Select Medical Holdings Corp (SEM) 2010 Q1 法說會逐字稿

Good morning and thank you for joining us today for Select Medical Holdings Corporation earnings conference call to discuss the first quarter 2010 results and the Company's business outlook. Speaking today are the Company's CEO, Robert Ortenzio, and the Company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter highlights 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's plans, expectations, strategies, intentions, and beliefs. 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 Robert Ortenzio.

Thank you and good morning, everyone and thanks for joining us for Select Medical Holdings First Quarter Conference Call for 2010. For our prepared remarks, I'll provide some overall highlights for the Company and our operating divisions, and then ask Marty Jackson to go over some additional financial details before we open the call for questions.

Earnings per fully diluted share were $0.15 in the first quarter compared to earnings per share in the first quarter last year of $0.27; however it's important to note that a significant portion of the earnings in Q1 of 2009 was derived from the repurchase and retirement of some of our senior subordinated notes at very attractive prices. Excluding the non-recurring gain and adjusting for the reverse split of common stock, the preferred stock conversion, and for the initial public offering and related interest reduction from the debt repayment, we estimate earnings per share in the first quarter last year would have been $0.12 representing a year-over-year gain in EPS of 25%. Net revenue for the first quarter increased 4.2% to $584.8 million, compared to the same quarter last year. We generated approximately 70% of our revenues from our Specialty Hospital segment, which includes both our long term acute care hospitals and inpatient rehab hospitals, and 30% from our Outpatient Rehabilitation segment, which includes both our outpatient clinics and our contract services.

Specialty Hospital net revenue for the first quarter increased 4.7% to $411.7 million compared to the same quarter last year. The primary driver behind the increase was additional volume as admissions increased 2.7% and patient days increased 4.5%, compared to the same quarter last year. The growth in volume was the result of both increases in our same-store hospitals, including those facilities opened in 2008, as well as additional volume in those hospitals added in 2009. Overall occupancy rates were 70% in the first quarter compared to 68% in the same quarter last year. Rate was relatively flat as net revenue per patient day was $1,511 in the first quarter compared to $1,508 per day in the same quarter last year.

Net revenue in our Outpatient Rehab segment for the first quarter increased 3.1% to $173.1 million compared to the same quarter last year. During the first quarter, approximately 66% of our outpatient revenue came from our owned clinics and 34% from our contract services and managed clinics. This was primarily the result of increases in our contract services business. We also experienced slight increase in our clinic based revenues as volume increases offset pricing reductions in that business. Patient visits increased 2.7% compared to the same quarter last year while rate declined 1.9% compared to the same quarter last year. The rate reduction was in part due to a migration of patients in one of our major markets from a PPO to a managed care plan which resulted in significantly lower rates in that market.

Overall adjusted EBITDA for the first quarter increased 6.1% to $90.9 million, compared to the same quarter last year, with overall adjusted EBITDA margins at 15.5% for the first quarter compared to 15.3% margins in the same quarter last year. Specialty Hospital adjusted EBITDA for the first quarter increased 8% to $82.9 million compared to $76.8 million in the same quarter last year. Adjusted EBITDA margins for the Specialty Hospital segment increased 60 basis points to 20.1%, compared to the same quarter last year. A significant contributor to the growth in the adjusted EBITDA for the segment was a result of the financial improvement of the hospitals added in 2008. These hospitals had adjusted EBITDA of $3.3 million in the first quarter, compared to losses of $200,000 in the same quarter last year.

Outpatient Rehabilitation adjusted EBITDA for the quarter decreased 3.6% to $20.5 million, compared to $21.3 million in the same quarter last year. Adjusted EBITDA margins for the outpatient segment decreased 80 basis points to 11.9%, compared to the same quarter last year. We did experience weather-related challenges particularly in the Northeast during the first quarter. This resulted in declines in expected volumes and incremental costs related to lost productivity and the need to use higher cost agency staffing at some of our locations. We estimated the weather impacted our business by approximately $2 million for the quarter.

I also wanted to provide you some updates since our last quarter's call. If you recall, we received a letter from the Senate Finance Committee on March 8 in response to an article published in the New York Times in early February. The Senate Finance Committee asked us to respond to a variety of questions regarding our long term care hospitals. On March 23, we responded Senate Finance Committee's letter and intend to fully cooperate with any further questions they may have. We have not heard anything back from the Senate Finance Committee since responding to their letter.

On the regulatory front, several things have occurred since our last call that are worth noting. In March, the President signed the Patient Protection and Affordable Care Act which included a two year extension through 2012 of the moratorium on new LTACH hospitals and many of the payment provisions related to our long term acute care hospitals, including relief from the 25% rule, the so-called very short stay outlier rule, the ability of CMS to make budget neutrality adjustment to PPS payment rates. On May 4, CMS released proposed annual payment rates and policy changes for October 1, 2010, for the LTACH hospitals. We have calculated the overall impact of these changes, which include a decrease in the base rate of 0.1%, an increase in the high cost outlier by $267, a change in the wage index and labor related portion and a change in the LTACH DRG weights and the geometric mean length of stay. These proposed changes would reduce Medicare payments by approximately $1.6 million annually for the Company, assuming our patient mix remains constant.

