Rehab Hospitals Earn 25% Margins. A Cut Is on the Table.

In fiscal 2024, fee-for-service Medicare and its beneficiaries spent $11.0 billion on about 435,000 stays in about 1,170 IRFs, and fee-for-service beneficiaries accounted for about 51% of all IRF stays. Fee-for-service stays grew about 8% from 2023, stays per beneficiary about 10%, and aggregate occupancy reached 71%, up from 69% (MedPAC, March 2026).

The growth is in freestanding hospitals. Their number rose from 302 in 2019 to 392 in 2024, while hospital-based units fell from 817 to 777, and freestanding IRFs handled 64% of fee-for-service stays in 2024. For-profit IRFs grew from 431 to 552 and handled 68% of stays (MedPAC, March 2026).

Jeff Axley, Managing Principal, Ridgeline Capital Partners, places IRFs with single-tenant net-lease development and has pointed out that "a lot of the development in healthcare is not in medical office buildings. It's like the post-acute, like IRFs and micro hospitals and ASCs."

MedPAC puts the IRF fee-for-service Medicare margin at 17.1% in fiscal 2024, up from 14.8% in 2023, and projects about 18% for fiscal 2026. The average hides the split: 25.0% for freestanding IRFs and 4.1% for hospital-based units (MedPAC, March 2026).

Across all payers, freestanding IRFs earned a total margin of about 12% in fiscal 2024. For-profit freestanding facilities earned about 14%, and nonprofit freestanding facilities about 4% (MedPAC, March 2026).

For a landlord, operator margin is the cushion behind rent coverage.

CMS's FY 2027 final rule, effective October 1, 2026, raises IRF payments 2.3%: a 3.2% market basket increase less 0.9 points for productivity, worth an estimated $340 million (CMS, July 2026). The standard conversion factor rises from $19,371 to $19,868 (HFMA, August 2026). The rule requires therapy to begin within 36 hours of admission and the first interdisciplinary team meeting by day four.

MedPAC voted 17-0 to recommend that Congress cut the IRF base payment rate by 7% for FY 2027, the same recommendation it made for FY 2026 (MedPAC, March 2026). The American Hospital Association urged current-law updates instead (AHA, January 2026).

Oversight is rising. Texas joined Medicare's IRF Review Choice Demonstration in March 2026, covering 24 Encompass Health hospitals in the state. Alabama, Pennsylvania and California are the other states in the demonstration (Encompass Health, August 2026).

Stroke and orthopedic recovery drive IRF volume. More than 795,000 people in the U.S. have a stroke each year (CDC, October 2024). Stroke makes up 13% of stays at freestanding for-profit IRFs and 20% at hospital-based nonprofit units, and lower-extremity fractures 12% to 16% (MedPAC, March 2026). Vizient projects that post-acute care volume will grow 31% from 2026 to 2036 (Vizient projection, via AHA, August 2026).

State law decides where operators build. Texas has no certificate-of-need (CON) requirement (CBRE, June 2026). Florida ended CON review for specialty hospitals, including rehabilitation hospitals, on July 1, 2021 (Arnall Golden Gregory, June 2021). Georgia still requires a CON for comprehensive inpatient rehabilitation, and its October 2025 review cycle opened one projected adult bed, in Planning Area 2 (Georgia Department of Community Health, October 2025).

Encompass Health ran 176 IRFs in 39 states and Puerto Rico at mid-2026, with 18 projects under development, and has announced 50-bed hospitals in San Antonio, in Haslet in the Dallas-Fort Worth area, and in Wesley Chapel and Apollo Beach near Tampa (Encompass Health, August 2026). Its 40-bed Loganville, Georgia hospital opened in June 2026 (Encompass Health, June 2026). The company guides to 6 to 10 new hospitals a year (company projection).

The biggest risk in IRF real estate is a payment cut. MedPAC has recommended a 7% cut to the base rate two years running, against the 2.3% increase CMS finalized for FY 2027, a 9.3-point gap between the regulator and its adviser (Ridgeline calculation). If Congress adopts the recommendation, operator margins fall and rent coverage falls with them.

A single-tenant building has one source of rent. An operator that loses margin to a payment cut, or to claims review under the Review Choice Demonstration, puts the building's entire cash flow at risk.

MARKET SIGNALS

The freestanding margin gap. Freestanding IRFs earned a 25.0% Medicare margin in fiscal 2024, against 4.1% for hospital-based units (MedPAC, March 2026).

Regulator versus adviser. CMS finalized a 2.3% payment increase for FY 2027, while MedPAC recommended a 7% cut (CMS, July 2026; MedPAC, March 2026).

Freestanding supply is growing. Freestanding IRFs rose from 302 in 2019 to 392 in 2024, while hospital-based units fell from 817 to 777 (MedPAC, March 2026).

In fiscal 2024, fee-for-service Medicare and its beneficiaries spent $11.0 billion on about 435,000 stays in about 1,170 inpatient rehabilitation facilities (IRFs) (MedPAC, March 2026). Fee-for-service beneficiaries accounted for about 51% of all IRF stays, and aggregate occupancy reached 71%, up from 69% (MedPAC, March 2026).

The Centers for Medicare & Medicaid Services (CMS) FY 2027 final rule raises IRF payments 2.3%, effective October 1, 2026: a 3.2% market basket increase less 0.9 points for productivity, worth an estimated $340 million (CMS, July 2026). The standard conversion factor rises from $19,371 to $19,868 (HFMA, August 2026).

The Medicare Payment Advisory Commission (MedPAC) voted 17-0 to recommend that Congress cut the IRF base payment rate by 7% for FY 2027, the same recommendation it made for FY 2026 (MedPAC, March 2026). That is a 9.3-point gap from the 2.3% increase CMS finalized (Ridgeline calculation). If Congress adopts it, operator margins and rent coverage fall.

Texas and Florida do not, and Georgia does. Texas has no certificate-of-need (CON) requirement (CBRE, June 2026). Florida ended CON review for specialty hospitals, including rehabilitation hospitals, on July 1, 2021 (Arnall Golden Gregory, June 2021). Georgia still requires a CON for comprehensive inpatient rehabilitation (Georgia Department of Community Health, October 2025).

For informational purposes only. Not an offer to sell or a solicitation of an offer to buy any security; any offer is made only through confidential offering documents. Projections are not guarantees of future results.