Select Medical Holdings Corp (SEM) 2010 Q2 法說會逐字稿

Good morning and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the second-quarter 2010 results. 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 the 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 would like to turn the conference call over to Mr. Robert Ortenzio. Sir?

Good morning, everyone, and thanks for joining us for the Select Medical Holdings second-quarter conference call for 2010. For our prepared remarks, I'll provide some overall highlights for the Company and our operating divisions. And then I'll ask Marty Jackson, our CFO, to provide some additional financial details before we open the call for questions.

Earnings per diluted share was $0.15 for the second quarter compared to earnings per share for the same quarter last year of $0.19. However, it's important to note that a significant portion of the earnings in the Q2 2009 was derived from the repurchase and the retirement of some of our senior subordinated notes at very attractive prices. Excluding this nonrecurring gain and adjusting for the preferred stock conversion and for the initial public offering and related interest reduction from debt repayments, we estimate earnings per share in the same quarter last year would have been $0.12, representing a year-over-year gain in earnings per share of 25%.

Net revenue for the second quarter increased 3.6% to $579.9 million compared with 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 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 second quarter increased 4.3% to $403.1 million compared to the same quarter last year. The primary driver behind the increase was additional volume, as admissions increased 1.1% and patient days increased 4.8% compared to the same quarter last year. The growth in volume was a result of both increases in our same-store hospitals, including those facilities opened in 2008, which increased their volumes by 26%, as well as additional volumes in those hospitals added in 2009, which accounted for half of the volume increase in the quarter. Overall occupancy rates were 68% in the second quarter compared to 67% in the same quarter last year. Rate declined in the second quarter by 1.1% as net revenue per patient day was $1,474 in the quarter compared to $1,491 per day in the same quarter last year.

While we did experience year-over-year growth in our Specialty Hospital segment, our net revenue fell short of our expectations. This was due to patient volumes and occupancies being less than expected in the quarter. While we understand patient volumes have been soft in both acute hospitals and with other LTACH operators in the quarter, the majority of our shortfall to plan occurred in 11 of our hospitals and were for a variety of reasons that were unique to those local operations. We also experienced a 1.1% decline in revenue per day compared to the same quarter last year. This decline in rate was the result of three primary factors -- the DRG reweighting that occurred June 3, 2009, which reduced the relative weightings of all LTACH DRGs; the Patient Protection Affordable Care Act, which mandated a 25% basis point -- or 25 basis point reduction in the standard federal rate on April 1 of 2002; and we experienced an increase in the number of high-cost outlier patients in the current period, which on average generate less revenue per patient day.

Net revenue in our Outpatient Rehabilitation segment for the segment increased 2.1% to $176.8 million compared to the same quarter last year. This increase was primarily due to increases in both our outpatient clinic revenue and contract services revenue that was a result of the contribution of acquired operations in 2009. During the second quarter, approximately 67% of our outpatient revenue came from our own clinics and 33% from our contract services and managed clinics. Patient visits increased a modest 0.8% compared to the same quarter last year, while rate remained stable at $101 compared to $101 in the same quarter last year as well.

Overall adjusted EBITDA for the second quarter increased 7.2% to $89.6 million compared to the same quarter last year, with overall adjusted EBITDA margins at 15.5% for the second quarter compared to 14.9% margins for the same quarter last year.

Specialty Hospital adjusted EBITDA for the second quarter increased 3.4% to $73.3 million compared to $71 million in the same quarter last year. Adjusted EBITDA margins for Specialty Hospital segment declined 20 basis points to 18.2% compared to 18.4% in the same quarter last year. For our same-store hospitals, or those hospitals opened and operated by us prior to January 1, 2009, adjusted EBITDA margins improved 10 basis points to 18.5% in the second quarter compared to 18.4% in the same quarter last year. Our hospitals opened and acquired in 2009 generated margins that lagged behind our same-store hospitals, which is why overall margins declined in the segment.

Outpatient Rehabilitation adjusted EBITDA for the second quarter increased 2.6% to $26 million compared to $25.3 million in the same quarter last year. Adjusted EBITDA margins for the Outpatient segment improved by 10 basis points to 14.7% compared to 14.6% in the same quarter last year.

