Prepared remarks
Good morning, everyone, and welcome to Encompass Health's Second Quarter 2026 Earnings Conference Call. The operator provided instructions to participants on how to ask questions. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Second Quarter 2026 Earnings Call. Before we begin, if you do not already have a copy, the second quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control.
We ask the audience to please stand by. I believe the speakers have reconnected to the live conference.
Yes, we're in the main room.
Aaron, can you hear me?
Gentlemen, you are with the audience now. You have reconnected. I'm hearing a little bit of echo at the moment.
Good morning, everyone. This is Doug Coltharp. We apologize for the technical difficulties we're experiencing this morning. These difficulties are arising through our vendors. It's a vendor we have historically used, and these are not on the Encompass Health side. We appreciate your patience. And with that, we are going to start from the top, assuming that you've heard nothing from us this morning, and I'm going to ask Mark Miller to begin.
Thank you, Doug, and good morning, everyone. Thank you for joining Encompass Health's Second Quarter 2026 Earnings Call. Before we begin, if you do not already have a copy, the second quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K, the Form 10-K for the year ended December 31, 2025, the Form 10-Q for the quarter ended March 31, 2026, and the Form 10-Q for the quarter ended June 30, 2026, when filed. We encourage you to read them. You are cautioned not to place undue reliance on these estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. The operator provided instructions to participants on how to ask questions. With that, I'll turn the call over to President and Chief Executive Officer, Mark Tarr.
Thank you, Mark, and good morning, everyone. We're very pleased with our second quarter results as revenue grew 9.6%, adjusted EBITDA increased 9.2% and adjusted EPS increased 10.7%. Based primarily on our Q2 results, we are again raising our guidance for 2026. Doug will review the details in his comments. Patient outcomes were again outstanding. Our Q2 discharge community rate was 84.7%, discharge to acute rate was 8.4% and discharge to skilled nursing facilities was 6.1%. Our performance on each of these quality metrics continues to exceed industry averages. We again experienced increased participation in our clinical staff professional growth and development programs, such as our career ladders, providing nurses with support to attain advanced licenses and certifications, including certified rehabilitation RN designation. We believe our success in these programs contributes to our favorable clinical staff turnover trends and helps to drive further declines in premium labor spend. Our professional growth and development programs also enhance our abilities to serve high-acuity medically complex patients. Demand for inpatient rehabilitation services remains strong, and we continue to invest in capacity additions. In Q2, we opened a new 50-bed hospital in Concordville, Pennsylvania; and a 40-bed hospital in Loganville, Georgia. Our Loganville Hospital is our eighth joint venture with Piedmont. We also added 10 beds to existing hospitals. Through the first half of the year, we opened 3 hospitals with a total of 139 beds and added 54 beds to existing hospitals. Over the balance of the year, we intend to open 5 more hospitals with a total of 250 beds and add 100 to 150 beds to existing hospitals. We maintain an active pipeline of new hospital development projects, both wholly owned and joint ventures while also executing on bed expansion opportunities as warranted by occupancy trends and market dynamics. Our pipeline of announced new hospital projects with opening dates beyond 2026 currently consists of 13 hospitals with 606 beds, and we anticipate additional projects, including small format hospitals, will be announced over the balance of the year. Last month, North Carolina repealed its Certificate of Need law for inpatient rehabilitation care effective October 1 of this year. We believe this is a great result for the citizens of North Carolina who will now benefit from more access to inpatient rehabilitation care. North Carolina exhibits highly favorable population growth and demographic characteristics, and our assessment points to a large underserved market for IRF services. We currently operate 1 hospital in North Carolina. Replicating our approach to CON repeal in Florida in anticipation of the CON revocation in North Carolina, we conducted a thorough market-by-market analysis across the state. This has led to an initial prioritization of 15 markets, and we currently have 3 real estate parcels under contract. We anticipate our next hospital opening in North Carolina to occur in late 2028 or early 2029. Finally, on July 30, 2026, CMS released the 2027 IRF final rule, which we estimate will result in approximately a 2.3% increase in net revenue per discharge for our Medicare patients beginning October 1, 2026 based on our current patient mix. Now I'll turn it over to Doug.