The patient Protection Affordable Act also extended the exception process related to outpatient therapy caps through the end of 2010. The exception process allows Medicare beneficiaries to go over a specified annual dollar caps for the provision of therapy services, for services that are documented and deemed medically necessary. The therapy caps had no impact on our outpatient clinics this quarter.

The President also signed in April the Continuing Extension Act of 2010 which included a retroactive block on a scheduled 21.2% rate cut in the physician fee schedule through May 31 of this year. Since 2002, scheduled reductions in the physician fee schedule that are based on sustainable growth rate formula have been prevented by either CMS or Congressional action. Our outpatient therapy services to Medicare beneficiaries are paid for based on the physician fee schedule. If the rate cuts go into effect after May 31 without further action, we estimate this would have an approximately $2.5 million quarterly impact to our revenue. The final point I would like to make in the regulatory area is in regards to RUGS 4. As most of you know, RUGS 4 will be implemented as of October 1 of this year. This regulatory change will have a slight negative impact to our contract therapy business of approximately $700,000 in Q4 of this year. On an annual basis, we expect it to be less than $3 million.

I'll now turn it over to Marty Jackson, our Chief Financial Officer, to cover some additional financial highlights for the quarter.

Thanks, Bob.

As Bob mentioned, our Specialty Hospital revenue per patient day was $1,511 in the first quarter, compared to $1,508 in the same quarter last year. I wanted to highlight an important point related to the year-over-year rate change. If you recall, CMS issued a new rule effective June 3, 2009, which adjusted Medicare LTACH DRG rates downward by 3.9% in our long term acute care hospitals to account for a previous formula in the rate setting. Adjusting Q1 09 per patient day rate for this reduction would have resulted in a rate of $1,487 or a year-over-year rate increase of 1.6%.

Our operating expenses, which include our cost of service, general, and administrative costs and bad debt expense in the first quarter, increased 3.9% to $494.5 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter were 84.5%, compared to 84.8% in the same quarter last year. Cost of services increased 4.6% to $472.4 million for the first quarter. As a percent of net revenue, cost of services was 80.8% for the first quarter, compared to 80.4% in the same quarter last year. G&A was $12.8 million in the first quarter, which as a percentage of net revenue was 2.2%, compared to 2.3% for the same quarter last year. Bad debt as a percent of net revenue was 1.6% for the first quarter, which represents a 50 basis point drop from the same quarter last year and a 20 basis point drop from Q4 of 2009.

On a related note, our accounts receivable balance increased $53.9 million in the first quarter compared to year-end 2009 while our Balance Sheet allowance for doubtful accounts declined $3.4 million in the same time period. In addition, we experienced a seven day increase in our Day Sales Outstanding or DSO compared to year-end 2009. There's some important items to note when looking at the trend in bad debt and accounts receivable. Five of the seven day increase that we were impacted by was due to our inpatient periodic interim payment or PIP. Three of the five days increase associated with PIP was the result of timing of our PIP payments. We actually received PIP payment one day after the close of the quarter on April 1 in the amount of $32 million. Two of the five days in creased associated with PIP was due to seasonality of our business. How PIP payments are adjusted every six months and given the seasonal changes in our volume and our patients acuity, we were underpaid by PIP. It's important to note that this is a normal business occurrence for us, as the PIP payments are adjusted due to the increases in volume and patient acuity, the receivables will basically be paid off.

We also had an additional one day increase resulting from the timing of getting our change of ownership and new Medicare providing billing number for SSM joint venture, which was added in the fourth quarter last year. We recently received our provider number and have commenced billing for the SSM joint venture. While we experienced a $53.9 million increase in net AR for the quarter, $41.2 million of the increase related to Medicare accounts that are showing in our current aging periods. In addition, we also continued to realize significant cash collections for receivables over 180 days in the first quarter with net AR before the allowance greater than 180 declining by $5 million compared to year-end 2009. This again, similar to the fourth quarter, had a positive impact in our bad debt accruals. I will again note that we continue to utilize the same methodology for the bad debt calculation that we have used for over the past decade.

Turning back to the income statement, as Bob mentioned, total adjusted EBITDA was $90.9 million for the first quarter and adjusted EBITDA margins were 15.5% compared to adjusted EBITDA of $85.7 million and 15.3% adjusted EBITDA margins in the same quarter last year. We were happy with the performance of both our business segments for the quarter, especially given the weather impact to our outpatient business. As Bob stated previously the weather impacted our outpatient business by approximately $2 million. If you were to adjust the outpatient numbers for this impact, our outpatient business would have had an EBITDA margin of approximately 12.9%. Depreciation and amortization expense was $17.7 million in the first quarter, same as the first quarter last year. Net interest expense was $30 million in the first quarter, down from $34.6 million in the same quarter last year. The reduction in interest expense was the result of lower debt levels during the quarter resulting from the payment of debt with proceeds of the initial public offering in the fourth quarter of last year.