I also want to provide some updates since our call last quarter. If you will recall, we received a letter from the Senate Finance Committee in early March in response to an article published by 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 acute hospital. As I indicated to you on the first-quarter conference call, we responded to the Committee's letter on March 23. On May 25 we received some follow-up questions from the Committee and we responded to those questions on June 4, 2010.

On the regulatory front, on June 30 CMS released the annual payment rate updates and policy changes for LTACHs which are effective October 1, 2010. The rate updates include a net reduction to the standard federal rate of 0.5% and makes adjustments to the relative weights and lengths of stays for LTACH DRGs. We estimate that overall Medicare payments to our LTACHs will decline by approximately $7 million annually, assuming patient mix remains constant.

On July 22 CMS published a notice of changes to the payment rates for inpatient rehab hospitals. The rate update includes changes to the standard federal rate and makes adjustments to the CMGs and lengths of stay. We estimate overall Medicaid payments for our inpatient rehab hospitals will remain unchanged, assuming patient mix remains constant.

On June 25, the President signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which, among other things, provided a 2.2% increase to the Medicare physician fee schedule retroactive to June 1, 2010. As you're aware, our outpatient therapy services to Medicare beneficiaries are paid for based on the physician fee schedule. Included in the Act was the suspension of the scheduled 21.3% rate cut in the physician fee schedule through November 30 this year. Since 2002, the scheduled reductions in the physician fee schedules that are based on the sustainable growth rate formula have been prevented by either CMS or congressional action.

On July 2, CMS published a proposed update to the Medicare physician fee schedule that would be effective January 1, 2011. The rules suggest that CMS may adopt a multiple-procedure payment reduction policy for therapy services. The MPPR would reduce payments where multiple services are provided during a single visit. We are currently working with a number of professional trade organizations in analyzing this change. The trade associations have concluded the underlying assumptions for the rehab services used by CMS are flawed and the proposed reimbursement changes need to be modified.

On a final regulatory point, which I mentioned on our last earnings call, is in regards to the RUGs IV. As most of you know, RUGs IV will be implemented as of October 1 of this year. The regulatory change will have a slight negative impact to our contract therapy business. We anticipate the implementation of RUGs IV will have a less than $3 million annual impact to the Company.

Finally, as you are aware, we signed a definitive agreement to acquire Regency Hospital Company on June 18th. We are on track with the regulatory process and anticipate closing the transaction sometime in the third quarter. We look forward to adding Regency's hospitals to the Select portfolio.

And finally, as many of you probably saw yesterday, we announced a new proposed joint venture partnership for rehabilitation services with the Baylor Health Care System. The new joint venture will encompass inpatient and outpatient rehab services in the broader Dallas-Fort Worth area and include two inpatient rehab hospitals with a total of 136 beds, three managed inpatient rehab units with 57 beds, 30 outpatient rehab locations throughout the area. The joint venture is subject to government approvals and will close once those are received.

I will now turn it over to Marty Jackson to cover some additional financial highlights for the quarter before we open it up for questions.

Thanks, Bob. Good morning everyone.

Our operating expenses, which include our cost of service, general and administrative costs, and bad debt expense in the second quarter increased 3% to $490.7 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter were 84.6% compared to 85.1% in the same quarter last year for a reduction of 50 basis points on a year-over-year, same-quarter basis.

Cost of services increased 3.8% to $470 million for the second quarter. As a percent of net revenue cost of services was 81% for the second quarter, which was consistent with the 81% experienced in the same quarter last year.

G&A was $9.8 million in the second quarter, which as a percent of net revenue was 1.7% compared to $12.9 million or 2.3% of revenue for the same quarter last year. The positive variance in G&A was primarily the result of the reduction of executive incentive-based compensation. The incentive compensation is based on expected financial performance measures which have not been met year to date.

Bad debt as a percent of net revenue was 1.9% for the second quarter compared to 1.8% for the second quarter last year. We continued to experience favorable account collection activity in both our business segments and currently expect our bad debt expense to continue to run under 2% for the foreseeable future.

As Bob mentioned, total adjusted EBITDA was $89.6 million for the second quarter and adjusted EBITDA margins were 15.5% compared to adjusted EBITDA of $83.6 million and 14.9% adjusted EBITDA margins in the same quarter last year. We did experience modest growth in both Specialty Hospital and Outpatient adjusted EBITDA during the quarter. However, we fell short of expectation primarily due to the shortfalls in patient volumes and rate in our Specialty hospitals.