Thank you, Mark, and good morning, everyone. Q2 revenue was up 9.6% over the second quarter of 2025. The increase was comprised of 5.6% discharge growth and a 3.9% increase in net revenue per discharge. Net revenue per discharge growth was driven by higher patient acuity. We continue to see very solid growth in medically complex categories, including stroke and brain injury. Bad debt expense in Q2 was 2.3%, in line with our expectations and the increase over last year is primarily due to a favorable reserve adjustment that occurred in the second quarter of 2025. Our Q2 adjusted EBITDA increased 9.2% to $348 million, even as we absorbed an $11.5 million year-over-year decrease in net provider tax impact. Essentially, all of the year-over-year change in net provider tax impact relates to out-of-period adjustments to our accruals for the fiscal year 2025 Florida Medicaid program based on revisions promulgated by the state and approved by CMS in Q2 of this year. Q2 SWB per FTE increased 3.4%, in part driven by increased participation in our career ladder programs, partly offset by a decline in premium labor. Premium labor costs comprised of contract labor and sign-on and shift bonuses declined $2.6 million from Q2 2025 to $25 million. Contract labor FTEs as a percent of total FTEs was 1.1%, an improvement of 20 basis points from Q2 2025. Net preopening and ramp-up costs were $6.9 million, up $2.9 million from Q2 2025 and were $10.9 million on a year-to-date basis compared to $6.1 million in the first half of 2025. We continue to expect net preopening and ramp-up costs of $18 million to $22 million for the full year. During Q2, we repurchased approximately 704,000 shares of our common stock for a total of $74.2 million, bringing our year-to-date total share repurchases to approximately 1,412,000 shares and $145.8 million. During Q2, we issued $500 million of 5.875% Senior Notes due 2034 and used most of the proceeds from that issuance to redeem $400 million of our 4.5% senior notes due in 2028. Our net leverage at quarter end was 1.9x. Our leverage and liquidity remain well positioned. We recently announced an increase in our quarterly dividend next payable in October to $0.21 per share. And within our earnings release yesterday, we announced an increase in our common stock repurchase authorization to $1 billion. As Mark mentioned, we have again raised our 2026 guidance as follows: we now expect for the full year net operating revenue of $6.41 billion to $6.49 billion, adjusted EBITDA of $1.365 billion to $1.395 billion and adjusted earnings per share of $6.02 to $6.25. The considerations underlying our guidance can be found on Page 11 of the supplemental slides, and I want to take just a moment to highlight updated assumptions. Our Medicare pricing assumption for Q4 of approximately 2.3% reflects the IRF final rule released on July 30. Our revised expectation for full year 2026 SWB per FTE growth is 3.5% to 4% as we expect increased participation in both our nursing and therapy career ladder programs. As we have previously stated, we believe these programs contribute to favorable clinical staff retention trends, higher quality patient outcomes and reduced reliance on premium labor. We previously indicated that we expected the net provider tax impact to adjusted EBITDA for 2026 to be essentially flat with 2025 at approximately $21 million. Based on the retroactive adjustments specific to Florida that I mentioned earlier, we now expect the net benefit to adjusted EBITDA in 2026 to be approximately $10 million. And with that, we will open the lines for questions.
Questions and answers
The operator provided instructions to participants. And we'll take our first question from Pito Chickering with Deutsche Bank.
So you raised the guidance in the back half of the year by about $5 million despite assuming 10 basis points of lower Medicare pricing in the fourth quarter and SWB that's 500 basis points higher than you had assumed previously. So can you bridge for us the drivers in 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? And then can you talk about the same-store discharge growth in the quarter and the durability of that strength? Just as you think about the second quarter 2026 stacked comps heading into easier comps in the back half of the year, should we be modeling more same-store discharge growth in the 4-plus percent range for Q3 and Q4?