The Company recorded income tax expense of $17.1 million in the first quarter, which represents an effective rate of 40% compared to the effective tax rate in the same quarter last year of 41.9%. The lower effective tax rate experienced in the first quarter is due to a reduction in our tax rate for State and local taxes and a reduction in the amount of tax reserves provided on uncertain tax positions. Net income attributable to Select Medical Holdings was $24.2 million in the first quarter and fully diluted earnings per share were $0.15. We ended the quarter with $1.4 billion of debt outstanding and $73.2 million of cash on the balance sheet. Our debt balances at the end of the first quarter included $167.3 million of HoldCo senior floating rate notes, $137.7 million of HoldCo senior subnotes, $611.5 million of 7.625% senior subnotes, and $483.1 million of term loans outstanding, with the balance of $9.6 million consisting of other miscellaneous debt. You will notice a $51.6 million increase in the current portion of the long term debt in this quarter. This relates to our term loan B which has $47.8 million quarterly amortization payments required at the end of the first three quarters of 2011 and a final payment due in February of 2012. As I'm sure most of you have noted our existing revolver is now current and a portion of the term loan B has also gone current. We're exploring our refinancing options at this time and expect to have a plan in place over the next quarter.

Operating activities used $15.8 million of cash flow for the first quarter compared to cash flow usage of $20.7 million in the same quarter last year. As we stated before, DSO was 56 days at the end of the quarter compared to 49 days at December 31, 2009, and 59 days as of March 31, 2009. As previously discussed, this was primarily the result of timing of our PIP payments from Medicare. Investment activities used $13 million of cash flow for the first quarter for purchases of property and equipment. Financing activities provided $18.3 million of cash for the first quarter. The financing cash flows were primarily the result of our bank overdrafts of $17.3 million. I also wanted to reaffirm the financial guidance the Company previously included in its 8-K filed on January 11 with the SEC. That guidance included expectations for net revenue of $2.38 billion to $2.42 billion, adjusted EBITDA of $360 million to $370 million, CapEx of $50 million to $60 million, and free cash flow of $120 million. Finally, we've received many questions on the use of our free cash flow, and I just want to reiterate that our priorities for our free cash flow is to continue to pay down our debt unless there are acquisition opportunities that meet our requirements. That concludes our prepared remarks.

We would like to ask the Operator to open up the call for questions.

(Operator Instructions).

Your first question comes from the line of Frank Morgan from RBC Capital Markets. Please proceed.

Good morning. A couple questions.

First, a simple one. On bad debt, is this a good provision, is this a good run rate to assume going forward?

Frank, we're getting that question a lot. I think in that 1.5% to 1.75% is probably a good rate.

Okay.

Then secondly, you alluded to this in your prepared remarks, in terms of the balance sheet activity you've got going on, can you talk a little bit more about the strategy there in light of acquisition opportunities? And update us on what's going on in the JV front, anything you're seeing there?

Then I know that you have a good slug of swaps that roll off on a good chunk of debt here over the course of the year. Can you talk about how that might affect your view on the earnings outlook? Thanks.

Yes, Bob, why don't you talk about the JV first.

Yes, I'll hit the JV first, Frank. As you know, we have two existing joint ventures and I'll just comment briefly on those, one with Penn State Milton Hershey Medical Center and one with SSM Healthcare in St. Louis. I'm pleased to report that those joint ventures are going very well and I'm quite pleased with how the execution has gone on those first two, so it reaffirms the importance of that in our overall strategic vision of how the Company is going to grow going forward.

In terms of the pipeline for future deals, we have previewed to the market during the road show and the IPO and since then that we would like to and feel we can have one more joint venture done this year. I am hopeful that that can be done. We can continue to work on a variety of deals. Some are further along than others. The timing on these is just very difficult and I think the better the deals, sometimes the longer they take.

I've said in prior calls that the SSM transaction took 18 months for us to fully negotiate. There's just a lot of moving parts when you consider that it's not only for inpatient rehab but outpatient and contract and management and contract therapy and the like, so we are working diligently on some deals and I still hope to be able to get another one across the finish line this year.

Frank, to address your questions on the swaps, we have swaps rolling off actually this month. We have $200 million of swaps rolling off this month, which is right now incrementally about 400 basis points over the existing LIBOR, so there's a real benefit there. I hesitate and let me continue along the swaps discussion. We also have $200 million worth of swaps rolling off as of August and then -- which also has a little bit North of 400 basis points incremental difference between what the current rate would be versus the swap; and then finally, $100 million of swap rolling off in November with about the same modification.

I hesitate to give you a number just because we can't predict where LIBOR is going to go, but I think you guys can make your own judgment with regards to that, and then finally as far as you had a question on the capital structure?

Yes.

Okay. Right now, our focus is on the revolver and we've been in significant conversations with our bankers and we feel quite confident that over the next quarter we will probably have something done there.