Depreciation and amortization expense was $16.6 million in the second quarter compared to $17.9 million in the same quarter last year. The decline was primarily the result of fully amortizing the contract therapy rights, which happened in the first quarter this year. The annual amortization expense related to the contract therapy rights was approximately $4.1 million.

Net interest expense was $29.3 million in the second quarter, down from $33.6 million in the same quarter last year. The reduction in interest expense was the result of lower debt levels during the quarter as well as lower interest rates.

We had $175 million in fixed rate swaps on the holding company senior floating rate notes that matured September 15, 2009. In Q2 2009 we had approximately $1.1 million in incremental interest expense related to these swaps. We also had $200 million in a fixed rate swap on the credit facility debt that matured May 24, 2010. This swap was most recently adding approximately $2.3 million in interest expense per quarter. We have two additional fixed rate swaps totaling $200 million on a credit facility debt that will mature August 23, 2010. These swaps are currently adding approximately $1.9 million of incremental interest expense per quarter. The final $100 million fixed rate swap on our credit facility debt matures November 22, 2010 and is currently adding approximately $1 million in interest expense per quarter. In total, the elimination of the fixed rate swaps, assuming the same base interest rates, would have had an approximately $6 million impact on interest expense on a quarterly basis.

The Company recorded income tax expense of $17.3 million in the second quarter, which represents an effective tax rate of 39.8% compared to an effective tax rate in the same quarter last year of 42.9%. The lower effective tax rate experienced in the second 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 and on uncertain tax positions.

Net income attributable to Select Medical Holdings was $24.5 million in the second quarter and fully diluted earnings per share were $0.15.

We ended the quarter with $1.4 billion of debt outstanding and $128.8 million of cash on the balance sheet, or net debt of about $1.27 billion. Our debt balances at the end of the second quarter included $167.3 million of Holdco senior floating rate notes; $138.2 million of Holdco senior sub notes; $611.5 million of the 7.625% senior sub notes; and $483.1 million of term loans outstanding, with the balance of $7.4 million consisting of other miscellaneous debt.

You'll again notice a significant increase in the current portion of the long-term debt in the quarter. This relates to our term loan B, which has $47.8 million quarterly amortization payments required at the end of each of the first three quarters of 2011 and a final payment due in February of 2012.

As I am sure many of you are aware, we extended the maturity of our $300 million revolving credit facility on June 7th to a maturity of August of 2013. The revolver remains undrawn as of the end of the second quarter.

Operating activities provided $74.5 million of cash flow for the second quarter and cumulative operating cash flow year to date was $58.7 million.

Our accounts receivable balance decreased $22.7 million in the second quarter compared to the first quarter of 2010. And we experienced a three-day decrease in days sales outstanding, or DSO, which was 53 days at the end of the quarter. This compares to 56 days at March 31, 2010 and 55 days at June 30, 2009. The decline in DSO from the last quarter was primarily the result of timing of our periodic interim payments from Medicare for our specialty hospitals.

Investing activities used $13.4 million of cash flow for the second quarter and has used $26.5 million year to date for the purchase of property and equipment. Financing activities used $5.5 million of cash for the second quarter. Year to date financing activities has provided $12.8 million of cash flows.

The Company plans to update and revise its business outlook and financial guidance once the Regency transaction closes, which it is expected to occur in the third quarter of this year. Our current intention is to use cash on the balance sheet and borrowings under the revolving portion of our credit facility to fund the Regency acquisition.

This concludes our prepared remarks and we'd like to ask the operator to open up the -- for calls for any questions.

Yes, sir. (Operator instructions.) Frank Morgan; RBC Capital.

I know you did address rates to some degree, but I'm curious did you see -- within rates on the commercial side did you see any kind of pressure from that standpoint? And then secondly, on the volume side, have you noticed any change in referral patterns from acute care hospitals as their volumes have softened, specifically, if they're holding patients longer? And then finally, on those markets where you did see some specific weakness, any commentary on how that has progressed since the end of the quarter? Thanks.

Yes, Frank. This is Bob Ortenzio. Let me address your second two questions, I think if I got them. We have not seen changes of referral patterns from general acute care hospitals even though, as we pointed out on the call, generally speaking -- and we read the reports and we see that acute volumes are soft. We see no evidence whatsoever of acute care hospitals holding onto patients longer than they ordinarily would. No evidence of that whatsoever.

