Select Medical Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 23, 2024

Key Takeaways

  • The Board approved a plan to pursue a tax-free separation of its Concentra occupational health business in 2024 to enhance shareholder value and operational focus.
  • In Q4 2023, revenue grew by 5% and adjusted EBITDA rose by 21% year-over-year, lifting consolidated adjusted EBITDA margin to 10.9% from 9.4%.
  • The critical illness recovery hospital division improved its adjusted EBITDA margin to 10.1% (up from 7.9%), driven by a 4% reduction in salary, wages and benefits ratio and a 24% drop in nursing agency costs.
  • Select Medical signed multiple partnership agreements—including Cox Health System, University of Florida Health Shands and Cleveland Clinic—to develop 533 rehab beds under construction or completion in 2024.
  • For 2024, the company reiterated guidance of $6.9B-7.1B in revenue, $830M-880M in adjusted EBITDA and $1.88-2.18 in EPS, with capital expenditures expected at $225M-275M.
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Earnings Conference Call
Select Medical Q4 2023
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Operator

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the Q4 2023 results and the company's business outlook. Speaking today are the company's Executive Chairman and Co-Founder, Robert Ortenzio, and the company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company including without limitation statements regarding operating results, growth opportunities, and other statements that refer to Select Medical's plans, expectations, strategies, intentions, and beliefs.

Operator

These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference call over to Mr. Robert Ortenzio.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Thanks, Operator. Good morning, everyone. Welcome to Select Medical's earnings call for the Q4 of 2023. Before providing details on each of our four operating divisions, I will provide some updates and commentary on the business. As most of you know, on January 3, 2024, we announced that our board of directors has approved a plan to pursue the separation of Select Medical's wholly-owned occupational health services business, Concentra. As I have previously stated, we are pursuing the separation of Concentra with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets. The potential separation is intended to be effected in a tax-free manner to Select Medical and its stockholders, and to be completed in 2024. We expect in the very near future to receive a private letter ruling from the U.S.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Internal Revenue Service with an opinion confirming the tax-free status of the potential separation of the Concentra business. The completion of the separation is still subject to customary conditions including favorable market conditions, completion of necessary financing transactions, and final approval by the Select Medical board of directors. I will now provide commentary on our four business lines. Overall, we had a very successful Q4 and year. We experienced double-digit adjusted EBITDA growth over prior year in every quarter of this year. In the Q4 of 2023, adjusted EBITDA grew 21%, and revenue grew by 5%, with all four of our operating divisions again exceeding prior year revenue and EBITDA. For the quarter, total company adjusted EBITDA was $180.1 million compared to $148.9 million in the prior year.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Our consolidated adjusted EBITDA margin was 10.9% for Q4 compared to 9.4% in the prior year. Our Critical Illness Recovery Hospital division continued to see margin improvement in Q4 with a 28% increase in adjusted EBITDA margin, along with a 4% reduction in their salary, wages, and benefits to revenue ratio compared to the prior year. Consistent with prior quarters, Marty Jackson will provide additional detail regarding critical illness continued progress with labor. Critical illness incurred $3.6 million of startup losses related to new hospitals in this quarter compared to $3.1 million in the same quarter prior year. The opening of critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with Rush University System for Health remains on target for Q2 of this year.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

As we mentioned last quarter, we also have hospital expansions underway which are expected to be completed in 2025 including in our Orlando market, which will also include a 48-bed rehab distinct part unit. On the inpatient rehab development front, we're excited to announce that we signed an agreement with CoxHealth to construct a new freestanding 63-bed inpatient rehab hospital in Ozark, Missouri, in which we will have a majority interest. This hospital is projected to open early 2026. As previously noted, we have agreements with UF Health Shands to open a 48-bed hospital in Jacksonville, Florida in Q3 of 2024, and with the Cleveland Clinic to open a fourth inpatient rehab hospital which is a 32-bed hospital scheduled to open in the first half of 2025.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