We also always examine our cap structure to see what's going on in the marketplace and to see if it makes any sense to make any adjustments.

Anything you're seeing beyond the JVs? Anything that you're seeing in the marketplace as it relates to just acquisition activity, be it rehab hospitals or LTACH's? Thanks.

And we are always looking and as you know I can't comment more on that other than to say that if you look at how the Company is positioned right now, we've said that the joint ventures are a priority, but if we found an acquisition either primarily in the inpatient rehab or the LTACH that was very attractive in terms of how it strategically fit with the Company and also attractive in terms of the economics, then we wouldn't hesitate to pull the trigger. We feel as though our business, our platform, and our Management would be easily able to absorb a transaction if we found one that fit our criteria, so we are not averse to doing one, but as Marty pointed out in the absence of it we'll use our free cash flow to improve the balance sheet.

Thank you.

Your next question comes from the line of Whit Mayo from Robert W. Baird. Please proceed.

Thanks. Good morning.

The first question I have is back to the New York Times article and, clearly, one of the more disturbing claims in the report is the claim that your quality of care is four times worse than just about any hospital company or LTACH provider that they compare you to so my question is have you guys been able to do any work or analysis to see, first, where they get that information from and how they cut the data? We just had a hard time getting our arms around the source of that information.

Well, yes, thanks for the question. We had a hard time getting our arms around the source of the information as well, and we have dug into it internally. We've done some work and we've used some outside resources and the conclusions that we come up with are really diametrically opposed to those that were reported in the New York Times.

In fact, when we look at our survey history and the point that you're talking about in terms of quality, quality measured by the number of what they call condition level survey deficiencies in our hospitals over the course of either three years or last current survey and we've looked at the data in a lot of different ways and we absolutely cannot replicate the conclusions that the New York Times came up with. In fact, what we've come up with is that our survey history is significantly better than our peers and significantly better than the acute care hospital or hospital industry as a whole, so we have focused on that because that probably more than anything else that was in the article was troubling. I've said publicly, I've said at conferences that we think that that information is wrong.

We don't know how they got to it. I have some ideas and we have some thoughts of how they may have gotten to it using inaccurate raw data, doing some rounding of the number of beds or facilities that we have by perhaps as much as 47%, so we're unable to duplicate the work that they did, but I think the more thoughtful and detailed work that we've done over the last 45 days says that that information is just absolutely inaccurate. I have gotten some questions on some 101s, on why we haven't been more proactive in getting that information out and I would just say that the, and I've said previously that the New York Times article itself did not have a negative impact in our business, and I think that you can see that from the last two quarters or since February, if you look at our operations, our business, our volume especially on the inpatient and outpatient. If you look at our partners, our referral sources and our physicians, we have not had a negative impact in the New York Times article.

I am more concerned about the letter and the inquiry from the Senate Finance Committee, because I think that's potentially a larger issue as I think many people have identified, so I think you can assume that most of our dialogue with regard to the inaccuracies of the New York Times articles have been targeted toward the Senate Finance Committee; and at this point in time we really don't think it's a priority and necessarily a good idea to be battling with the -- or putting a lot of information out publicly when our priority is really on Senate Finance for right now. So I think it's possible that you may hear more from us in the future, but for now, this is how we've identified our priorities.

No, that's really helpful,

Marty, just looking at the Specialty Hospital revenue, how much of -- when I think about the budget neutrality error adjustment, how much of that revenue is actually subject to the adjustment? I just can't recall if that impacts the short stay or the high cost outliers.

That's a good question, Whit.

It will not impact anything that's associated with cost so if you take a look at the short stay outliers, if you take a look at the high cost outliers, it would not impact that and that probably represents -- DRG payments probably represent 60% to 65% of our Medicare revenue.

And Medicare is how much again?

I think it's about 70%.

Okay, that's helpful.

Back to the comment that you made about the shift between PPO and HMO with your outpatient clinics, can you maybe help us pars out the differential and the rates there?

Yes, it is north of $20 a visit, so it's pretty significant.

How much of your book of business is exposed to that?

Well, New Jersey is a very, that's the area where it is and it's a very populated area as far as -- I think we have north of 100 clinics in that marketplace.

Okay, that's helpful.

Do you think you may have opportunities to go back to that particular payer?

Yes. If you take a look at the history of the contract, the HMO/PPO mix hasn't changed over the list five or six years. I really think this is reflective of some of the things going on with the economy where people may not actually be getting the choice to do the PPO anymore and they are being pushed into the HMO.

Okay.

So what we have to do is go back and renegotiate the rates we're getting on the HMO side.

That's helpful.

One last question, just back to the same-store margin improvement for the Specialty Hospital division. If you could cut that one or two levels deep, how much of the margin improvement do you think was driven by the '08 class of acquisitions? Just trying to understand the improvement there a little further.

Whit, could you restate that question?

Yes, I think your same-store margins were up 110 basis points in that segment and I'm just trying to get a sense of how much of that improvement was driven exclusively by the '08 --

Okay, so you're talking about the class of 2008 hospitals?

