Doug Coltharp — EVP and CFO, Encompass Health
Morning, Pito.
Pito Chickering — Analyst, Deutsche Bank
Hey, good morning, guys. Thanks for taking my questions. Nice job getting this earnings call going this morning.
Doug Coltharp — EVP and CFO, Encompass Health
We didn't know it was going to be so hard, Pito.
Pito Chickering — Analyst, Deutsche Bank
You raised the guidance the back half of the year by about $5 million, despite assuming 10 basis points of lower Medicare pricing in the fourth quarter. In SWB, that's 500 basis points higher than you had assumed previously. Can you bridge us, the good guys, the back half of the year versus last quarter to help understand how you got so much leverage to raise EBITDA despite those two macro pressures?
Doug Coltharp — EVP and CFO, Encompass Health
Yeah, Pito, this is Doug. I'll take a shot at it. We had some favorability in the second quarter and really for the first half in a couple of areas. One is pricing, which was driven predominantly by patient acuity. There's no certainty that that continues into the second half, but it does represent a source of potential upside. Additionally, we did see some further benefits in ePOB. Some of that is attributable to the fact that we've been running at a higher year-to-date occupancy level, and I can go through some of that if you'd like. It's also an ancillary benefit related to the career ladder program participation. Again, the causality there is we believe that the career ladder program participation is contributing to favorable clinical staff turnover.
When you've got favorable clinical staff turnover, that means that your new hires can consequentially come down, which means that you're spending less hours that would get into the ePOB calculation during orientation.
Pito Chickering — Analyst, Deutsche Bank
Okay. Fair enough. Can you talk about the same-store discharge growth in the quarter, the durability of that strength? Just as you think about the second quarter 26 stacked comps heading into easier comps in the back half of the year, just be modeling more same-store discharge growth in the 4%+ for 3Q and 4Q? Thank you.
Doug Coltharp — EVP and CFO, Encompass Health
Yeah. Again, this is a statement you've heard us made repeatedly for the last several quarters, but we believe increasingly that the distinction between same-store and total discharge growth is going to come less relevant and less consequential. We are up against easier comps in the second half of the year, that will be favorable. We also anticipate that the impact of the four unit closures that we had beginning in June of last year will dissipate a bit further. We've got a lot of new capacity coming on in the second half of the year. It is skewed more heavily towards Q4 than Q3, but that will be a contributor, to some extent, for total discharge growth as well.
Pito Chickering — Analyst, Deutsche Bank
Great. Thanks so much.
Doug Coltharp — EVP and CFO, Encompass Health
Morning, Matt.
Mark Tarr — President and CEO, Encompass Health
Hey, Matt.
Matthew Gillmor — Analyst, KeyBank
Hey. Morning, guys. Thanks for the question. Following up on the North Carolina comments. I think you had mentioned there's 15 markets you're prioritizing. I was curious what you thought the overall opportunity is in North Carolina, and would that be enough to impact your de novo target of six to 10 per year, or just maybe bias you towards the high end as you're thinking about beyond 2027?
Doug Coltharp — EVP and CFO, Encompass Health
Yeah, this is Doug. I think, right now, if we could get 15 open, we'd feel pretty good about that, but that certainly doesn't mean that the opportunities in the state of North Carolina would be exhausted at that level. I should note that that 15 is looking at markets both large and small as well. There are good pockets of opportunity really dispersed across the state, which is very exciting to us. I think at a minimum, it would drive us probably beginning in 2029 towards the high end of that six to 10 range, and there is some possibility just on how quickly we can pull those together, as well as some opportunities that continue to develop in other states that we could wind up going above that.
For right now, we're going to stay with the six to 10 range and hope that North Carolina pushes us to the upper end.
Pat Tuer — EVP and COO, Encompass Health
Matt, this is Pat. One additional point that I'd make there is as we get the small format hospital concept up and rolling, that'll provide substantial opportunity and runway for us to continue to grow in North Carolina beyond just the traditional de novo format.
Doug Coltharp — EVP and CFO, Encompass Health
I think, to piggyback on what Pat said, we've talked before about one of the benefits of the introduction of small format hospitals, that allows us to approach certain markets with a hub and spoke type strategy. Given that we only have one hospital in the state of North Carolina and the extensive opportunities that are there, we're essentially starting with a blank sheet of paper. Really utilizing the combination of de novos and small format hospitals to pursue that hub and spoke strategy in that market could be very compelling.