In the latter half of 2024, we plan to begin construction on a new inpatient rehab hospital in Southern New Jersey, the Bacharach Institute for Rehabilitation, in partnership with AtlantiCare. We anticipate that our inpatient rehab division will continue their strong performance and have a successful 2024. Overall, I am pleased with the development results and pipeline for our specialty hospital divisions. In 2023, we developed, acquired, and put in operation 128 inpatient rehab beds and 227 critical illness recovery hospital beds. In 2024, we plan to be under construction or complete construction of 533 inpatient rehab facility beds and 70 critical illness recovery hospital beds that will begin operations in the current year or 2025. Concentra continued to their strong performance exceeding prior year revenue, EBITDA, and patient volumes.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

As we mentioned on the last call, Concentra had significant development activity in October with the acquisition of three occupational medicine centers in Delaware and Maryland, and the opening of three De Novos in Norfolk, Virginia, Columbus, Ohio, and Fort Myers, Florida. We have five signed leases for De Novos slated to open in 2024, and two signed leases for De Novos expected to be open in Q1 2025. There is a strong pipeline of acquisitions including one currently under letter of intent and other De Novos that we continue to evaluate. This quarter, our outpatient rehab division generated a 41% increase in adjusted EBITDA and an 11% increase in visits per day. The division added seven clinics this quarter via De Novos which offset the closure of 12 underperforming clinics and the fold-in of eight clinics into existing operations as their leases expired.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

The pipeline for future growth remains strong with 19 executed leases for De Novos clinics of which 10 are scheduled to open in the first half of 2024. There are also many additional opportunities for acquisitions and De Novos development that are under consideration. At this point, I'll provide some further data points on each of our operating divisions. Our critical illness recovery hospital division experienced increases of 1% in net revenue and 29% in adjusted EBITDA. While our occupancy was down from same quarter last year, an increase in our case mix index and favorable payer contract negotiations contributed to an increase in our revenue per patient day. We've experienced very nice volume increases thus far in the Q1 of 2024 and are now at levels that exceed prior year.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Our adjusted EBITDA margin was 10.1% for the quarter compared to 7.9% in the prior year Q4. The reduction in labor costs contributed to the improvement of our EBITDA margin with a 4% reduction in our salaries, wages, and benefits to revenue ratio. Both nursing agency rates and utilization decreased 24% when compared to prior year Q4. Orientation hours decreased 10% compared to prior year Q4 and decreased 26% compared to Q3 of 2023. Nursing sign-on incentive bonus dollars decreased 36% from prior year Q4 and 5% from the prior sequential quarter. Our inpatient rehab hospital division experienced 9% increase in net revenue and a 19% increase in adjusted EBITDA. Patient volumes increased 7% and our rate per patient day increased 3%.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Our occupancy of 85% was consistent with prior year. The adjusted EBITDA margin for inpatient rehab was 25.5% for Q4, higher than the prior year of 23.6%. Concentra experienced an increase of 6% in net revenue driven primarily by rate. Our workers' comp volume increased 6% but was offset primarily by a decrease in employer-based visits which are reimbursed at lower rates that resulted in an overall visit increase of 1%. Concentra's adjusted EBITDA margin increased to 15.5% for the quarter compared to 15% for the same quarter prior year. Outpatient rehab division experienced an increase of 6% in net revenue with patient volumes increasing by 11% offset by a decrease in rate from $102 net revenue per visit to $100.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Organizational activities focusing on improving clinical productivity via patient access contributed to additional volume where the decline in rate was due to a decline in the outpatient Medicare fee schedule, payer mix, and variable discounts. The outpatient division adjusted EBITDA increased by 40.9% compared to prior year with a 33% increase in EBITDA margin to 7.5% from 5.7%. Earnings per fully diluted share were $0.36 in the Q4 compared to $0.22 per share in the same quarter prior year. For the full year, earnings per fully diluted share were $1.91 compared to $1.23 per share in the prior year. adjusted earnings per fully diluted share were $1.99 this year, which excludes the loss from early retirement of debt and its related costs and tax effects.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