And I mentioned those 11 markets where we saw some softness only to make the point that we didn't see a broader trend in that area. As we drilled down into the quarter we saw those shortfalls primarily from those 11 hospitals. And it was for a variety of reasons. It wasn't necessarily changes of acute cares. In some cases it was maybe the potential relocation of a hospital where we have an HIH where the general acute care hospital has moved services to another hospital, and things that are unique to those hospitals and are operational in nature.

And I'll let Marty address rate.

Frank, on the commercial side we're actually pretty comfortable with what's going on there. We actually saw a bit of an increase on the commercial side.

Okay. Thanks.

Whit Mayo; Robert W. Baird.

Maybe first, just to start with the Baylor JV, how much incremental revenue comes with the Dallas rehab facility and their outpatient clinics? And maybe some thoughts on the timing of the Frisco facility and will you bear any of the capital costs on that facility, including the pre-opening and startup costs?

Whit, this is Bob. I appreciate your question. Normally our practice is to not announce the joint ventures until they're closed and then we can give a lot more color on the nature of the operations and so forth. In this case, because of some regulatory submissions that had to happen, we felt that we needed to get out in front and announce this when it was signed even thought it's not -- won't be closed until after regulatory approvals. So as a result of that, I'm really hesitant out of respect for the regulatory process, and our partner, and the fact that the deal's not closed, to give a lot of details on that individual operations.

I will say that -- and because it's publicly available -- Baylor does have -- I think it's mentioned in the release -- a very well respected 92-bed freestanding hospital that is near their main campus. I will also tell you that our Frisco location that we built that will become part of the joint venture is fully constructed and shortly after, or right about the time that the JV is closed we'll be opening that facility under the joint venture. But beyond that we probably will wait until we close the transaction to give you a little bit more of a granular understanding of the kind of revenues that are coming off.

Okay, sure. And maybe with Regency you may not be able to say too much as well. But just maybe any updated thoughts? I know it's probably premature, but thoughts on synergies and the opportunity there -- I was hoping you would provide some additional color about that particular transaction.

We think there's significant synergies that will come from the Regency transaction for us. As you know, and as we reported when we announced the deal, the revenue line's about $375 million and EBITDA was in that $28 million range. So that leaves you with about a $7.5 million -- or 7.5% margin, EBITDA margin. We're currently running in the 18%-plus range and we think over a period of time we'll be able to gravitate towards our margins.

Okay. And Bob, I thought I heard you say that you expect your inpatient rehab rates from Medicare to be flat in 2011. Just was hoping you could help me get there. I know the impact files don't really tell the whole story with wage index changes, et cetera. So can you get me from sort of the 2% update to how you see your rates being flat?

Well, I think the point that I was making in my prepared remarks is that the rehab rule that came out on -- for rehabs on July 22, that was the CMS rule for Medicare standard federal rate. Then they made some adjustments to the CMGs and the length of stay. So my only point is, as we run that through our existing rehab hospitals we're saying that that rule change or annual update will not change, will not have a material impact. It was not any kind of a more broader comment on our overall rates in the rehab hospital, which I think we've talked about previously. Or I don't know if, Marty, if you want to make any comment on --

Yes. Whit, I think you're right. I think they did talk about an increase in the standard payment amount. But due to the changes in the wage index and the labor related portion, there was a decrease associated with that. So net/net it's about breakeven.

Okay. And maybe just one last question, just on the outpatient clinics, just looking at the margins. They were up about 70 basis points year to year. Inside that growth, I was just curious, is all of that pretty much driven by the HealthSouth assets?

I think a good portion of it is. We're starting to see some nice improvement on the HealthSouth assets. And I also think that we're starting to see some benefit coming from some of our JV outpatient locations.

Okay. And I think you consolidated a CBO or two in the quarter, or maybe perhaps after the quarter. Were those savings contemplated in the 200 basis points of margin expansion you originally thought you would obtain from HealthSouth?

No, they were not.

Okay. Great. Thanks a lot, guys.

Gary Lieberman; Wells Fargo Securities.

Was wondering if there might be an estimate that you guys have run through and could share with us in terms of what the impact from the multiple-therapy cap change would be if it went through as proposed?