That's why you may not see it push the number of de novos up, but I think what will become increasingly important, and we'll be able to provide some more visibility on this as we move into 2027, is what do we think is the opportunity for total beds to be added to the state?
Matthew Gillmor — Analyst, KeyBank
Great. As a follow-up, I wanted to ask about the payer denial topic. There was an OIG report that highlighted the wide variation in denial rates among MA plans for IRF services. I was curious what your reaction was to that report, and I also wanted to see if there were any early learnings from the admit and appeal strategy that you'd discussed on prior calls.
Doug Coltharp — EVP and CFO, Encompass Health
I would say just in general, that the denials through pre-authorization from Medicare Advantage continues to be a challenge. The trends that we saw in Q2 were not really dissimilar. We saw some marginal improvement from what we experienced in Q4 of last year and Q1 of this year, but there remains a very substantial disparity between what we see out of the MA plans and Medicare fee-for-service patients. We understand, from the comments made by large MA providers, that they are struggling to achieve what they deem as an acceptable level of profitability. Denying access to appropriate care for Medicare beneficiaries is not the right solution to that. We are very pleased with what we have seen thus far in the pilot program. Again, that's our admit and appeal strategy.
We initiated that with select patients across nine of our hospital markets towards the end of February. It remains fairly early in the program. Remember, there are five various levels of appeal that you can go through. I won't take you through each of those five right now. Through the end of July, we had a total of 298 patients who had been admitted into our hospitals on that basis. 144 of those have been fully adjudicated, and of that 144, we have prevailed on 128, which is an 89% success rate. I'll turn it over to Pat to maybe comment about how we see potential opportunities to extend that program in the future.
Pat Tuer — EVP and COO, Encompass Health
Thanks, Doug. I think the first opportunity for us to scale this up, within that 89%, there's certain diagnosis that are almost 100% or darn close to it. I think as we think about scaling, it'll likely be within those diagnosis categories that we move forward across the portfolio and then evaluate fully scaling the rest of the program up. We're in conversations and evaluations of the education program and rollout that'll have to take place for that to happen. That's something we're preparing for now. A broader rollout of the whole program, I think we still want to get some more time under our belt, bigger sample size, but there's certain things right now that we think have the potential to be scaled throughout the portfolio.
Mark Tarr — President and CEO, Encompass Health
We've talked in the past about just the stroke program in general and how some of the payers seem to recognize the value proposition around the stroke patients more so than others. That would certainly be one of the diagnostic categories that Pat had mentioned that would be a likely candidate to try to push forward.
Doug Coltharp — EVP and CFO, Encompass Health
When you're prevailing at almost 90% on these patients, what it tells you is that those patients should have been admitted on the front end into our hospitals. The fact that we have to go through this admit and appeal strategy is doing nothing but adding to the cost of the healthcare system by increasing the administrative costs.
Pat Tuer — EVP and COO, Encompass Health
I think just to put a bow on this, I think you could see that we'll look to scale certain parts of this in the coming quarters, and then by the end of the year, I think we'll be in a position to evaluate for a full, broader rollout across the company.
Matthew Gillmor — Analyst, KeyBank
Great. Thank you.
Pat Tuer — EVP and COO, Encompass Health
Morning, Ann.
Mark Tarr — President and CEO, Encompass Health
Hey there, Ann.
Ann Hynes — Analyst, Mizuho Securities
Great. Good morning. Thank you. I guess my first question is, you announced a nice share repurchase program this morning. How do you view that versus your other capital needs going forward? I did notice that year-over-year, you have, I think it was a 20% increase maybe in CapEx year-over-year. What is driving that? Is this an acceleration of development versus last year? Then, thanks for all the detail on South Carolina. I know that's a CON you've been waiting for, but I believe there's two other states, I think it's North Carolina and Tennessee, that could be expanding CONs for inpatient rehab. Any updates on those? Thanks.