Yes.

Yes, what you have to do is when you take a look at that class what we said is we anticipate that that class of hospitals will fully mature by the end of 2011. They basically, as you know, they lost about $25 million in 2008; they basically broke even in 2009. If you take a look at our margins on our mature hospitals at 20%, I'd assume a linear approach, so by the end of this year, I anticipate they will be at 10%, so this first quarter, it's a little bit less than 10% I think.

Okay, that's helpful. Thanks a lot guys.

Yes.

Your next question comes from the line of AJ Rice from Susquehanna.

Hi, everybody. A couple questions if I might.

First of all, obviously you went through what impacted the margin in the outpatient business this quarter, weather and some changes in contracting and so forth. Can you just comment, though, on your long term thinking on that business? I know there's been discussion that you think that business has a couple hundred basis points over three or four year period of margin potential improvement. Is that still your thought or has any of these factors changed that outlook?

Yes, AJ, two comments on that. Number one is we were very pleased to see, on a year-over-year basis, business go up. I think when you go out and take a look at the marketplace a lot of those people are experiencing that business go down so for us seeing that business go up is a very positive thing.

Number two is when we take a look and just segment the Healthsouth outpatient clinics that we acquired, those did perform much better than they had in the first quarter of 2009, so we anticipate that we are on track. You're absolutely right, we talked about a 500 basis point differential between our legacy clinics and the Healthsouth clinics. We think that we're going to be able to significantly reduce that probably to the extent of 200 to 250 basis points this year and then close the gap fully by the end of next year.

Okay.

The contract therapy business, I know that's embedded in the outpatient business. It sounds like it may be getting to the point where it's significant enough to talk on a stand alone basis. Can you just make some comments about the business environment there, your ability to win new contracts if you're winning new contracts?

You comment the on RUGS 4 impact, but I was just curious whether you thought that would affect willingness on the part of nursing homes to add contract therapy, do you see that business coming under some pressure as a result of Rugs 4? Just gives some flavor for where things are in that.

Well, AJ, this is Bob. Let me talk about the strategy for that business and you're right. It's been growing and it's been a good performer for us. Unlike most people that are in that industry, they typically a lot of the larger companies are owned by companies that have significant skilled nursing facilities. Our Company obviously provides 100% of their business to third party clients, so we tend to have the smaller regional chains or the stand alones because we don't have the opportunity to contract with the big skilled nursing chains that have their own company, so that's a business that we have grown exclusively by Denovo new contracts. You don't really have the opportunity in that business to grow by acquisition, so when you look at our hospital business whether it's LTACH or rehab, that contract business will never grow as fast as those two businesses, because, as you know, periodically we make acquisitions in the LTACH or the rehab business and the contract business is just growing incrementally through new contracts.

Having said that, it is a good business. We see that there is a lot of talk about modifications on how the nursing homes will be reimbursed and that's going to be impacted because we're driven by the needs of the skilled nursing facilities so we want to be responsive to their needs, but we still think that no matter what they are going to have need to have contract therapy provided, particularly the smaller ones and twos and smaller regional ones that don't have the opportunity to employ and keep their own therapy staff which is, obviously, something we think we're pretty good at.

So, I think that as that reimbursement gets tweeked, we will see an impact even though we don't bill Medicare directly, we'll see the impact through our clients, so we're keeping an eye on that and my comment about the impact that we were seeing through the discussions of RUG 4 is the best we can calculate based on what we're hearing. I actually can't quantify it anymore than that just because the nature of us as a contract provider to skilled nursing, but having said that, I would say we also provide that service to schools and school districts and assisted living and other providers that have a need for contract therapy.

And then the last question for me is another broader one. Obviously, health reform passes, we've got this two year extension of the various holds on reimbursement changes. What happens between now and the end of 2012? Is it a stand down for the rest of this year and into early next year or are there things you're trying to do to get positioned either from a business standpoint or in discussions with the policy makers in Washington that may be worth highlighting?

Well, I hope it is from a regulatory standpoint somewhat of a stand down. We would certainly like to have the next two and a half years of some stability and predictability, within the tweeks you get every year and the IPPS regulation, market (inaudible) adjustments, and so forth.

Having said that, what I think needs to be done between now and the expiration at the end of 2012 is the industry has to move toward a more defined patient and facility based criteria to more further narrow and define the LTACH. As I've said the LTACH are very regulated now, but I think it would benefit greatly by having a patient and facility criteria and that's going to be the discussion with the policy makers between now and the next 12 to 18 months and then I think it's important and I think that the other companies in this space, in the LTACH space believe that it's important as well .

This industry is changing. There was a time when there was only one publicly traded healthcare company that had LTACH presence and now there's three with a Select Medical, Kindred, and Rehab Care, so I think that as we coming to in our association, we'll be talking more about patient and facility criteria and pushing that for the industry as a whole over the next 18 months so we think we can have it in place before the end of

Great. Thanks a lot.

