Select Medical Holdings Corp (SEM) 2002 Q3 法說會逐字稿

Good afternoon. My name is Katie and I will be your conference facilitator today. At this time I would like to welcome everyone to the Select Medical's third quarter 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press '*' then the number '1' on your telephone keypad. If you would like to withdraw your question, press '*' then the number '2' on your telephone keypad. Thank you Mr. Murphy you may begin your conference.

Good morning and thank you for joining us today for Select Medical Corporation's Investor Conference Call to discuss recent corporate developments relative to yesterday's third quarter 2002 earnings announcement. By now you should have received the press release, if for some reason you have not received the press release or are unable to log on to the web cast, please call me Donald Murphy of [Noononruco Presidence your RSCG] at (212) 845 4274 and I will be happy to assist you. This conference call is being recorded and will also be available through replay starting at 1p.m. Eastern today and running until 1p.m. Eastern on Friday November 8th. To access this replay, please dial (800) 642 1687 within the US, or (706) 645 9291 internationally. The passcode to listen to the replay will be 5910971. Speaking today, we have the company's President and Chief Executive Officer, Robert Ortenzio and the company's Senior Vice President and Chief Financial Officer, Marty Jackson. Management will give you an overview of the quarter highlights and then open the call for questions and answers.

Before we get started, we would like to remind you that this conference may contain forward-looking statements regarding future events or the future financial performance of the company, including without limitation statements regarding operating results in calendar 2003, earnings per share in 2003, growth opportunities and other statements that refer to Select Medical's plans, prospects, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to Select Medical Corporation today and the company assumes no obligation to update these statements as circumstances change. For additional information, please see the cautionary statements included in Select Medical's most recent Form 10Q or other public filings filed with the Securities and Exchange Commission. At this time, I will turn the conference call over to Robert Ortenzio. Please go ahead Mr. Ortenzio.

Good morning everyone and welcome to Select Medical's earnings call covering the results of the third quarter ended September 30th 2002. As we have done in the past I will start by providing some overall financial performance highlights and then take you through the performance of each of our operating divisions. We are pleased to report strong earnings performance for another quarter. We have exceeded expectations with fully diluted earnings per share for the quarter of 19¢ versus consensus estimates of 18¢. This represents a 46.2% increase over fully diluted earnings of 13¢ in the same quarter last year. Our net revenue for the quarter increased 16.7% to $279mln compared to $239.2mln for the same quarter last year. Our earnings before interest taxes, depreciation, amortization and minority interest for EBITDA for the quarter increased 11.8% to $29mln compared to $25.9mln for the same quarter last year. Income from operations increased 26.4% to $22.5mln for the quarter, versus $17.8mln in the same quarter last year. Our tax growth from operations was $52.3mln for the quarter and $102.8mln for the nine months ended September 30th.

Next I'll take you through some of the key performance measures for each of our operating divisions, starting with our specialty hospitals. Our hospital net revenue increased 20.2% for the quarter to $155.6mln compared to $129.4mln in the same quarter last year. For hospitals opened prior to January 1st, 2001, which I will refer to throughout as same store, net revenues increased 6.5% to $134.2mln compared to $126mln in the same quarter last year. This increase was primarily driven by higher occupancy and rates in these hospitals. Our hospital EBITDA increased 16.4% for the quarter to $16.5mln compared to $14.2mln in the same quarter last year. Same store hospital EBITDA increased 14.4% to $17.5mln compared to $15.3mln in the same quarter last year. Same store EBITDA margins improved to 13.1% for the third quarter, versus 12.2% in the same quarter last year. Occupancies in our hospitals were 69% for the quarter, up from 67% in the same quarter last year. Same store occupancy rates were 73% for the quarter, up from 70% for the same quarter last year.