In regards to our allocation and deployment of capital, our board of directors declared a cash dividend of $0.125 payable on 13 March 2024 to stockholders of record as of the close of business on 1 March 2024. This past quarter, we did not repurchase shares under our board authorized share repurchase program, and we will continue to evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks, and I'll turn the call over to Marty Jackson for some additional financial details and commentary before we open the call up for questions.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Thanks, Bob. Good morning, everyone. I would like to first provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our salaries, wages, and benefits as a percentage of revenue decreased from 59.8% in Q4 prior year down to 57.6% this past quarter. Our SW&B as a percentage of revenue improved as the quarter progressed. Our year-to-date basis with regards to SW&B as a percentage of revenue decreased from 63.4% in 2022 down to 57.2% in 2023. Thus far, in 2024, our SW&B as a percentage to revenue has continued to trend favorably, and we expect to finish at or below 55% in Q1.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

This past quarter, we had a sequential reduction from Q3-Q4 in our RN agency costs with a decrease in both utilization and agency rates. The reductions realized were 17% in RN agency costs, a drop in RN utilization from 15%-14%, and a decrease in agency rate from $78-$70. RN agency utilization decreased throughout the quarter from 14.4% in October, 13.8% in November, and 13% in December. Nursing sign-on and incentive bonuses dollars also decreased by 5%, and we had a 26% decrease in orientation hours. Moving on to our financials in Q4, equity and earnings of unconsolidated subsidiaries was $10.2 million compared to $6.8 million in the same quarter prior year.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Net income attributable to non-controlling interests was $15.5 million compared to $10.2 million in the same quarter prior year. Interest expense was $50.8 million in the Q4. This compares to $47.3 million in the same quarter prior year. The increase in interest expense was attributable to an increase in interest rates. This was offset by a decrease in our revolving credit facility when compared to Q4 of 2022. At the end of the quarter, we had $3.7 billion of debt outstanding and $84 million of cash on the balance sheet.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Our debt balance at the end of the quarter included $2.1 billion in term loans, $280 million in revolving loans, $1.2 billion in our 6.25 senior notes, and $68.2 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.54x. As of 31 December 2023, we had $434 million of availability on our revolver. The interest rate on $2 billion of our term loans is capped at 1% SOFR plus 300 basis points through 30 September 2024. For the Q4, operating activities provided us with $179.4 million in cash flows. Our day sales outstanding or DSO was 52 days as of 31 December 2023.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

This compared to 55 days at 31 December 2022 and 52 days at 30 September 2023. Investing activities used $69.6 million of cash in the Q4. This includes $60.6 million in purchases of property, equipment, and other assets and $9 million in acquisition and investment activity. Financing activities used $103.3 million of cash in the Q4. This was primarily due to $60 million in net payments on a revolving line of credit, $16 million in dividends on our common stock, $13.4 million in net payments on other debt which included $5.3 million of term loan payments, and $12.5 million in net payments and distributions to non-controlling interests.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

As stated previously, we did not purchase any shares under our board authorized repurchase program this quarter. Last quarter, the board approved a 2-year extension of the share repurchase program which now remains in effect until 31 December 2025 unless further extended or earlier terminated by the board. We are issuing our business outlook for 2024 and expect revenue to be in the range of $6.9 billion-$7.1 billion. Adjusted EBITDA is expected to be in the range of $830 million-$880 million. And finally, our expected range for earnings per fully diluted common share is $1.88-$2.18. We expect capital expenditures to be in the range of $225 million-$275 million for 2024. This concludes our prepared remarks, and at this time, we'd like to turn it back over to the Operator to open up the call for questions.

Operator

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Justin Bowers from Deutsche Bank.

Justin Bowers
Justin Bowers
Equity Research Analyst at Deutsche Bank

Hi. Good morning, everyone. Could you talk about some of the moving parts in the guide, and then any additional color you can give us by segment would be appreciated as well? How you're thinking about some of the segments playing out for the year.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah, Justin. This is Marty. The outlook that we provided is really a function of, you know, taking a look at the four business segments, taking a look at some of the headwinds as well as the tailwinds. Obviously, the inpatient rehab is doing quite well. Concentra is doing quite well. We did have some headwinds, though, in both our critical illness recovery hospitals with regards to the high-cost outlier, and we had cuts on the Medicare portion of our outpatient rehab. So and all of that's reflected, you know, in the outlook. So I think, you know, you can expect to that the critical illness recovery hospitals and outpatient rehab was a little bit muted because of that, but both inpatient rehab and Concentra, you know, continues to do quite well both in terms of revenue growth and EBITDA growth.

