
4.Patient criteria	No; 60% Rule already in place	No	Study dictated as part of MMSEA	PPACA requires a patient - physician “face-to-face” encounter; new therapy coverage proposed
5.Healthcare Reform
–Market basket update reductions	–Known	–Known	–Known	–Known
–Productivity adjustments	–Begins 2012	–Begins 2012	–Begins 2012	–Begins 2015
–Bundling	–Pilot to be established by 2013	–Pilot to be established by 2013	–Pilot to be established by 2013	–Pilot to be established by 2013
–Independent Payment Advisory Board	–FY 2019	–FY 2015	–FY 2019	–CY 2015
–New quality reporting requirements	–Begins 2014	–N/A	–Begins 2014	–N/A
–Value based purchasing	–Pilot begins 2016	–Post 2012	–Pilot begins 2016	–Post 2012
6.Other	N/A	Forecast error being implemented in FY 2011	25% Rule regulatory relief expires in 2012/2013; prohibition on new LTCHs through 2012	Limits on transfer of ownership

Regulatory Uncertainty

Sources:Healthcare Reform Bill (PPACA, HERA),CMS Regulatory published rules and MMSEA

Exhibit 99.1

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Readmission Rates

Note:Use of home health care and hospice is based on care that starts within three days of discharge. Other PAC care starts within one day
of discharge. Home health use includes episodes that overlap an inpatient stay.

Source:Medicare Payment Advisory Commission, “A Data Book:Healthcare spending and the Medicare program,” Chart 9-3 (June 2008)

Exhibit 99.1

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Revenues & Expenses
(Q2 2010 vs. Q2 2009)

Exhibit 99.1

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Exhibit 99.1

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Exhibit 99.1

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Payment Sources

(1)Managed Medicare revenues represent ~ 8%, 9%, 8%, 8% and 8% of total revenues for Q2 2010, Q2 2009, 6 months 2010, 6 months 2009 and
2009, respectively, and are included in “Managed care and other discount plans.”

Exhibit 99.1

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Operational and Labor Metrics(1)

(2)Represents discharges from HealthSouth’s 92 consolidated hospitals and 6 LTCHs in Q2 2010 and 90 consolidated hospitals and 6 LTCHs prior
to Q2 2010.

(3)Excludes approximately 400 full-time equivalents, 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 above table
represent HealthSouth employees who participate in or support the operations of the Company’s hospitals.

(4)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.

Exhibit 99.1

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Debt to

EBITDA6.3x6.3x5.3x4.3x4.1x(1)

($ Billions)

Year-End2010 Goal:3.75x to 4.00x

Liquidity

Debt Outstanding, Liquidity and Swaps

(1)Based on trailing, four-quarter Adjusted Consolidated EBITDA of $400.7 million; reconciliation to GAAP provided on slides 29 and 30.

(2)Cash settlements flow through investing activities for swaps that do not qualify for hedge accounting. Notional amount of $884 million receives
3-month LIBOR and pays 5.22% fixed until expiration in March of 2011.

(3)Forward-starting interest rate swaps (designated as cash flow hedges). Cash settlements will flow through operating activities as part of interest
expense. Notional amounts of $100 million and $100 million receive LIBOR and pay 2.6% and 2.9% fixed, respectively.

Exhibit 99.1

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Debt Profile

3 month

LIBOR

plus

225 bps

3 month

LIBOR

plus

375 bps

Call Schedule

DatePrice

June 15, 2011 105.375

June 15, 2012 103.583

June 15, 2013101.792

June 15, 2014 100.000

and thereafter

$400.0

=Term Loan maturities

=10.75% Fixed

=8.125% Fixed

=Capital leases & term
loan amortization

Exhibit 99.1

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Non-Operating Cash/Tax Position

Cash Refunds as of June 30, 2010

•Federal tax recoveries virtually complete.

•State tax refunds in progress.

–Approx. $3.1 million received in Q2
2010.

–Approx. $5.7 million net receivable on

the balance sheet.

Future Cash Tax Payments

•Expect to pay about $5-7 million per year of income
tax.

–State income tax.

–Alternative Minimum Tax (AMT).

•The Company does not expect to pay significant
federal income taxes for the next 10-12 years due to
approximately $905 million in deferred tax assets as
of 12/31/09 outlined in the 2009 Form 10-K. The
majority of the deferred tax assets is related to
NOLs.

–At this time, we do not believe the use

of NOLs will be limited before they

expire, however, no assurances can

be provided.

•HealthSouth is not currently subject to an annual
use limitation (AUL) under Internal Revenue Code
section 382.

•If we experienced a “change of ownership” as
defined by Internal Revenue Code section 382, we
would be subject to an AUL, which is equal to the
value of the company at the time of the “change of
ownership” multiplied by the long-term tax exempt
rate.

GAAP Considerations

•HealthSouth’s balance sheet currently
reflects a valuation allowance for the
potential value of NOLs and future
deductions. The valuation allowance is
approximately $888 million.

•GAAP tax rate will net to small amount as
there will be a reduction in the valuation
allowance when NOLs are utilized.

Exhibit 99.1

Page 27

Outstanding Share Summary(Millions)

Notes:

(1)Does not include 2.0 million warrants issued in connection with a January 2004 loan repaid to Credit Suisse First Boston. In connection with this
transaction, we issued warrants to the lender to purchase two million shares of our common stock. Each warrant has a term of ten years from the
date of issuance and an exercise price of $32.50 per share. The warrants were not assumed exercised for dilutive shares outstanding because
they were antidilutive in the periods presented.

(2)The agreement to settle our class action securities litigation received final court approval in January 2007. These shares of common stock and
warrants were issued on September 30, 2009. The 5.0 million of common shares are now included in the outstanding shares. The warrants at a
strike price of $41.40 were not assumed exercised for the dilutive shares outstanding because they are anti-dilutive in the periods presented.

(3)The difference between the basic and diluted shares outstanding is primarily related to our convertible perpetual preferred stock.

Exhibit 99.1

Page 28

(1)Notes on page 30.

Net Cash Provided by Operating Activities

Exhibit 99.1

Page 29

Exhibit 99.1

Page 30

Reconciliation Notes

1.Adjusted income from continuing operations and Adjusted Consolidated EBITDA are
non-GAAP financial measures. The Company’s leverage ratio (total consolidated debt to
Adjusted Consolidated EBITDA for the trailing four quarters) is, likewise, a non-GAAP
financial measure. Management and some members of the investment community
utilize adjusted income from continuing operations as a financial measure and Adjusted
Consolidated EBITDA and the leverage ratio as liquidity measures 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
these adjusted measures, the reader should be aware that in the future HealthSouth
may incur expenses similar to the adjustments set forth above.

2.Per share amounts for each period presented are based on basic weighted average
common shares outstanding for all amounts except adjusted income from continuing
operations per diluted share, which is based on diluted weighted average shares
outstanding. The difference in shares between the basic and diluted shares outstanding
is primarily related to our convertible perpetual preferred stock.

3.Adjusted income from continuing operations per diluted share and Adjusted
Consolidated EBITDA are two components of our guidance.

4.The Company’s credit agreement allows certain other items to be added to arrive at
Adjusted Consolidated EBITDA, and there may be certain other deductions required.