Our hospital patient mix, which is based on the number of patient days, was 76% Medicare and 24% non-Medicare in the third quarter, compared to 74% Medicare and 26% non-Medicare for the same quarter last year. Same store patient mix was also 76% Medicare and 24% non-Medicare in the third quarter. Our hospital revenue per patient day or rate improved 2.2% to $1,003 per day compared to $981 per day in the same quarter last year. Our hospital pay or mix based on the latest twelve months ended September 2002 was 63% Medicare, 2% Medicaid, 1% workers comp and the balance of 34% from commercial insurance and managed care. Hospital patient days increased 17.6% for the quarter to 155,105 days compared to 131,851 days in the third quarter last year. Same store, hospital patient days increased 4.5% to 134,029 days for the quarter versus 128,311 days in the same quarter last year.

We opened two new hospitals in the third quarter and one additional hospital in the month of October, giving us five new openings year-to-date. We continue to project a total of eight to ten new openings this year.

As most of you know, CMS published the final rules for LTCH-PPS on August 30th 2002. The new system went into effect on October 1st of this year. The reimbursement system is a fixed payment, based on patient diagnosis similar to the DRG payment system utilized for short-term acute hospitals. Prior to October 1st, all LTCH reimbursement was cost based subject to a cap. This new system will reward efficient providers with an opportunity to make marginal Medicare patients. Under the new systems, providers will have a choice with each hospital to phase into the PPS system over five years or accelerate to PPS at the start of that hospital's next Medicare cost year. The Medicare year-end for Select hospitals after October 1st are spread throughout the remainder of this year and the first three quarters of 2003. It is our current expectation that over 90% of our hospitals will choose to accelerate into the PPS system, that will be 11 in Q4, 2002, 23 in Q1 of 2003, 12 in Q2 of 2003 and 22 in Q3 of 2003. The standard federal rate in the new system is $34,956, which is, weight index adjusted over a five-year phase-in. For our top five LTCH-DRG's, which make up 31% of our cases, the average payment is $41,800 with a range of $30,000-$68,000 given the high acuity of our patients. This is a positive as reimbursement under the new system is better for higher acuity patients although I point out that the cost of services are high with these types of patients as well. While we are providing no specific expectations on the financial impact of PPS, we do expect the results to be accretive in 2003. Our financial objectives outlined in yesterday's press release, which Marty Jackson will discuss today, do not include additional revenues from PPS.

Moving over to our outpatient rehabilitation division. Our outpatient rehab net revenue increased 12.3% for the quarter to $119.2mln compared to $106.1mln in the same quarter last year. Of our out patient revenues for the quarter, $83mln came from our US out patient rehab clinics, $6.4mln from our managed clinics and $29.8mln from our Canadian subsidiary and our other out patient services. Our outpatient rehab EBITDA increased 9.2% for the quarter to $19mln compared to $17.4mln in the same quarter last year. EBITDA margins were down 40 basis points year-over-year to 16% for the third quarter, compared to 16.4% in the quarter last year. This decline was a result of increased benefit expense specifically our healthcare insurance costs and our NovaCare subsidiary. Visits in our US based out patient rehab clinics increased 3.5% for the quarter to over 957,000 visits compared to over 925,000 visits in the same quarter last year. Net revenue per visit in these clinics increased to $87 compared to $82 in the same quarter last year. During the third quarter, our out patient rehab division opened 14 new clinics, acquired two clinics and closed or consolidated 13 existing clinics. At the end of the quarter, we had a total of 743 clinics operating in 32 states in the District of Columbia and seven Canadian provenances. This compares to 688 operating clinics at the end of the third quarter last year. With forty-six new developed clinic openings through September, we have exceeded our goal of 30-40 internally developed clinics for the year. I will now turn it over to Marty Jackson, our Chief Financial Officer to cover this quarter's financial highlights in greater detail as well as outline our fourth quarter and 2003 financial objectives.