Justin Bowers
Justin Bowers
Equity Research Analyst at Deutsche Bank

Okay. Understood. I just wanted to ask a couple about LTAC and then one on outpatient rehab. So I think you said that LTAC is tracking towards 55% SW&B in Q1. I just want to clarify that I heard that correctly. And then is that sort of the implication there that volumes are up sequentially? And then just one more. Do you have another LTAC coming online in 2024 this year? So I guess a bit of a three-parter.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Sure. The first part of the question was the 55%. And yes, you did hear that correctly. We are trending towards 55%. We have seen volumes up in the Q1, and we do have a hospital coming on at critical illness recovery hospital in Q2.

Justin Bowers
Justin Bowers
Equity Research Analyst at Deutsche Bank

Okay. Got it. And then just on outpatient rehab, I know that, you know, there's obviously, there's been some headwinds with Medicare too, but you guys have been chopping some wood operationally as well over the last, you know, I think, four to six quarters. Is that segment likely like, are you expecting margins to improve in that segment this year and sort of any thoughts on the trajectory to get back to, you know, that low to mid-teens margin that you guys target?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yes. As I mentioned before, we did have the cuts from Medicare, and that muted the growth there. We do expect we're seeing clinical efficiencies improve. And, you know, we expect, you know, within probably the next two to three years that we will be in that low-to-mid-teens, as far as margins are concerned.

Justin Bowers
Justin Bowers
Equity Research Analyst at Deutsche Bank

Okay. Thanks. I'll jump back in the queue.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Thanks, Justin.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Kevin Fischbeck from Bank of America.

Kevin Fischbeck
Kevin Fischbeck
Managing Director and Senior Equity Research at Bank of America

Great. Thanks. Maybe just to go back to the guidance, you know, the range, I guess, from a percentage perspective looks a little wide. You know, is what, what are the things that you think are kind of the things that could push you to the high end or the low end of the of the guidance range?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

I think the primary item for us, Kevin, is the potential impact on the high-cost outliers on the critical illness recovery hospitals. That's why we were pretty wide on the range.

Kevin Fischbeck
Kevin Fischbeck
Managing Director and Senior Equity Research at Bank of America

Okay. And then, you know, I guess, the improvement that you made in the Q4 on the labor side of things happened with volume being a little bit weak. And I just want to see, you know, it seems it should be easier to staff when volumes are a little bit light. It sounds like you're expecting volumes to kind of come back. Is there anything you need to do on the hiring side or any trends you could point to on the hiring side that kind of say, as volumes normalize, you know, you'll still be able to make progress on the temp staffing side of things?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah. You know, what we've seen is we're back to pre-pandemic with regards to our staffing. If you recall, we talked about, you know, on average, pre-pandemic, what our different buckets of nurses are in. You know, we have our full-time nurses. That's pretty much back to where we've been pre-pandemic. We think we're seeing PRN actually increase, which is a good thing. You know, historically, we've been in that 15%-18% as far as agency nursing, and we're down to 13%-14%.

Kevin Fischbeck
Kevin Fischbeck
Managing Director and Senior Equity Research at Bank of America

So if you're kind of back from a staffing level, what's the lever to get, you know, further down as a percentage of SW&B? Is it just occupancy and leverage from that, or is it rates?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah. It really is. It's volume. Volume will do wonders to get that percentage down. Yeah. I mean, volume is going to, you know, increase your top line.

Kevin Fischbeck
Kevin Fischbeck
Managing Director and Senior Equity Research at Bank of America

Yeah. Okay. And then maybe, you know, the Concentra spinoff sounds really interesting. I was wondering if you could just maybe provide us or remind us kind of how you're thinking about the growth of Concentra, and what that company might look like as a standalone company. You've done a really good job bringing the margins up in that business. Is there still room on the margin side, or is it more about organic growth, De Novos, and Tucking acquisitions? How should we think about the growth of that business as a separate company?

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Well, it's, Bob. You know, I think Concentra is just a fabulous company because of their dominance in that occupational medicine space and their various levers they have to grow. I mean, they can grow by De Novos. They can grow by acquisitions either in new markets or existing markets. So they have a lot of levers that they can press, and I think that they enjoy solid margins now. I'm not sure that I could sit here and project that their margins are going to go very much higher than they are right now, but they do have a lot of opportunities for growth. So, you know, we're pretty excited to have Concentra, as you know, all these years that we've had it, and I'm pretty enthusiastic about their prospects as a standalone company.