Yes, Pito, this is Doug. I'll take a shot at it. So 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. And it's also an ancillary benefit related to the career ladder program participation. And again, the causality there is we believe that the career ladder program participation is contributing to favorable clinical staff turnover. And 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. Yes. So again, this is a statement you've heard us make repeatedly for the last several quarters, but we believe increasingly that the distinction between same-store and total discharge growth is going to become less relevant and less consequential. We are up against easier comps in the second half of the year. And so that will be favorable. We also anticipate that the impact of the 4 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.
And we will take our next question from Matthew Gillmor with KeyBanc.
Maybe 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 6 to 10 per year or just maybe bias you towards the high end as you're thinking about beyond 2027?
Yes, this is Doug. I think right now, if we could get 15 open, we 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. And 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 6 to 10 range. And there is some possibility just on how quickly we could pull those together as well as some opportunities that continue to develop in other states that we could wind up going above that. But right now, we're going to stay with the 6 to 10 range and hope that North Carolina pushes us to the upper end.
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 will provide substantial opportunity and runway for us to continue to grow in North Carolina beyond just the traditional de novo format.
And 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. And 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. And so 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. And 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.
And we will move next to Ann Hynes with Mizuho Securities.
So 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? And I did notice that year-over-year, you have about a 20% increase in CapEx year-over-year. What is driving that? Is it just an acceleration of development versus last year? And 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, North Carolina and Tennessee, that could be expanding CONs for inpatient rehab. Any updates on those?
Yes. So it's North Carolina. South Carolina did not — South Carolina was previously repealed, and we have a much larger presence where we have 11 hospitals in South Carolina already. We do hear that there is some dialogue around Tennessee, I don't know that anything is imminent there, but 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, yes, 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. And again, 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. And then 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 because 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, but augment that with the dividend, which was increased for the October payout and increasingly with share repurchase activity.
And we will move next to Benjamin Mayo with Leerink Partners.
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?
Yes, we do. I'm going to let Pat go into greater detail on that. But 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 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 the existing hospitals and to staff up our de novo hospitals. So Pat, do you want to give some details around that?
Yes, sure, Mark. So on an annualized basis through Q2, our nursing turnover sits around 19%. That represents a low in more than 12 years. On the therapy perspective, we're just above 7%. That's our lowest turnover on an annualized basis in 5 years. So 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%. And we've increased the number of certified nurses by almost 21% versus prior year and 60% since 2023. So 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. So we're pretty excited about this.
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. And 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. So really seems like a lot of things are clicking on all cylinders around this initiative.
We currently have approximately 22% of our RNs with 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. But as Pat just enumerated, we think that the benefits are more than offsetting.
Got it. And 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.
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. And in Q2, we hit VA growth of around 33%. It now represents about 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. And just 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. So substantial runway there.
And as a reminder, that pays at the Medicare fee-for-service rate.
And we will move next to Ryan Langston with TD Cowen.
Maybe I missed this. I got dropped from the call, unfortunately. But 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?
Yes. I think the bed additions in the de novos continue to ramp very favorably. If we look at the openings on a year-to-date basis, in Q1, we opened 1 hospital with 49 beds. In Q2, we opened 2 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 3 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 6, and they're typically north of a 70% occupancy rate by the time they get to month 10. Now those are averages, so some are faster and some are slower. But 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. And as a result, the progress that we're making from the day that we opened the doors has really improved and has decreased the time to achieving four-wall profitability.
One thing I would add to that is just as we think about bed additions in 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. So we have lowered that threshold to 70% to 75% versus the historical 80% to 85% threshold.
Ryan, I'd also say it's been really nice to see the ramp-up momentum in hospitals, not only in states where we have a well-known brand like Florida, but as we've gone out into new states, Connecticut, Rhode Island and others, those are markets where you really 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.