Thanks Bob. We are really pleased to report another quarter of strong financial results. Our seventh straight quarter as a public company beating street consensus expectations per earnings. Operating expenses increased 17.2% to $250mln in the third quarter, compared to $213.2mln in the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter increased 40 basis points to 89.6% versus 89.2% in the same quarter last year. Cost of services as a percentage of net revenue was the primary reason for the increase in operating expenses as it rose 130 basis points to 82.8% for the third quarter compared to 81.5% for the same quarter last year. This increase was primarily the result of increased healthcare insurance expense in our NovaCare subsidiary.

G&A as a percentage of net revenue remained a consistent 3.7% for the third quarter compared to the same quarter last year. Actual G&A expense for the quarter increased 15.3% to $10.3mln versus $9mln in the same quarter last year. Bad debt expense decreased 8% to $8.6mln this quarter, compared to $9.4mln in the same quarter last year. As a percentage of net revenue, bad debt decreased 80 basis points to 3.1% for the third quarter, compared to 3.9% for the same quarter last year. While total EBITDA increased 11.8% for the quarter, EBITDA margins declined 40 basis points to 10.4% for the third quarter, compared to 10.8% in the same quarter last year. This decline was experienced in both our inpatient hospitals and our outpatient rehabilitation segments.

For our hospitals, overall EBITDA margins declined 40 basis points to 10.6% for the quarter, compared to 11% in the same quarter last year. However, same store margins improved 90 basis points to 13.1% for the third quarter. EBITDA start up losses in our newly developed hospitals and those in their pre-opening phase amounted to $2.1mln in the third quarter. Outpatient rehab EBITDA margins also declined 40 basis points to 16% for the quarter, compared to 16.4% in the same quarter last year. As I mentioned earlier, this was the result of increased healthcare expenses in our NovaCare subsidiary. Depreciation and amortization declined 20% to $6.5mln for the quarter, compared to $8.2mln for the same quarter last year. This decline results primarily from the amortization reduction from the adoption of FAS 141, 142 which decreased amortization expense by approximately $2.2mln for the quarter, offset by increases in depreciation on fixed asset additions related to new developments.

Net interest expense decreased by $200,000 to $6.7mln for the quarter, compared to $6.9mln for the same quarter last year. This decline in interest expense is a result of lower debt levels outstanding during the quarter, as well as reduced overall interest rates compared to the same quarter last year. The effect of interest rates on our credit facility debt at September 30th, 2002 was 7.5% compared to 8.1% at the end of September quarter last year. Tax expense was $6mln for the third quarter, representing an effective tax rate of 39.2%. Net income increased 47.5% to $9.4mln for the quarter, compared to $6.3mln in the same quarter last year. And as Bob mentioned EPS increased 46.2% to 19¢ per fully diluted share for the quarter, versus 13¢ in the same quarter last year.

We ended the quarter with $268.8mln of debt outstanding, total leverage or total debt to EBITDA 2.1 times. This represents a net reduction of $19.7mln in debt year-to-date and improvement in the leverage from 2.6 times at year-end 2001. Debt to total capitalization was down to 50% at the end of the third quarter, compared to 58% at the end of the third quarter last year and 55% at the end of 2001. We generated $52.3mln of cash flow from operations this past quarter, compared to cash generation of $33.5mln in the same quarter last year. This increase was the result of improved operating performance as well as an increase in our accrued liabilities. Day sales outstanding remain constant at 76 days at the end of the third quarter.

Investing activities used $15.3mln of cash in this quarter, including $10.9mln for the purchase of capital and $4.4mln of acquisition related payments. Year-to-date investing activities have used $37.1mln including $28.8mln in capital purchases. Financing activities used $5.7mln of cash in the quarter. This includes $4.6mln in debt reduction payments. We had $60mln of cash on the balance sheet at the end of the third quarter, up from $28.8mln at the end of the last quarter and $10.7mln at the end of 2001.