Doug Coltharp — EVP and CFO, Encompass Health
It's North Carolina. South Carolina was previously repealed. We have a much larger presence. What do we have? 11 hospitals in South Carolina already. We do hear that there is some dialogue around Tennessee. Don't know that anything is imminent there. We continue to have good success getting CONs approved in Tennessee and have a couple of opportunities that are already in the pipeline there. Nothing else from a CON repeal perspective that is currently viewed as imminent. In terms of CapEx, going in reverse order here. CapEx this year is running right at about 15% of revenue. We think that probably represents close to a high watermark.
Most of the increase on a year-over-year basis is in capacity expansions, which is a good thing. Some of that is directly related to those high occupancy doors we referenced in Q1 and our ability to add beds there, as well as what remains a robust de novo pipeline. As Pat alluded to previously, we're really excited about the introduction of the small format hospitals with the intent to get at least one open next year and then increase that to close to a handful, at least, on an annual basis beginning in 2028. The story on capital allocation, the increase in the share repurchase authorization notwithstanding, remains unchanged. We like to say that we're an "and" story, not an "or" story.
Of the strength of our free cash flow and the resulting strength in our balance sheet, we have the capacity to increase the capital expenditures and increase the number of beds that we're adding to our overall franchise on an annual basis. Augment that with the dividend, which was increased for the October payout, and increasingly with share repurchase activity.
Ann Hynes — Analyst, Mizuho Securities
Thank you.
Doug Coltharp — EVP and CFO, Encompass Health
Morning, Whit.
Mark Tarr — President and CEO, Encompass Health
Hey there, Whit.
Whit Mayo — Analyst, Leerink Partners
Hey, guys. Mark, you've talked a good bit on this call about various investments in workforce development that you guys are making. Do you have any numbers that you could share around turnover, employee satisfaction, anything to gauge the impact that these investments are making?
Mark Tarr — President and CEO, Encompass Health
Yeah, we do. I'm going to let Pat go into greater detail on that. Just a quick comment on the clinical ladders. That's not a new tool, but we have a team that did a really nice job going in, back in to look to see what appeals to the clinical workforce, updated things. We've promoted it internally, and we've had a really good response, which is definitely impacting our turnover rates. It's impacting our ability to not only retain staff, but it's affecting our ability to hire staff in both existing hospitals and to staff up our de novo hospitals. Pat, you want to give some details around that?
Pat Tuer — EVP and COO, Encompass Health
Yeah, sure, Mark. On an annualized basis through Q2, our nursing turnover sits around 19%. That represents a low of 12+ years. On the therapy perspective, we're just above 7%. That's our lowest turnover on an annualized basis in five years. Really pleased with the progress there. From a ladder perspective, we are up to 43% of eligible RNs and certified nurses that are participating on the ladder. If we think about the turnover within that group, it's only 5%. If they're a non-laddered nurse, the turnover is closer to 25%. If we can get a nurse certified, even if they're not on the ladder, turnover is only 12%. We've increased the number of certified nurses by almost 21% versus prior year, and 60% since 2023.
These programs are certainly having the intended outcome in terms of producing lower turnover, lower premium pay costs, the benefit to ePOB, and lower unproductive time, as well as allowing us to build enhanced clinical capabilities and fueling the value proposition through strong outcomes. We're pretty excited about this.
Mark Tarr — President and CEO, Encompass Health
If somebody puts in the time and effort to get their CRRN, there's a pretty good chance they're going to stay in rehab as opposed to going out and trying other specialties. As we've noted, these are increasing their clinical skills, which ultimately allows us to take medically complex patients, and it's just been proven out. It really seems like a lot of things are clicking on all cylinders around this initiative.
Doug Coltharp — EVP and CFO, Encompass Health
We currently have approximately 22% of our RNs have the CRRN certification. That does carry a premium in terms of their wage rate. It's about 9% over their peers who do not have that certification. As Pat just enumerated, we think that the benefits are more than offsetting.
Whit Mayo — Analyst, Leerink Partners
All right. Maybe my follow-up, just wanted to get an update on the VA initiative and whether that's having any meaningful contribution to same-store growth effects.