Your next question comes from the line of Kevin Fischbeck from Banc of America. Please proceed.

Okay, great, thank you. That was very helpful to provide the Class of 2008 stats.

Just remind me what is now in the non-same-store number, the two Denovo's you did last year as well as the JV?

Yes, Kevin, in that category, there's the two acquired hospitals in 2009 plus the JV, so there's three.

Okay and is it right to assume the JV is profitable and the other two hospitals that are creating the negative number in the quarter?

I'm sorry, Kevin, could you repeat that?

It looks like the non-same-store number was a negative earnings number. Is it right to assume that the JV is profitable and it's the other two facilities that are creating that drag?

Well, I think we can say that the JV is profitable. The other two hospitals are negative.

Should we expect a similar ramp up in those hospitals to the timeline we saw for the 2008 hospital?

Yes, I think so.

You didn't really mention the therapy caps. Did that have much of an impact on the quarter?

I think we did mention it and I think I said it had no impact.

Okay and finally, you did a good job moving occupancy up into the 70% range in the quarter. Where do you think that number can go? Is there much room to go from here?

Well, some of that is seasonal. I'd be hesitant to give you a number that we could move that up to. It's driven by a lot of factors in certain regions, so I don't want to make any kind of projection about where it could go. We're always looking to increase occupancy and we certainly have opportunity to do it, so we'll be pushing on that, but I don't want to get out there with the number.

Although, I will say that historically, we've been in that 65% to 68% range and given the fact that development that really -- there is no more development on the LTACH side, I do think that we will see some increases in that.

Now, Bob's exactly right that when you take a look at our top quarters, top quarters are typically in Q1 and Q4, so you're going to see higher occupancy in those quarters.

Okay, great. Thanks.

Thanks, Kevin.

Your next question comes from the line of Gary Lieberman from Wells Fargo. Please proceed.

Thanks, good morning.

Was wondering if maybe you could comment on the proposed regulations, the reimbursement for 2011 and where it came in verses your expectations? What, if any, pressure could it put on the business next year?

I assume you're talking about the proposed payment rate updates for the LTACH?

Correct.

Yes, that's always a mixed bag. You get CMS giveth and they taketh away all at the same time in these regs., so you saw in this proposal, you saw a decrease in the federal base rate, an increase in the high cost outlier threshold and you have the wage index and labor related portion and then you have the changing of the weight.

Now, we break that down and we look at our business into each component what it means. What I gave in my prepared comments was that we looked at that as a total estimated impact of $1.6 million, so in our view, fairly modest impact. If you look at what we build into our numbers when we project or when we go out with guidance, I think we always assume that there's going to be no increase.

You don't see us building into our numbers market baskets of 2% or 2.5%, although quite honestly in the proposed rate there was a market basket increase of 2.4% and then it was subtracted by 2.5% negative to account for increases in case mix in prior periods that resulted in changes in documentation and coding practices, so this is kind of that black box that CMS works with, so that's how we've looked at it. Is that responsive to your question?

Yes, that's very helpful.

Any thoughts in terms of chances for getting better in the final rule or do you think the chances are maybe less than in prior years?

I'm never optimistic, but usually the history is it doesn't get worse, so if at anything it will get better. Maybe it will get a little better on the margin, but I don't anticipate having a surprise to the upside when the final rule comes out, anyway not one that's meaningful.

Okay, great. Thanks a lot.

Your next question comes from the line of Shelley Gnall from Goldman Sachs. Please proceed.

Great, thank you. I'd like to go back to the rate seen for the specialty segment. I think what we saw, if you look at revenue per patient day in the first quarter, there was about a 1% decline sequentially from the fourth quarter. I'd love your comments on whether, first, that's a reasonable way to look at it.

I think historically you've tended to see pretty flat pricing on a revenue per patient day basis from the fourth quarter into the first quarter, because we shouldn't be seeing much change from the Medicare rates. Anything specific to the first quarter or to the fourth quarter of '09 that would be causing any noise in the comparison?

No, Shelley. I really think it's a function of the acuity of the patient that we're seeing and obviously you're looking at the $1,553 versus the $1,538?

Well, I'm looking at the $1,528 in the fourth quarter.

Yes, $1,528 versus $1,507, I'm sorry.

Yes, so is it just lower acuity during the first quarter than the fourth quarter?

I think that's probably right.

Okay, and that doesn't seem like a reasonable carry forward for the pricing that you saw in the quarter, understanding that we've got the Medicare, the June Medicare rate adjustment that came in June of 2009, that should anniversary in the third quarter, but at least going forward does the pricing that you saw in the revenue per patient day seem like a decent run rate?

Yes, it does.

Okay, great and then just a question for you.

It looks like your admission strengths were pretty good, but can you comment, I'm following the New York Times article and the Senate Finance Committee investigation or questioning. Have you seen any changes to your physician referral patterns? Can you talk about maybe the discussions you've had, just anecdotally with an update on how you're handling that process with your physicians?