We are providing the following financial objectives for the fourth quarter and the full year of 2002. For the fourth quarter we expect revenue to be in the $260mln-$270mln range. EBITDA we expect to range from $34mln-$36mln and we expect EPS in the 23¢-24¢ range on a fully diluted basis. This will adjust our expectations for the full year 2002 to revenue of $1.09bln-$1.1bln. EBITDA at $127mln-$129mln and EPS on a fully diluted basis in the 88¢-89¢ range.

We expect to open four to five additional hospitals in the fourth quarter. We continue to expand bed capacity in some of our existing hospitals and we continue to open new outpatient rehab clinics. We are increasing our expectation on capital expenditures for 2002 and are now expecting CAPEX in the $34mln-$36mln range. The increase in our expectations regarding CAPEX are primarily related to the additional outpatient rehab clinic development efforts year-to-date and our previously mentioned opportunities to expand hospital beds. We will continue to take advantages of opportunities for development when those opportunities arise.

Our financial objectives for 2003 were outlined in our press release issued yesterday. Those objectives include annualized net revenues of $1.235bln-$1.275bln, EBITDA of $146mln-$150mln and fully diluted earnings per share of $1.09-$1.13.

As Bob previously mentioned, these numbers do not include any impact from the new PPS system for our LTCH hospitals. The quarterly details for these financial measures were also outlined in our release. Other objectives outlined for 2003 are capital expenditures in the $35mln-$40mln range, depreciation and amortization expense in the $30mln-$35mln range and interest expense in the $20mln-$25mln range. We expect day sales outstanding in the 68-72 day range for 2003.

We are again pleased with the financial and operational performance we experienced this past quarter and the fact that we were once again able to exceed consensus earnings expectations. The remainder of our time is allotted for your questions; we would like to open up the call at this time.

At this time I would like to remind everyone, if you would like to ask a question, press '*' then the number '1' on your telephone keypad. We will pause for just a moment to compile the q and a roster. Your first question comes from A. J. Rice with Merrill Lynch.

Hi.

Mr. Rice, your line is open.

Hi, yes, hello everyone, can you hear me?

Yes, we can hear you A.J.

Okay sorry about that. Can you just maybe first of all comment on the labor cost trends that you are seeing in both divisions?

Sure I don't think that we are seeing any material changes in our labor situation on the outpatient. On the inpatient side of the business it's probably more dramatic because of the continuing nursing shortage, but we don't see that shortage abating although the intensity of it is probably a little less than it has been historically. What we are seeing A.J. is the way we measure the nursing shortage in our hospitals is really looking at the percentage of temporary nursing that we have to use at our hospitals, compared against our total nursing salary wages and benefits. What we are seeing over the past, I'd look over like the past six quarters and that has not varied more than about 3% differences, so we are not seeing that percent of temporary nursing labor increasing dramatically. In any one quarter it's up or down but it has stayed in the range of a band of increase of about 3%.

Okay. I know in the clinic or outpatient therapy division, there has been a focus on the last two years of working through contracts due to your average price per visit up. Can you maybe just elaborate a little bit on where you are at there, what are the pricing trends of that business looking like going forward?

Well I would say that we are probably about 80% through the contracts and we've talked a lot about that over the last year as we have worked through the contracts that we inherited from our NovaCare acquisition. But I would say that about 80% of those have been through. Although I would point out that that is really ongoing, there is a general perception somehow that these contracts are a year in length and typically they are not, they are subject to be terminated by either party with typically about 90 days notice. So we continue to look at that. I think it's safe to say, A.J. that most of the large ones have been negotiated and renegotiated and we have seen a gradual up tick in the revenue per visit, which is really where the results of that manifest themselves. Marty, do you want to?

No.

Okay, all right, thanks a lot.

Your next question comes from Kent Oliver with SG Cowen Securities.

First question pertains to the PPS and I guess one topic initially would be, essentially the game plan over the next year with regard to the transition process. Where do you stand now with regard to your coding, billing, adjustments etc.? How does CMS look because I think effectively they probably wont be ready to go until January 1st, etc. and then also if you could discuss some of the longer term opportunity, beyond just whatever immediate benefit you get from transition, how the process plays out from there, thank you?