Yes. We have taken a look at that, Gary, and the amount would be somewhere in the $10 million to $11 million range. But I have to tell you that in working with a lot of the professional organizations, the underlying assumptions that CMS is using, with regards to the 15-minute increments as it pertains to MPPR the way it's been used with imaging and also surgery centers, it's just flawed with PT. So we're really -- we are communicating with them and we will be corresponding in the letters that we send to them just saying that the incremental 15% -- 15-minute units -- the way that this was initially set up is it was over a 45-minute period of time. And consequently we don't think that, at least for that 45-minutes period of time, that that should change at all.

Okay. And if they accepted that, would that mitigate all of it or part of it?

That would mitigate just about all of it, yes.

Okay. And then, can you talk a little bit about the acquisition environment? A number of the acute care hospitals have talked about it being an attractive environment just in terms of the number of opportunities that are out there and the potential prices that they could pay. Could you talk about how that -- how it's impacting you guys?

I wouldn't say that it's impacting us much. I mean, that's really a different space. If you look at the LTACH space, which is obviously much smaller than the general short-term acute care hospitals, there was our consolidation of Regency. And then there was two small private companies -- I just saw an announcement -- combined earlier this week, Cornerstone and Solara. So you see some of that consolidation, which I think was predicted by some of the analysts and I think some commentary by me earlier on. And so I think that you don't see as much in that area.

The outpatient rehab is still pretty fragmented, but there is really not a lot of large players. And so -- in fact that environment's pretty much unchanged.

And then the inpatient rehab is a pretty mature industry in my estimation and I think that the opportunities there really -- for Select Medical -- really show themselves in our joint venture strategy. So I would say that overall the acquisition environment for us is probably unchanged.

Okay, great. Thanks a lot.

Doug Simpson; Morgan Stanley.

Could we just -- I'd be curious if you had any more color on those 11 facilities that you discussed earlier. I think in the response to one of the questions you had touched on the dynamic that there was a local inpatient relocation. I guess specifically, what are you trying to do with those facilities to mitigate that? And how do we think about kind of the correction going forward in those facilities? Is that sort of a permanent market change or what can you do to bring that back to where you want it to be?

Yes, Doug. Let me clarify that again. Anytime you have as many hospitals as we have -- so just look at our LTACHs. We have 89 hospitals. And the way we look at the business is you look for kind of systemic trends and then you always have your hospitals that you're always dealing with issues. I mean, you have enough hospitals and everything, as I like to say, starts to look like a bell curve. You have some high performing. You have a lot in the middle. And then you have some that you're always facing challenges with. So my point was not to draw attention that these hospitals were out of the ordinary in terms of things. There's always improvement that you can make. I was only trying to make the point that with that shortfall, as we looked at it, it was more localized and didn't represent a larger trend.

So I would tell you that at any time during the year, or any year, we'd probably always have 10 to 15% of our facilities that we think are underperforming for a variety of reasons. Whether it is that they need to be repositioned in the local market, maybe you have a change in the leadership team, maybe -- there's a variety of reasons which I just wouldn't propose to ever get into those individual hospital operational issues kind of at this level. So I didn't mean to draw attention to those as having unique operational challenges, but really can make the comment that the shortfall that we saw was not representative of a larger trend across all of our hospitals.

Okay. So as we're -- I mean, as we think to the second half of this year, given what you've seen in the quarter and since, would you -- is this the kind of thing that maybe they come back Q4, Q3? I mean, just in terms of modeling and thinking about revenue progression, is it -- or should we sort of look at this as a better run rate? Just how would you think about that impact?

Well, with respect to those, my expectations for the second half of the year, those 8, 10, 11 hospitals that have challenges will get right on the right course and they'll probably be replaced by other hospitals that have operational challenges. That's the nature of this business. Compare -- I'll let Marty comment on what he sees as the broader trends fiscally and operationally over the balance of the year.

Yes, Doug. I would continue to think that we're going to see increased number of days, increased admissions over the last part of the year here. One of the reasons that Bob had -- one of the indications that Bob had given was moving a hospital. Moving a hospital is disruptive and you're going to see a reduction in census because of that. So as that hospital moves we expect to see that census built.