Well, as I stated, we have not seen any discernible change. We had our annual CEO Medical Directors meeting last month where all of our medical directors and CEOs gathered for our annual meeting, so I had a chance to anecdotally talk to many of them. I think what you find is that healthcare is a very local market, so referral sources know their individual hospital. They don't react to kind of these broad statements, so I think, in part, maybe they say that's not the Select Medical I know, that's not the hospital I know here. They are obviously very aware of the quality of the care, the reputation of their local hospital, so that's what drives them and they're intimately involved.

Just like our host hospitals where we have hospitals within hospitals. I've spoken to many of them and they -- it was really a non-issue to them, because they are obviously intimately aware of the care. If you're one of our hospitals and they are referring their patients there they get feedback from their medical staff and from their people and their hospitals, so they already have a very -- they don't have to read the New York Times to know what their view is, their professional view of their quality of the hospital that they perceive.

Some of the more sensationalistic things in the that were in the Times article about going back to an individual patient case in litigation going back to 2003, most people in healthcare will look at that that work inside hospitals and say what hospital in the country could you go look back over a seven year period and not find cases that you could look at and say it was a bad outcome or unfortunate outcome or whatever it was and I'm might commenting on a specific case, so we didn't see that.

This really became more of a corporate issue particularly with the follow-up of the questions from the Senate Finance Committee that we saw. If you look at our business and our admissions and our trends since February, I think it pretty much bears out. Actually, take my word for it that it bears out what I'm saying about the confidence that our referral sources continue to have.

Great. Appreciate it. Thank you.

Your next question comes from the line of Miles Highsmith from RBC Capital Markets. Please proceed.

Hi, good morning guys.

Marty, I just want to make sure I understood everything correctly on the cash flow and DSOs. Is it right to think about the seven days that five of the seven are related to payments ultimately and you got one more from SSM that's going to be a timing issue too, so six of the seven days should be working their way back out in the next couple quarters?

I wouldn't think it would be the next couple quarter, Miles. I would think it would be in the next quarter or two.

As we revised the PIP payments, you will see a reduction in DSO.

Okay, perfect.

And then just curious, looking at the LTACH proposal and the impact analysis CMS projected, plus 0.8% payments per case and you guys were seeing potentially a slightly negative, minus $1.6 million. Is there anything noteworthy Bob to talk about you guys versus the balance of the industry?

No, I don't think so. CMS after they do these spreads they always give you their view of the overall impact. I actually never paid much attention to it because I don't know how they would -- I don't know how they calculate it. We really apply these proposed regs. to our exact business, so I think our estimate is a lot more granular and probably a lot more accurate.

Now what's going on with the other companies -- I frankly don't know what the other companies have said the impact would be. I'm surprised they would say they are positive, but I guess it could be if depending on their case mix and their patient population.

Okay, that's fair.

Then last one for me. Just looking at the two year extension on the MEMC provisions related to SSO and base rate and things like that, you've got some protection around those areas for some time. Is there anything that's known at this point that's giving you any indigestion that CMS might consider outside of the things that are part of the MEMC extension?

It's a great question. Nothing I know about, and I spend a lot of time thinking about it, and I always have indigestion whenever I think about it, but nothing that we know about right now, so -- that does cover some of the big ones, but I think the only way to really guide is look at the history.

This proposed rule was fairly benign. I'm always baffled by these provisions for changes in coding and so forth that they are always able to back out, but that's their own calculation, so fairly benign rule this year. It used to be that the LTACH's had to look forward to two rules that could have impact on our business. Thankfully, at least, now we only go through one rule. They used to have an LTACH only proposed rule and then we would also find things in the QIPPS rule and now it's collapsed into one annual rule. We're through this year and we'll get the final rule in the coming months and then on to next year.

Okay, thanks very much.

Your next question comes from the line of Collin Winer from Morgan Stanley.

Hi, it's actually Doug Simpson. Good morning everyone.

Was wondering if you could just discuss a little bit more the $2 million hit from weather in the first quarter. Overall numbers came in pretty close. Can you just talk about how you were able to specifically mitigate those pressures and just talk -- and I apologize if I missed the earlier part of the call -- but talk about the seasonality within the quarter and how are you feeling looking into Q2 with hopefully the absence of that weather dynamic?

Yes, Doug, as far as the seasonality of the quarter, it's the first quarter. There's really no seasonality normally in that quarter. Basically, what we did was we took a look at those areas where we had significant concentrations of clinics where we had 40 plus inches of snow and a number of those clinics were closed and taking a look at basically the visits missed and the associated costs. Those visits that were missed, what was the revenue and what type of impact did that create?

So did the people who missed their visits, did they roll in such that you had, well, higher utilization of those facilities in subsequent weeks or does it kick everything out?

It really kicks everything out.

Okay, and then could you just remind us, I'm not sure if you gave the number for the JV in the quarter just the order of magnitude and what that was and how are you thinking about that relative to the 2010 numbers?