Kent, to your first question. While the reg did not come out until the end of August, call it the beginning of September, the proposed regs were out and we have been preparing for the transition to PPS for some time. We will be bringing on coders and we have been and we have been training our CEOs and the people in our hospitals where much of the responsibility will fall for the coding of the patients under PPS, which will be the biggest difference. I would point that all 69 of our hospitals, we do the billing and collection from a central location here at our corporate office. So we do have the advantage of being able to make many of the systems modifications right here with the staff that we have, so that's ongoing.

To your point about CMS being ready. It is our understanding at the current time with our hospitals that are transitioning as we speak in Q4 is that we will continue to remain on the pip-payments which are the periodic payments which some people are familiar with. And we will bill under the new PPS and then we will settle up right after January 1st, with the intermediaries who are responsible for implementing the PPS. So we feel fairly good about the efforts and the training and the response we have gotten from our hospitals that are going on in Q4. As for the more longer term, well we have looked at PPS in a lot of detail, we are really quite focused on the acceleration of most of our hospitals throughout the balance of this year to the first three quarters of next year. We do believe as I mentioned that it's going to be accretive because the advantages of the model that we have established. We have if you look across all of the LTCH hospitals in the US, I think we believe that our cost structure is below the average and we believe that our acuity of our patients that we see in our hospitals is above the average. So the combination of those two factors we think will bode well for us in our success under the new PPS system.

Looking beyond 2003, we haven't spent a lot of time doing that as you can expect, because we are really focusing on getting the systems in place and transitioning that also. I think we feel confident enough about the short and long term benefits of PPS to be able to say that our expectation is to accelerate over a minimum 90%, will be over 90% of our hospitals to accelerate into PPS.

Okay. And is there any real change in the business if you look at the context of appropriate host hospitals, attractiveness of patients and then also as you transition, what kinds of changes are you making in terms of skill, your patient mix, skill mix, cost, etc.? If you could just give a little flavor on that?

You mean the changes in those elements as you mentioned because of PPS?

Correct.

No, I wouldn't think that our model and our strategy for attracting host hospitals or the hospitals where we would establish a separate LTCH have changed. And I would not say that the profile of the patient that we have attracted historically will change with PPS either. Now there are some new answers within the PPS structure, because it's a relatively complicated reimbursement system. So we will have more things to track, but I don't think we are looking at any kind of a c-change or a material change in either the type of development projects that we will do, or the way we operate our hospitals. The key is to continue to attract the high acuity patients which we do and to continue to run at a cost level that can allow you to be successful under PPS.

That's great, thanks. And just one question on the outpatient with the healthcare cost up-kick. Is that representative of say a contract renewal or some unusual hit you took to the expense that will then bump back down in Q4 and beyond, or is this something that's going to have a little ongoing impact on margins?

Well we mentioned the increase in the expense while we saw very good progress in our outpatient route, because we were up on our revenue for visits, we were up on visits end volume but the margins were down about 40 basis points. That was a narrow issue. We went through a transition in our NovaCare subsidiary for our health insurance costs for our employees to a premium based, well we paid a premium for our health insurance costs to one where we brought those employees on to Select Self-insured plan. The insurance company that provided the health insurance prior had gone bankrupt and when we sold the experience level and our self-insured plan, we had to add to the expense. So that is something that you see the difference in the quarter comparisons and while it will be part of the cost structure going forward, after next quarter you will see that the comparisons of quarter-over-quarter will be more consistent than I think they are this quarter or perhaps next quarter.

That's great, thanks a lot.

Your next question comes from Joel Ray with Wachovia Securities.

Mr. Ray your line is open.

Sir he is not responding. We will go to our next question with David Carmen from JP Morgan.