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, and you're seeing that flow through the P&L. And to put a finer point on that, our Q2 occupancy of 77.4% was up 290 basis points over Q2 2025. And sequentially, occupancy decreased only 130 basis points from Q1 of this year, and that compares to a decrease of 220 basis points from Q1 to Q2 in each of 2025 and 2024. And further, our average daily census or ADC decreased only 69 from Q1 as compared to a sequential Q1 to 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.
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. But any reason we shouldn't think that this could ramp up at least versus the first half?
Yes. The EPS guidance change reflects only the share repurchases that have been accomplished year-to-date. I think you have seen an increase in the last 3 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 then we have capacity just given the free cash flow and the relationship of that free cash flow to our growth CapEx number as well. So 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.
And we will take our next question from Joanna Gajuk with Bank of America.
So a couple of questions. First, on the volume discussion, you mentioned that you're seeing higher acuity. In the past, you gave some stats — can you give us growth rates by category, like stroke, neuro brain injury versus ortho hip and knee? And second, can you give the stat on the percent of your hospitals that are above 90% occupied? And in terms of bed expansions or de novos, how much have you captured of the pent-up demand in the hospitals you called out prior to this quarter?
Yes, we can do that.
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 total basis, and on a same-store basis they were up 5.5% and 3.9%, respectively. Brain injury has been an area we've discussed previously; 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. So it's great to see us capitalize on that.
Yes. Knee and hip replacement, which is how we categorize lower extremity joint replacement, was up only modestly, about 1% in the quarter.
Okay, great. So clearly the higher-acuity categories are growing much faster than orthopedics. On the pent-up demand and occupancy, can you give the stat you gave last quarter in terms of the percent of hospitals that are above 90% occupied and how bed additions have captured that demand?
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 5 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. It's the definition of a high-class problem.
And we will move next to Andrew Mok with Barclays.
The same-store discharge growth of 2.8% accelerated 120 basis points sequentially despite tougher comps. Did that finish better than internal expectations? And 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 those acuity gains may not be sustainable?
So first, we're not going to comment on performance versus internal expectations. We will compare to guidance. We revised our guidance upwards for the full year based on the second quarter performance. 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 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, and 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 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.
Andrew, I don't think it's a reluctance for us to commit to that in the foreseeable future. What we see is fluctuations in acuity from quarter to quarter. While we're very confident in the ability for us to capture that market share, it's not prudent to back us into a corner and then have one of those fluctuations occur. But we're very confident in the outcomes we provide and the access to care we're able to provide, and our teams do a great job of capitalizing on that.
Another factor that can impact the acuity is we must not be perceived by our referral sources as cherry-picking certain types of patients. We could 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. And so doing that based on the flows that come into an acute care hospital in any particular quarter can cause some fluctuations in that acuity. But again, when you look at some of the headwinds 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.
And we will move next to A.J. Rice with UBS.
First, I 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? And any update on your technology investments and AI initiatives, such as the partnership with Palantir around claims processing and administrative efficiency? Are you seeing meaningful efficiencies yet or is that mostly still in front of you?
I think right now, it is an assumption for this year only and specifically for the back half trend. Because of the success we've had in 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. So we should see the SWB per FTE moderate, but we're not ready to call a level on it yet. And remember, as we move into the second half of this year, we're also up against easier comps 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. Regarding technology and AI, 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 now embedded as an aid or a tool in our clinical workflows that aid the patient journey, everything from the prescreen 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 HANA, 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 close of the books and scanning journal entries for exceptions. What is coming soon is an enhanced market analytics tool that's really going to help us to buy 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. So there's a lot in the pipeline.
We've got a team that's been very intentional in terms of prioritizing projects and initiatives that we wanted to work with Palantir on. So 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. The benefits still are out in front of us, but I'm very encouraged about where we are and how we're going about it as an organization.