Pat Tuer — EVP and COO, Encompass Health
Yeah, Whit, thanks for teeing that up. That remains a source of pride for us and a very fulfilling patient population for us to serve. This is the first quarter where we've really anniversaried a lot of the growth that we had in the VA program that we started talking about last year. In Q2, we hit VA growth of around 33%. It now represents about 23%, just under 23%, of our managed care volume, and there still is a lot of runway there. Our local teams and our regional teams have done a really nice job collaborating with the VA populations within their markets. You may recall, we have talked about that there's 8 million veterans over the age of 65 in the country, and we're on pace to treat somewhere close to 10,000 by the end of the year. Substantial runway there.
Doug Coltharp — EVP and CFO, Encompass Health
As a reminder, that pays at the Medicare fee-for-service rate.
Whit Mayo — Analyst, Leerink Partners
Right. Appreciate it, guys.
Pat Tuer — EVP and COO, Encompass Health
Morning, Ryan.
Mark Tarr — President and CEO, Encompass Health
Hello, Ryan.
Ryan Langston — Analyst, TD Cowen
Good morning. Maybe I missed this. I got dropped from the call, unfortunately. Maybe just an update on the recently opened facilities versus the bed additions over the last year, and maybe how each of those cohorts have been ramping, versus your historical average.
Doug Coltharp — EVP and CFO, Encompass Health
I think the bed additions and the de novos continue to ramp very favorably. If we look at the openings on a year-to-date basis, in Q1 we opened one hospital with 49 beds. In Q2, we opened two hospitals with a total of 90 beds. From a bed expansion perspective, in Q1 we added 44 beds, in Q2 we added 10 beds. Those 10 beds, importantly, were added to three of the hospitals that in Q1 had an occupancy level of north of 95%. As we've stated previously, the returns on our de novos are in part driven by the fact that we tend to experience a very rapid ramp-up in those. On average, our de novos achieve four-wall positive EBITDA by the time they hit month six, and they're typically north of the 70% occupancy rate by the time they get to month 10.
Those are averages, so some are faster and some are slower. We think that over the years that we've been pursuing an accelerated de novo strategy, which really came to fruition in 2021, we have further refined our processes. We've set up dedicated teams across functions to do nothing but open the de novos. As a result, the progress that we're making from the day that we open the doors has really improved and has increased the time to achieving four-wall profitability.
Pat Tuer — EVP and COO, Encompass Health
One thing I would add to that is, just as we think about bed additions, and last quarter, we talked a lot about the capacity-constrained hospitals, and the cohort that represented that. We have lowered the threshold of when we start the evaluation process for bed additions, just to try to time that capacity coming online to when we actually need it, so we're not missing out on potential volume. We, again, have lowered that threshold to 70%-75%, versus the historical 80%-85% threshold.
Mark Tarr — President and CEO, Encompass Health
Ryan, I'd also say it's been really nice to see the ramp-up momentum in hospitals, not only in the state of Florida, where we have a well-known brand, but as we've gone out into new states, Connecticut, we opened up in Rhode Island a couple of years ago. Those are markets where you will have to do a lot of education about IRF versus SNF, and it's been really nice to see the ramp-up in these new markets to complement the states where we already have a strong presence.
Doug Coltharp — EVP and CFO, Encompass Health
I think it's important to note that the increase that we've been experiencing over the last several years in system-wide occupancy is an important driver of efficiency. You're seeing that flow through the P&L. To put a finer point on that, our Q2 occupancy of 77.4% was up 290 basis points over Q2 2025. Sequentially, occupancy decreased only 130 basis points from Q1 of this year, and that compares to a decrease of 220 basis points from Q1-Q2 in each of 2025 and 2024. Further, our average daily census, or ADC, decreased only 69 from Q1 as compared to a sequential Q1-Q2 decrease, in ADC of 184 in 2025 and 113 in 2024. Q1 and Q2 also represented the first two quarters in company history with ADC in excess of 9,000.
Ryan Langston — Analyst, TD Cowen
Great. Appreciate all the detail. Just a quick follow-up maybe to Ann's question on share repurchase. How should we think about you utilizing this over time? I don't think the EPS guidance change implies a material increase in repurchase through the back half of the year. Any reason we shouldn't think that this could ramp-up at least versus the first half? Thanks.