Kevin Fischbeck
Kevin Fischbeck
Managing Director and Senior Equity Research at Bank of America

All right. Great. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Ben Hendrix from RBC Capital Markets.

Ben Hendrix
Ben Hendrix
VP at RBC Capital Markets

Hey. Thank you very much. You guys are continuing to deliver a really impressive margin in the inpatient rehab business, despite what looks like a fairly aggressive development strategy. I just wondered if you could kind of go in a little bit more into your development pipeline, how you're thinking about that, and if there's any risks that we could see some drag on the margin over the next several quarters, you all given the expansion. Thanks.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah. As you point out, we feel pretty good about the development pipeline for inpatient rehab given our strategy. You know, our strategy is our new development is in partnership with large acute care systems. So in some regards, we don't have complete control over the cadence of when those hospitals come on. Now, as you know, our policy is not to announce our rehab projects until they're signed and commence. But we did go a little bit further on disclosure today when I talked about the hospitals in 2024 that we had hoped to have under construction or complete. So that's 533 rehab beds, and a much smaller number of critical illness beds in 2024. Any drag on earnings as a result of that development, you can assume, is factored into the guidance. So I think that we're of a size, and the platform there is that we feel we can bring these on and not really compromise our growth rate in that division.

Ben Hendrix
Ben Hendrix
VP at RBC Capital Markets

Thanks. And just if I may ask a different question here. We're getting some questions about the recently announced subpoena in California for Concentra, and I know these types of things pop up from time to time. But is there anything unique or notable about this subpoena, and is there any potential for it to delay your timeline on the spinoff? Thanks.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

No. Well, we do not believe that it will have any delay on the separation of Concentra. You know, these subpoenas, you can get for all kinds of reasons. This one comes from the California Department of Insurance, you know, and you can have, you know, I think investors in healthcare are used to the various qui tam that are oftentimes announced, because of whistleblower suits. And that can happen in state agencies as well as federal. You know, we never like to get them, but, and I'm a little loath to say that these are routine, but they have become routine over the years. And so, we disclosed it as we feel is our obligation. But beyond that, I really can't predict the outcome. But I can tell you that we will vigorously defend our business practices in California with Concentra.

Ben Hendrix
Ben Hendrix
VP at RBC Capital Markets

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Bill Sutherland from The Benchmark Company.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

Oh. Thank you. Good morning, guys. Hey, Bob. You mentioned that volumes were starting to improve quarter to date, for critical illness. Can you just give us a little more color on that and maybe the how, how you think about the sustainability?

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Well, I can't give you much more color on that. I mean, you know, we are trying to give a little bit more disclosure. You know, for us to give, you know, how the Q1 is shaping up is, as you know, probably a little unusual for us. But we were pleased that volumes are up. Now, it is seasonally. This is the time. And those volumes can be affected by lots of things, but it was pretty broad-based and across the country, for our critical illness hospitals. So I thought that was noteworthy. I mean, it's hard to say without more current data whether it's because you have more respiratory cases or whether there's COVID or other acute illnesses that are driving that volume.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

You know, normally, our critical illness volumes go up when the ICUs at acute care hospitals' volumes go up. So, when we look at our volumes, I think you can assume that in large measure, it's because volumes at our referral hospitals and their ICUs are up as well. So sustainable? You know, I, I'd like to think so. I mean, I don't think there's anything to suggest that there has been an outbreak of health in the United States. I think we'll continue to see patients that, particularly with an aging population that have the kind of respiratory conditions that land them in ICUs and make them appropriate for our level of care. So, I'd like to think so. But as you've seen over the years, that census can go up and down. Q1 is seasonally one of the better quarters because of the winter and the colder months.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

Yeah. It was just interesting on a year-over-year basis. It's, 'cause you were kind of flat-ish last year, last year.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Yeah.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