A couple of call-outs I'm excited about: in addition to the workflows Doug mentioned, one challenge we have from an operations perspective is manual auditing of records and clinical systems, which takes time and resources. We're developing a solution with Palantir and our internal IT team that will proactively and concurrently scan our medical records for potential risk areas—if an order is not followed or if an order is delayed—so you can act and intervene in real time. Also, we have our Fusion ERP conversion underway; we've gotten our sea legs under that. We continue to enhance that system, and we're evaluating opportunities that may come with that to centralize certain tasks that could create efficiencies in the near future, though we're not ready to call those out yet.
And we will take our next question from Brian Tanquilut with Jefferies.
Congrats on the quarter. Maybe, Doug, as I think about temp staff or contract labor utilization, obviously down a decent bit during the quarter. How should we be thinking about the back half, especially in light of planned openings coming up in the pipeline?
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 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 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 now at an annual rate of about $175,000, we've kind of hit the point of diminishing returns. So part of what's embedded in the increased assumption for SWB per FTE inflation for the second half is just that realization that incrementally, we would hope to continue to improve, but the level of improvement is going to be less than it has been for the last almost three years.
Doug is right. There's some diminishing returns on this, but there is still opportunity left. 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 partnerships around recruitment and marketing. We saw substantial improvement in the majority of those markets well over historical hiring trends and saw nice reductions in premium labor there. Some of those markets are still going to see continued improvement, which we will benefit from. This was our best hiring quarter in some time, coming off a really strong Q1. From a labor availability perspective, it's the least stressed I've been about it in several years.
And we will take our next question from Jared Haase with William Blair.
Maybe I'll 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. I wanted to try to connect that back to the model. When you have dialogues with referral partners to drive volumes, are you actually able to articulate some of that data—tenure of your workforce, mix of credentials, turnover rates—directly? Ultimately outcomes and readmission rates matter most, but can you give a sense of how the workforce data plays into your go-to-market as you try to capture volume?
Jared, those conversations around turnover and improvements to the overall business are more direct with our joint venture partners than with non-partners. 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, which reduces acute length of stay and associated readmission. So that's really where the conversations come in. From a partner perspective, they're very interested in those labor dynamics as it has a direct line to their distributions.
I would also say that the more skilled and more tenured your clinical workforce is, there's a correlation to your ability to obtain hospital-level disease-specific certifications. When we can go to a referral source citing the disease-specific certifications we have and providing our clinical outcomes, that presents a compelling case.
And we will take our next question from Raj Kumar with Stephens.
Maybe going back to the North Carolina opportunity. How do you see it in terms of JV versus wholly owned? Using Florida as a use case, can you illustrate the ramp in that state and what the timeline looks like to reach targeted market share or capture your fair share from acute admissions in that market?
I'll take the first part of that. I think North Carolina will be like what we've seen in other states: a combination of some wholly owned hospitals and some joint venture partnerships. Our existing hospital in Winston-Salem is a partnership with the Novant system. As we initially look at these 15 markets, we see some that may be more likely to be partnered than others, given the marketplace dynamics. You can expect a mixture of wholly owned and joint venture facilities within the 15 markets.
There are a number of benefits attendant to a joint venture versus a wholly owned facility; one is the ability to get a CON foothold because the acute care partner is already established. That doesn't apply when you've got the CON barrier removed. When the CON was revoked in Florida, we already had a presence with 12 existing hospitals, so we were well known to many acute care providers, which facilitated more balance of joint ventures and wholly owned projects. That's a bit distinct from North Carolina, where we have just one hospital. First-mover advantage is important, and we can move faster alone than negotiating joint ventures on the front end. With the expansion in Florida, we initially moved with a portfolio approach more balanced towards wholly owned than joint ventures, but as we progressed, some projects converted to joint ventures. I would expect a similar trajectory in North Carolina. We're prepared to move quickly and start projects, and once announced, we'll evaluate whether a particular project would benefit from a joint venture partner.
This concludes the Q&A portion of today's call. I will now turn the program over to Mark Miller for closing remarks.
Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.
Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.