Doug Coltharp — EVP and CFO, Encompass Health
Yeah. The EPS guidance change reflects only the share repurchases that had been accomplished year-to-date. I think you have seen an increase the last three quarters from our historical run rate in share repurchase. We continue to have capacity in the balance sheet based on the leverage ratio that we're running, and also we have capacity just given the free cash flow and the relationship of that free cash flow to our growth CapEx number as well. Clearly there's capacity for increased share repurchase activity in the future, and if that had not been the case, I don't think the board would have taken the action of increasing the authorization.
Ryan Langston — Analyst, TD Cowen
All right, guys. Thank you.
Doug Coltharp — EVP and CFO, Encompass Health
Morning, Joanna.
Joanna Gajuk — Analyst, Bank of America
Hi. Good morning. Thanks so much. Couple of questions. First, I guess on the volume discussion, you mentioned that you're seeing higher acuity. I guess in the past, you gave us these stats. I haven't heard them in a while. I want to ask, can you give us some of these growth rates by category, like the stroke, neuro, brain injury versus ortho, hip, and knee?
Doug Coltharp — EVP and CFO, Encompass Health
Yes, we can do that.
Mark Tarr — President and CEO, Encompass Health
I can touch on that to start. Two of the largest categories of growth for us were in stroke and brain injury. Those were up 7.9% and 8% respectively, on a same-store basis, 5.5% and 3.9% respectively. Brain injury, we talked about this on the last call, probably the call before that as well. We continue to see a lot of growth in brain injury, specifically non-traumatic brain injury, which from a claims perspective, represents the largest source of potential market capture for us. It's great to see us capitalize on that.
Doug Coltharp — EVP and CFO, Encompass Health
I think you asked specifically about lower extremity joint replacement. Knee and hip replacement, which is how we categorize that, was up only modestly about 1% in the quarter.
Joanna Gajuk — Analyst, Bank of America
Okay, great. That's what I was getting at. Clearly these other categories, higher acuity, growing much faster than orthopedics. Thanks for that. If I may follow up, in terms of the de novo and the plans adding beds and such, and as it relates to the pent-up demand, can you give us the stat you gave us last quarter in terms of percent of your hospitals that are above 90% occupied? To that end, can you talk about the bed expansions or de novos, and how much, I guess, you achieved in terms of capturing the pent-up demand in those hospitals you called out prior to that quarter? Thank you.
Doug Coltharp — EVP and CFO, Encompass Health
Yeah, absolutely. In Q1, we had 65 hospitals with occupancy rates greater than 90%, and an average in that cohort of 95%. In Q2, we had 60 hospitals at greater than 90%, so a decrease of five, with an average occupancy rate of 94%. Three of those hospitals that dropped from that cohort did so because of the bed expansions that occurred in the first half. Approximately 90% of the bed additions that we have in the pipeline and targeted for the second half of this year and the first half of next year are going into hospitals that are in that greater than 90% cohort.
Joanna Gajuk — Analyst, Bank of America
Great. Thank you so much. Appreciate it.
Doug Coltharp — EVP and CFO, Encompass Health
It's the definition of a high-class problem.
Joanna Gajuk — Analyst, Bank of America
Exactly. No, I love it. Thank you. Thanks so much for taking the question.
Doug Coltharp — EVP and CFO, Encompass Health
Morning, Andrew.
Andrew Mok — Analyst, Barclays
Good morning. The same-store discharge growth of 2.8% accelerated 120 basis points sequentially despite tougher comps. One, did that finish better than internal expectations? If those higher acuity categories that you called out are driving the better volumes and are expected to continue, why is there a hesitation to say that those acuity gains may not be sustainable? Thanks.
Doug Coltharp — EVP and CFO, Encompass Health
Yeah. First, we're not going to comment on performance versus internal expectations. We, again, will just compare it to guidance, and obviously, we revised our guidance upwards for the full year based on the second quarter performance. This is, again, one where we continue to believe that the breakdown between same-store and total discharge growth is less relevant because you can be influenced in any particular quarter by bed additions, which go immediately into the same-store count, and also by the maturation of de novos, which were outside of the same-store category into the same-store category. There are other influences that we've cited previously that can impact same-store discharge growth from quarter-to-quarter. With regard to the increase in acuity, we think that is very positive. One, because there's a bit of a competitive moat around that.