Yes, good morning all and thanks. I actually unfortunately joined the call late, so I have two questions. I'm sorry if you have touched on them. One is could you address the non-same store revenues and EBITDA for the LTCH's opened less than twelve months?

Sorry say that again, the non-same?

Yes, sorry the non-same store revenues and the EBITDA for the recently opened LTCH's that you [harp] out same store?

David are you talking about the new?

Yes. Well how do you define same store?

So it's anything other than same store, so it would be the newly developed hospitals?

Yes, there is some significant margin dilution there and I just wanted you to illustrate how that's impacting? If you don't have an answer we can talk after the call.

Yes because we are still not sure of the question. I mean you know that we had an EBITDA loss of $2.1mln in the third quarter associated with the newly developed hospitals?

That's what I meant thank you. And could you address also that bad debt is down, I assume that's just because of receivables?

Yes, net debt is down, or debt is down on an overall basis, as well as net debt. I mean if you take a look at the net debt we are down to 210, 212, somewhere in that range.

Sorry it was bad debt that I was interested as a percent of revenue. Is it simply that that accounts receivable is short being sufficiently and it's formula driven?

That's correct. I mean if you take a look at our bad debt policy, David. It's really been applied consistently since the company's inception and I think while the bad debt percentage is down, if you take a look at the allowance for doubtful accounts, as a percent of AR, it's actually up.

By implication that it sells, so we can assume that you are probably going to stay under the 4%, you are not expecting DSO to extend?

Yes, I think that's a fair assumption.

Okay, thank you.

Your next question comes from Walter Branson with Regiments Capital.

Thank you. I have a couple of things. Regarding LTCH-PPS, you said if I understood what you said correctly, that your average reimbursement under the new system, your current acuity would be $41,800. Can you give us a number of your historical reimbursement under the cost basis [of this implication]?

Let me clarify that. The standard federal rate under the new PPS reimbursement is a little over $34,000, it's close to $35,000. What we have put out and shown is that if you look at our top five DRGs, they represent an average of reimbursement under the new system of approximately $40,000. Now was your question what is the cost associated with those?

No, my question was, what has your average reimbursement been under the cost system?

If you look at our 2002 year-to-date average cost per Medicare case it's a little over, it's about $25,000. But having said that you really can't draw the conclusion that that $40,000 is associated in any way with the $25,000 in terms of the margin that we could expect. What you have to understand is the illustration is that our top five LTCH-DRGs, while the new reimbursement will have an average of $40,000, those are for the very high acuity type cases. So you get much greater reimbursement for those, but your cost for those, for the care patients in those types of diagnosis is also much higher as well. For example, our highest DRG is respiratory with ventilators. The reimbursement for that is over $68,000. So it's difficult to equate that with what the average is for all of our costs over all of our patients. And we have not broken out what our costs are for individual types of cases.

Okay, so there's no apples-to-apples comparison?

That is not a true apples-to-apples. The illustration is that we do take care of higher acuity patients for those DRGs and for those you will get under the new system, a higher reimbursement.

Okay, but the standard federal rate of $35,000 reflects all acuities, right?

That standard federal rate under the new system of $34,956 is the base which you can really view as the base rate. Then every one of the DRGs will be a factor of that. It can be anywhere from 0.5 of the $35,000 to a 1.6 of the $35,000, so that's how you get for certain types of diagnosis, you get much higher reimbursement.

Okay. Your reimbursement under LTCH-PPS will decrease by I think you said an inflation wage factor. Can you give us some color as to what your expense is, your cost of operating that business on a same store basis have been increasing and whether you think that the inflation factor contained in the new regs will offset the cost increases in your experience?

Well what I mentioned was that the new system has a, most new reimbursement systems that come out for Medicare have a wage index adjuster. In other words whatever the reimbursement they give for a certain type of case is affected by your wage index depending on where you are in the US. So more urban areas will have a higher wage index. The point with this reimbursement is because CMS didn't find a correlation. A high correlation was that they elected to phase in the wage index adjuster over a five-year period. So that may or may not effect any one of our individual facilities either positively or negatively depending on what location, what is the wage index of the city of metropolitan area that they are in. So I really can't comment on how that would affect.