At Concentra, curious if you could give us a little more color on the blend of the business and why the employer visit side is not as strong and what might be the outlook for that. I know it helps the mix, but just curious about that.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah, Bill. This is Marty. Yeah. The employer side, there's you know, the different things that they have there or the different activities they perform, is pre-employment physicals, drug testing. You know, to a certain extent, it has to do with the drug testing is down a little bit. And I think that may have to do with some of the part we've increased some of our pricing. And there is a lot of price elasticity associated with that product.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

But it has a pretty standard, I mean, steady demand side, the drug testing?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah. Yeah. There is.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

Okay.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

You know, as you probably know, the Department of Transportation requires drug testing for all truck drivers. So that's certainly been good. And there is some, you know, as far as the employment's been pretty steady.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

Okay. Thinking about outpatient rehab for a second and the revenue per visit, and I know the pressure there from Medicare, how do you think things could go this year for that number?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

I think we're going to see net revenue per visit increase. I, you know, our expectation is to see that increase at least a couple of dollars, you know, whether it's $2 or $3 by the end of the year.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

Right. And then kind of one just kind of a more high-level question, Bob. I'm looking at this big expansion plan for beds for rehab hospital relative to critical illness. And I'm wondering if this is just timing, or is this kind of a board management view of capital allocation, you know, relative to you know, given the margin profile of rehab hospital and the I think the market growth opportunities relative to critical illness?

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Yeah. I mean, it's a good question about how we think about allocating capital. It's truly all an allocation of capital assessment. You know, the rehab, the critical illness has historically been our largest division. We have a footprint of over 107 hospitals. I see that there will always be, I think, opportunities there, although, you know, we have fought some reimbursement headwinds in the critical illness. And this high-cost outlier threshold issue that we've talked about is certainly a headwind. That's not to say that rehab hospitals will not have headwinds in the future.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

But I think the way we look at it is, as we work with the kind of large partners of the type that we have signed, when you have those opportunities to do those deals, I think those are the ones that become a priority for our capital. And typically, they involve using capital to build new hospitals, which are not inexpensive. The critical illness opportunities do come about, and we tend to treat those as the ones that are absolutely the most compelling. So we will continue to do that and add new hospitals to critical illness. But when we have an opportunity to work with a great partner, as the profile of the ones that we have for inpatient rehab, we certainly want to move on those.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Our development pipeline that we've been working for years and years and years is just, it's just very robust right now. And there are some great opportunities to sign some rehab deals with just some great partners. And what we've seen over the history of the company is these partnership deals and returns and growth within the partnerships is absolutely compelling. And so we'll, and I think because of the way we structured those with the partners, they tend to have, you know, a larger moat around them and give you the comfort that even in the face of perhaps some reimbursement headwinds, if and when they come, you'll be able to navigate them better with a, with a very large system.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

I think the other thing that's not particularly well recognized is not only the signing of the new partnerships but the growth within the partnerships. I mentioned today that we are getting underway with the construction of our fourth inpatient rehab facility in partnership with the Cleveland Clinic, in their market. So these opportunities just are really compelling. Sometimes building replacement facilities or taking units out of hospitals in partnership and building those are just really great deals. So I think you'll continue to see growth in both but perhaps a bit more of an acceleration of the inpatient rehab. With the planned separation of Concentra, you know, as we look at the growth rate for the company, we'll see it in outpatient rehab, inpatient, and in the critical illness.But the rehab is a good opportunity.

Bill Sutherland
Bill Sutherland
Director of Research at The Benchmark Company

Got it. Thanks, Bob.

Operator

Thank you. One moment for our next question. Our next question comes from the line of A.J. Rice from UBS.

A.J. Rice
A.J. Rice
Managing Director at UBS

Hi, everybody. Couple questions, maybe. I just want to make sure I understand on the talked a couple times in response to questions about the outlier threshold increasing on the critical illness facilities or critical illness facilities. What that went into effect, I think, October 1. Do you get a pretty good read right away as to how that impact is? I guess I'm trying to figure out why it still is a big swing factor in the guidance if you've got a quarter's experience already.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

A.J., it really takes some time to evaluate, you know, something that significant with regards to the high-cost outlier. I mean, we went from a little bit north of $38,000 up to $59,000. So it's, remember, the length of stay of our patients is not 5 days-6 days. It's over 30 days.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

I think the other thing, A.J., is, you know, it's not hard for us with our kind of robust systems and data collection to understand the impact. We understood the impact way in advance of it going into effect. It's a question of how your mitigation strategies are going to work. And so it's not so much understanding the impact, but over the course of this year, how successful will the operators be in the mitigation? And it tends to play out and is not as easy as you would think because, you know, you want to keep your referral sources happy, but at the same time, you have to appreciate that the more high-cost outliers that you hit, the more of the losses you're going to sustain. So, you know, I think that is a reason why we've left ourselves some room on the guidance.