It is a real challenge to treat successfully those more medically complex programs. We're very proud of the clinical programs that we have in place that allow us to do that. It also creates a competitive advantage because part of the value proposition, a significant portion of the value proposition that we have for our upstream acute care partners, is the ability to take those patients out of their facilities with a lower length of stay in the acute care hospital, which frees up the bed for them.
Pat Tuer — EVP and COO, Encompass Health
Andrew, this is Pat. I don't think it's a reluctance for us to commit to that in the foreseeable future. I think from our standpoint, we see fluctuations in acuity from quarter-to-quarter, year-to-year. While we're very confident in the ability for us to capture that market share, I don't think it'd be prudent for us to back us into a corner and then have one of those fluctuations that occur from time to time. We're very confident in the outcomes that we provide and the access to care that we're able to provide, and our teams do a great job of capitalizing on that.
Doug Coltharp — EVP and CFO, Encompass Health
Another factor that can impact the acuity is it's important that we not be perceived by our referral sources as cherry-picking certain types of patients. We can create the most value for our referral sources, the hospitals, and the attending physicians if we're willing to accept all patients who qualify for admission into an inpatient rehabilitation facility, and not just say, "We're only going to take your stroke or your brain injury patients." Doing that based on the flows that come into an acute care hospital in any particular quarter can cause some fluctuations in that acuity.
Again, when you look at some of the headwinds that are now baked into our guidance, specifically incorporated into the second half, one of the potential areas of upside that I cited earlier is seeing improved pricing continue for the balance of this year based on some sustainability in that higher acuity.
Andrew Mok — Analyst, Barclays
Great. Thank you.
Doug Coltharp — EVP and CFO, Encompass Health
Morning, AJ.
Pat Tuer — EVP and COO, Encompass Health
AJ.
A.J. Rice — Analyst, UBS
Hi, everyone. First, just wanted to ask about one more question on the career ladder and the decision to boost your SWB expense growth by 50 basis points. Should we think of that as this year only, or are you trading off higher wage growth on an ongoing basis for better turnover and then the back-end benefits of that? How should we think about this?
Doug Coltharp — EVP and CFO, Encompass Health
I think right now it is an assumption for this year only and specifically for the back half trend. We believe that as we move, just because of the success we've had in the participation in these ladders on a year-to-date basis, as we move into next year, we would expect to start anniversarying some of those increases. We should see the SWB per FTE moderate that, but we're not ready to call a level on it yet. Remember, as we move into the second half of this year, we're also up against easier comps, or excuse me, tougher comps in terms of more favorable outcomes from last year. If you look at Q3 of 2025, SWB per FTE inflation was 2.6%, and in Q4 it was 2.1%. That compares to 3.2% in Q1 of 2025 and 4% in Q2 of 2025.
A.J. Rice — Analyst, UBS
Okay. Yeah, no, that's helpful. I just wondered also, any update on your technology investments and AI initiatives? I know you have called out previously a partnership with Palantir around claims processing and on the administrative side. Are you seeing any meaningful efficiencies yet, or is that mostly still in front of you?
Doug Coltharp — EVP and CFO, Encompass Health
I think a lot of it is still in front of us, but we've definitely seen many enhancements in our processes. There's a lot of AI that is now embedded as an aid or a tool in our clinical workflows that aid the patient journey. Everything from the pre-screen narrative to automation of the face-to-face notes. We've used it to enhance our falls risk model, our react model, and our readmission model. We've spoken previously about the agentic solution we have, which we call Hannah, for following up with recently discharged patients. On the administrative side, it really runs the gamut from agents that are helping us with the monthly closing of the books and scanning journal entries for exceptions.
We referenced previously that what is coming soon is going to be an enhanced market analytics tool that's really going to help us devise the appropriate real estate strategy for markets that we're entering. We think it's going to be very useful as we map out our strategy for North Carolina. There's a lot in the pipeline.
Mark Tarr — President and CEO, Encompass Health
I will say, A.J., we've got a team that's been very intentional in terms of prioritizing projects and initiatives in which we wanted to work with Palantir. We're looking for those that can benefit us the greatest in terms of either efficiencies or working through projects like the development of opportunities and evaluating markets. I'm with Doug. I think that the benefits still are out in front of us, but I'm very encouraged about where we are and probably more importantly, how we're going about it as an organization.