Yes, we are -- given the fact that it's a joint venture, we're not providing the financials for the individual JVs. I think it's fair to say, though, it really is right down the middle of the fair way with the numbers that we provided to you before with what a typical JV looks like, that $50 million to $70 million top line, 16% EBITDA margins; we're very comfortable that SSM will be in a position to achieve that.

Okay.

Bob you were talking earlier about optimism and the potential to close another JV this year. I know it's very tough to give specifics, but could you just help us step back and talk about more broadly the back drop? Any color around the pipeline and how that's trending if we're looking out 12-18 months. Given the experience you've had thus far, are things that opportunity more broadly tracking about as you would've expected in terms of volume of conversations, interest level, that kind of thing.

Well, I think it's pretty good but with this, you never know. We have some great conversations but it's almost as though you have to wait until there's a point where it either gets serious and you may not know for six to eight months whether it's really going to get serious. We have oftentimes a series of visits, some philosophical conversations, it gets more detailed. Then with these large systems, it kind of goes up the ladder for approvals and to move forward, so they are always tenuous until you actually get to documents. I would describe our pipeline as being a mixed bag of those that are more further along and those that are in the early stages.

What I've said is that these opportunities are so good and I think that they have the potential to be such good value creators for the Company that no matter how long they take and they do take a long time, they are really worth sticking with, so I feel good about the strategy. I feel good about our ability to pull them off. As I said earlier, you may have missed the comments, is I'm very pleased with how we're doing in the two joint ventures that we have, the one at Penn State and the one at SSM, and I think that gives me the most optimism that we'll be able to do deals in the future because I think our partners at both of those deals that have been closed are happy, happy that we're delivering what we said we could deliver and to me that will eventually translate into us getting more deals.

We're working and I will tell you that we hope to drag one across the finish line this year. If anything, if anything and I've said that the New York Times and the Senate Finance did not affect our business, and if anything, it may have slowed up just because of distraction and noise and things, it may have slowed a little bit some of the deals we're working on, but we have not anybody that said that because of either of those events they are unwilling to work with us.

Okay.

Then, Marty, if I could just one modeling question to make sure we have this right. The quarterly progression of G&A over the balance of the year. Is there any dramatic seasonality that would be much different from last year that we should be thinking about when we model that?

No, there isn't, Doug. It should be very similar. If you take a look at our G&A, it's relatively the same throughout each work order.

And the tax rate came in just a touch better than we were looking for. Is that about the right number to use going forward?

Yes, I think that's pretty good.

Okay, thank you.

Thanks, Doug.

Your final question comes from the line of Todd Coreseir from UBS. Please proceed.

Hi guys how's it going?

Good, Todd.

I just wondering, could you just refresh us on which, if it's clear, which thing came up first. Was it the Senate finance inquiry or was it the New York Times article?

The New York Times article was in early February, and the Senate Finance letter that we received was specifically in response to the New York Times. In fact the letter to me was, we've read the New York types article and they actually attached it to the letter and said, Medicare is under our jurisdiction and we would like to ask you some questions, because we're obviously concerned about some of the things that were said in the times article and their questions to us pretty much tracked the things that some of the things that was in the New York Times article, so in some ways, I was pleased to be able to provide a detailed response, although you're never pleased to get a letter from the Senate Finance Committee, but clearly the Senate Finance letter was triggered 100% by the New York Times article.

It's just interesting because you just -- we're not typically used to seeing the press trying to dissect the minutia of Medicare quality statistics or anything else that's regulatory intensive. I'm just wondering, is there any indication of how exactly this staff writer came upon this story in the first place? Just the whole genesis of the whole thing just always seems somewhat suspect to me.

Yes, to us as well. It's probably not appropriate for me to speculate on it although I've had numerous people tell me how these things oftentimes come about. I don't know.

Fair enough, in the world of leaks and so forth.

In any event, the one other thing, from a numbers standpoint, Outpatient Rehab. I heard the commentary and that was helpful in terms of what got the rate to 101 in the quarter for net revenue per clinic visit. Would it be fair to assume that that rate is probably at least fairly stable from this point forward in the year?

I think so, Todd. If you take a look at the 101, 102, I think that's probably where net revenue purpose is going to be. The underlying variables that make that up is really the number of units billed per visit and that's been pretty consistent over the past couple of years, so I think that 101, 102 is probably a good number.

And I'm sorry, just one last thing on the New York Times article. Were you, are you a defendant in litigation that's related to this? Perhaps there's a plaintiffs law firm or something like that, that's my speculation, but are you a defendant or at the time were you a defendant in potentially related litigation?

Yes. We were in some of the cases that were raised, some of the more sensationalized stories patient stories or cases that at times a reporter used, yes, those were some cases that were in litigation.

Interesting. Thanks very much for your thoughts. Appreciate it.

Thanks, Todd.

Ladies and Gentlemen, there are no further questions. I will now hand the call back to Mr. Robert Ortenzio for closing remarks. Please proceed.

Thank all of you for joining us today. We look forward to updating you after next quarter's results.

Ladies and Gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.