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. Can you, you've probably given this before. Can you just remind me, what percentage of your admissions or your volume, however you want to describe it, end up falling into that status, typically? I know it'll change with the increased threshold, but is there, can we give an order of magnitude of how many, what percentage of your patients are impacted in that business?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah, A.J. It varies pretty significantly hospital by hospital and then on average also. So we really have not provided that because of that variation.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

I can tell you that, as we look over the entire industry, Select Medical probably has more higher-cost outliers than the average of the rest of the industry because we take higher acuity patients. You'll recall that our strategy, long-held, was not to take site-neutral patients and to only take the highest acuity patients. We believe that that was the intent of the 2014 criteria. We built our clinical programs around being able to take care of those very complex patients. So this has been, you know, part of our efforts with CMS that the high-cost outlier increase of the threshold actually hurts those providers that are actually taking care of the very patients that the policy wants the LTACs to take care of. So ours tend to be higher, and so we're affected more.

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. That makes sense. I think in the Q4, you called out that you had about $3 million of startup costs for development, and that's similar to what you had in the Q4 of 2022. Have you talked about the total amount, given the development projects that are underway, joint ventures, etc., How much 2024 startup costs will be compared to what startup costs ended up being up in 2023? Is it a headwind, tailwind? How does it shake out?

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

I think for 2024, our projected startup loss is $12.3 million. That is reflected in the business outlook.

A.J. Rice
A.J. Rice
Managing Director at UBS

Do you have, if off the top of your head, do you have how that compares with 2023? Is it a similar amount?

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Yeah. It's a similar amount in 2023.

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. All right. And then, just some last question. Marty, you called out that, obviously, some of these interest rate caps and swaps, etc., expire in September. What is your assumption when you think about your outlook as to what happens in the Q4 with respect to your borrowing costs, or what mitigation strategies are you thinking about, or any comment on that?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah, A.J. We anticipate that we'll see probably about a $20 million increase in interest expense for the Q4. On an EPS basis, that's about $0.12 a share.

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. And is there any way to mitigate that in any way, or not? Not particularly. That sort of it is what rates are?

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

Yeah. At this point in time, the only way to mitigate it is to have the indices come down, right?

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. I was thinking maybe pivot to paying down, retiring debt or something like that. I know you said you didn't do any buybacks this quarter. I didn't know if anything like that was under review or not.

Martin Jackson
Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation

We will be very opportunistic, as we always are, A.J., and take advantage of any opportunity we can to get that interest expense down.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

Yeah. Well, we're, you know, we're looking at it at this point in time. It's, you know, we've got a good six months plus to think about what opportunities there are. And as Marty pointed out, that's $0.12 off the EPS that we reflected in the guidance, which, because of the cap going off. But, you know, we will find opportunities.

A.J. Rice
A.J. Rice
Managing Director at UBS

Okay. All right. Thanks, Bob.

Operator

Thank you. At this time, I would now like to turn the conference back over to Mr. Ortenzio for closing remarks.

Robert Ortenzio
Robert Ortenzio
Executive Chairman and Co-Founder at Select Medical Holdings Corporation

No closing remarks. Thank you, Operator. Thanks, everybody, for joining us.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Executives
Analysts
    • A.J. Rice
      Managing Director at UBS
    • Ben Hendrix
      VP at RBC Capital Markets
    • Bill Sutherland
      Director of Research at The Benchmark Company
    • Justin Bowers
      Equity Research Analyst at Deutsche Bank
    • Kevin Fischbeck
      Managing Director and Senior Equity Research at Bank of America
    • Martin Jackson
      Senior Executive VP of Strategic Finance and Operations at Select Medical Holdings Corporation
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