Pat Tuer — EVP and COO, Encompass Health
A.J., this is Pat. Just a couple of other call-outs from a use case perspective that I'm pretty excited about, in addition to the ones that Doug talked about. One of the challenges that we have from an operations perspective is when we are manually auditing records and clinical systems, it takes a lot of time, it takes a lot of effort, it takes a lot of resources. We're developing a solution with Palantir and our ITG team, our internal IT team, that will proactively and concurrently scan our medical records for any potential risk area. If an order is not followed or if an order is delayed, and you can act and intervene in real time. I'm pretty excited about that.
Not specific to Palantir, but we did talk in prior calls about our Fusion ERP conversion, we've gotten our sea legs under us with that. We continue to enhance that system, we're evaluating opportunities that may come with that to centralize certain tasks that could reduce or create efficiencies for us in the near future. We're just not ready to call those out just yet.
A.J. Rice — Analyst, UBS
Okay, thanks.
Mark Tarr — President and CEO, Encompass Health
Hey, Brian.
Brian Tanquilut — Analyst, Jefferies
Hey, guys.
Mark Tarr — President and CEO, Encompass Health
Morning, Brian.
Brian Tanquilut — Analyst, Jefferies
Good morning. Congrats on the quarter. Doug, as I think about temp staff or contract labor utilization, obviously down a decent bit during the quarter, just curious how we should be thinking about the back half, especially in light of planned openings coming up in the pipeline.
Doug Coltharp — EVP and CFO, Encompass Health
Yeah. We've historically been very good about not having to tap into contract labor for de novo openings, and we would hope that will continue to be the case in the second half. We're really proud of the progress that we have made and that we continue to make on decreasing the utilization of premium labor. Q2 marked our 11th consecutive quarter where we had a year-over-year decline in premium labor cost, even as over that period of time, our volume has increased substantially. Being at 1.1% of total FTEs in contract FTEs, and the fact that the rate has really stabilized for about a two-year period right now at an annual rate of about $175,000, we've hit the point of diminishing returns.
Part of what's embedded in the increased assumption for SWB per FTE, the inflation rate there for the second half is just that realization that incrementally, we would hope to continue to improve, the level of improvement is going to be less than it has been for the last almost three years.
Pat Tuer — EVP and COO, Encompass Health
Just to add to that, this is Pat. Doug's right. There's some diminishing returns on this, there is still juice left to squeeze here. Again, it's just going to be smaller than what we have been able to produce over the last several quarters sequentially. A couple of call-outs. In January, we started a pilot with our top 10 markets from a contract labor, extra shift, and sign-on perspective that had historical recruiting challenges. We worked with our talent acquisition team and our regional operators and piloted a partnership around recruitment marketing. We saw a substantial improvement in the majority of those markets, way over the historical hiring trends that had occurred, and we saw nice reductions there. Some of those markets are still going to see continued improvement, which we will benefit from.
There's opportunities for us to take that pilot to other markets that are challenged as well. I'll just call out that this was our best hiring quarter that we've had in some time, and that comes off of a really strong Q1. I know that can change year-over-year, but right now, from a labor availability perspective, it's probably the least stressed that I've been about it in several years.
Brian Tanquilut — Analyst, Jefferies
That's awesome. Doug, I noticed the new slide added there, slide 19 for the RCD and TEAM. Just curious, anything you can share with us in terms of what you're seeing with RCD at this point? Thank you.
Doug Coltharp — EVP and CFO, Encompass Health
I would say, things continue to be about the same in Alabama. For all seven of our hospitals, we're above the target affirmation rate, which is north of 90%. The rollout in Texas has gone very well, and there we're seeing affirmation rates that are consistent with what Novitas had demonstrated in Pennsylvania previously of north of 98%. California, which is a smaller number of our hospitals, I would say that the MAC was less well-prepared than we would have hoped for, but they're continuing to make some progress. We're above the target affirmation rate there, and we would expect continued improvement.
We don't really see any reason why that should differ from the experience that we've been having in the state of Texas. Finally, the inclusion of our hospitals in Pennsylvania has been deferred for a period of time, but we will have a couple of hospitals in Pennsylvania that we believe will be subject to RCD, beginning in 2027. The experience for other providers in the state of Pennsylvania thus far has been positive. We're optimistic about that as well. We're not currently aware of plans by CMS to extend RCD into any other states at this time.