The second part of your question which is what has our cost bid increasing year-over-year for operating our business. Marty do you have that number?

We don't have that specific number Bob, but Walter what we would like to do is also talk to you about, and you are looking specifically at Medicare. Medicare constitutes 61% of our payer mix. We also have the commercial side where if you take a look at the rates there that are going up, you know on average over the past three years, we have been going up 8.8%.

Okay. But under the new system is the only annual update you get wage index or do you do an annual update?

Yes, we'll get updates as other acute hospitals do. What they view as a market basket increase. There are likely to be increases much the same way as you see those increases come through for acute care hospitals over time.

Okay and my final question is you now have a fairly significant amount of cash on your balance sheet. Do you intend to pay down debt or keep the cash around for future opportunities?

Yes, we are currently taking a look at that right now Walter. Probably you won't see any pay down in debt until after the first of the year. One of the issues is we have a hedge in place, that that hedge goes away at the end of the first quarter and because the accounting issues associated with that hedge we have not accelerated the amortization of the current debt.

Okay. Great. Thank you.

Your next question comes from Charles Lynch with CIBC World Markets.

Thanks a lot. I have two quick questions for clarification. Bob, in your discussion of the PPS and trust me I just have one question here. You mentioned that the top five DRGs are 31%, is that of your census?

No, that's of our cases.

Of your cases, sorry. Just wanted to make sure I had that correct. And then secondly, Marty on the balance sheet, what I noticed was a decent uptake in some of your current liability accounts. Excluding current debt they were up around $30mln from the second quarter and I was just curious if that is something that is temporary or if we should expect those levels going forward if there is anything specific in those accounts?

Charlie, it's really, if you take a look at the timings of the payroll accrual. I think that was about $7mln-$8mln, in addition to that you have the interest associated with the high yield, you know if it's paid on an semi-annual basis.

Okay, so some of those are indeed fairly timing related?

Yes it is.

Okay, great, thanks a lot.

Your next question comes from Ellie Rozinski with Jeffries.

Yes, first of all congratulations on a good quarter. A couple of questions for you concerning your outpatient rehabilitation. You mentioned that you renegotiated most of your managed care contracts. What type of rate increases are you seeing there and also are you seeing any of the managed care companies, given what Medicare has done, try to renegotiate and moving concurrent therapy and calling that group therapy now?

Yes, we have gone through most of the outpatient rehab contracts, we still have a few to go. What type of rate increases are we seeing, I mean you can expect modest rate increases we think from now on to the future.

Your second question was whether managed care was renegotiating their contract based on the recent clarification memo on group therapy. We think the same. We have seen none of that.

Okay. Have you seen any things out of Medicare or out of managed care to try to recoup past monies? You know I guess let's say from 1999?

No we have not.

Okay thank you so very much.

The next question comes from Mersion Garrett with RBC Capital Market.

Yes, I just have a quick housekeeping question. What's the CAPEX figure for Q1 2003? What's your guidance for the entire year for 2002?

2002? The CAPEX is $34mln-$36mln.

And in 3Q do you have, can you give guidance for the numbers and how the number of admissions, the number of licensed beds have increased in specialty hospitals?

I tell you what, we don't have that number at hand right now. If you can give me your number I'll get back to you offline.

Sure. I tell you what I'll just give you a call later.

If you can give me a call that would be great.

Ladies and gentlemen we have reached the end of the allotted time for questions and answers. Mr. Ortenzio are there any closing remarks?

I want to thank you all for your participation on the call and we were pleased with the quarter that we had and we will look forward to updating you on the company's progress at the end of this quarter.

This concludes today's Select Medical's third quarter 2002 earnings conference call. You may now disconnect.