Doug Coltharp — EVP and CFO, Encompass Health
Morning, Jared.
Mark Tarr — President and CEO, Encompass Health
Morning, Jared.
Jared Haase — Analyst, William Blair
Morning. Thanks for squeezing me in here. Maybe I'll just stick with one, as we get towards the end of the call. I wanted to go back on the career ladder programs and appreciate the investment that you're making there. I wanted to try and connect that back to the model a little bit. When I think about the dialogue that you have with referral partners to drive volumes, are you actually able to articulate some of that data around, let's say, the tenure of your workforce, the mix of credentials, turnover rates, things like that directly? I sort of get ultimately, at the end of the day, quality measures, readmission rates are probably the main things that they're going to focus on. In some sense, that's basically downstream from the quality of our workforce.
Just trying to get a sense of how that actually plays out in the go-to-market as you try to capture volume.
Mark Tarr — President and CEO, Encompass Health
Yeah, Jared, I think those conversations directly around turnover and the improvements to the overall business are more direct with our joint venture partners, than they are non-partners. I think for non-partners and joint venture partners, the primary focus comes down to outcomes and how fast can we take their patients. If we have a more stable, trained clinical workforce, we're able to take a wider variety of conditions and take them sooner before certain conditions can resolve and reduce acute length of stay and associated readmissions. That's really where the conversations come in. Again, from a partner perspective, they're very interested in those labor dynamics as it has a direct line to their distributions.
Doug Coltharp — EVP and CFO, Encompass Health
I would also say that the more skilled and more tenured your clinical workforce is, there's a correlation of that to your ability to obtain at a hospital level, disease-specific certifications. When we can go to a referral source citing the disease-specific certifications that we have, and then providing them with our clinical outcomes, that presents a very compelling case.
Jared Haase — Analyst, William Blair
Okay. Very helpful. I'll leave it there. Thank you.
Doug Coltharp — EVP and CFO, Encompass Health
Morning, Raj.
Mark Tarr — President and CEO, Encompass Health
Morning, Raj.
Raj Kumar — Analyst, Stephens
Hey, good morning. Maybe just going back to the North Carolina opportunity, I guess, curious on that front, how you see it in terms of JV versus wholly owned, and then I thinking as a Florida as a use case, maybe illustrating the kind of ramp in that state and what the timeline looks like to reach your targeted market share or, saying getting your fair share from acute admissions, in that market.
Mark Tarr — President and CEO, Encompass Health
I'll take the first part of that. I think that North Carolina will be like what we've seen in other states. There'll be a combination of some wholly owned hospitals and some JV partnerships. Our existing hospital in Winston-Salem is a partnership with the Novant system. I think that as we initially look at these 15 markets, we see some that may be more likely to be partnered than others, just given the dynamics in the marketplace. I think you could count on a mixture of some wholly owned and some joint venture facilities within the 15 markets.
Doug Coltharp — EVP and CFO, Encompass Health
There are any number of benefits that are attendant to a joint venture versus a wholly owned. One of them is the ability to get a CON foothold in a state because the acute care partner is already established by definition, and we may be new to that market or to that state in particular. That doesn't apply when you've got the CON barrier removed. There are some analogies to Florida, but some distinctions as well. If you think about it, when the CON was revoked in Florida, we already had presence with 12 existing hospitals. We were well known to many of the acute care providers, and that facilitated more of a balance of joint ventures and wholly owned. That's a little bit distinct from North Carolina, where we have just one, even though it isn't a joint venture.
Where you get a more parallel path, though, is that we felt that first-mover advantage was extremely important, and we can move faster alone than we can negotiating joint ventures on the front end. With the expansion in Florida, what you saw us do was go out and initially move with a portfolio approach that was much more balanced towards wholly owned than joint ventures. As we got along the way and announced certain projects, a number of those that started as wholly owned converted to joint venture opportunities. I would expect a similar type of trajectory in North Carolina. We're prepared to move quickly, and start projects, and we're going to do that. Once those projects are announced, we'll survey the market and make a determination as to whether or not that particular project would benefit from the presence of a joint venture partner.
Raj Kumar — Analyst, Stephens
Great. I'll leave it there. Thanks.