Okay. Maybe just if I could sneak one final question in here. Obviously you guys have a ton of experience in the industry. And you're seeing what's going on in other care settings across the industry. I'd just be curious, you guys play in a somewhat unique spot with the clinic business -- stepping back, how do you think about what we've seen in utilization? Given what we're seeing in the economy and given the trends you've seen in outpatient versus LTACH, which obviously have very different characteristics, what's your gut as to what's really driving the softness in utilization we're seeing pretty broadly?

I don't have a good sense for that. On the LTACH side of the business, the people that would have the best view of that are really the short-term acute-care hospital operators. Since we're downstream from them we see the result. But you would see it at that level. And so for me to comment on that would be much less valuable to you than hearing from the short-term acute-care hospital companies.

I will tell you that, looking at the economy and the outpatient -- while our outpatient business has been strong and we've been very pleased with it, the one thing that you do see with the economy and perhaps the changes, is you see the changes in the insurance market where we continue to see increase in co-pays that need to be collected at the time of the visit. And sometimes, while that may not impact a referral, we still see some pressure on perhaps number of visits. So that would be the other thing that we see. And Marty, do you want to comment at all on that?

Well, yes, what's interesting for us, Doug, is that, as Bob mentioned, one of the key statistics we take a look at is visits per new patient. Visit per new patient has not changed over the past couple of years and we've been very pleased with that. Now, that doesn't mean that we're seeing the patient in the same time frame. Timeframe may extend a couple weeks later with the same number of visits.

Okay. Thank you.

Kevin Fischbeck; Bank of America Merrill Lynch.

I wanted to -- I know you can't really comment specifically on the Baylor deal, but just wanted to understand a little bit since there was a lot of moving parts in there, how the contract around the -- you managing the beds within the Baylor hospitals -- would that be showing up as a management fee or would that be something where you would actually book the entire P&L on that?

Yes, Kevin, that will show up as a management fee.

Okay. That makes sense. And just going back to the commentary around -- I don't want to keep going back to this, but those 11 hospitals -- I didn't hear a number, but do you have a number for what the admission trends might have looked like if you just excluded those 11 hospitals to get a sense of what the underlying core growth that you're seeing is?

Yes, Kevin. The majority of the decline were in those 11 hospitals.

So it might (inaudible) flat if you took those out?

Yes, I would say that.

Okay. And I guess maybe going back to Baylor for a second, I know that Baylor actually has a pretty strong relationship with Skilled Healthcare Group. Skilled built a couple of SNFs in the Dallas market that really almost look like inpatient rehab hospitals. And there was not a strict JV relationship there, but clearly a strong relationship there. Does that relationship in any way impact this proposed joint venture?

I would not think that it would. The way we look at the business is they're -- not withstanding the commentary that surrounded back when they were fighting over the 75 or 60% rule -- we think that there's a reasonably good demarcation line between the rehab that's provided in skilled nursing facilities and the rehab that's provided in inpatient rehab hospitals. And when you look at our Kessler operation and our operation out at SSM and at Penn State and those joint ventures, and you look at what Baylor has done with their Baylor rehab hospital and their units, I can't imagine that we would see any conflict around those. And I would not anticipate any.

Okay, good.

I mean, the Baylor rehab hospital that's near their main campus enjoys really a very strong reputation, takes care of pretty high-end rehab patients. And as many of you probably know, the Baylor rehab is also on -- has been a perennial presence on the US News list of best rehab hospitals in the country. So I don't see any issues around SNF. That's usually a battle that sometimes gets fought out in community-based hospitals where the -- probably perhaps take more orthopedic cases.

Okay, that's helpful. And I guess you said a little bit about the deal pipeline, but what about the JV pipeline now that you have two and close to getting a third one? Do you still feel good about adding one to two per year from here?

We do. I always reiterate that these are a long sales pipeline. I would tell you that they're worth it. I mean to get an SSM, a Baylor, a Penn State, to get hospitals of that caliber in a joint venture I think positions us very well to grow in rehab. But to get hospitals like that it does take a while, so it is hard to predict. But I think the more that we do, hopefully the easier it will be to do the next one.

Okay. All right. Thanks.

Miles Highsmith; RBC Capital Markets.

So Marty, I guess last quarter we had about a $54 million increase in A/R from the PIP payments. Was all that recaptured this quarter or is there a little bit more to go in Q3?

Yes, there's some more to go, Miles.

Can you quantify --

Miles, it's the natural process that we have with the PIP payments. I think we've talked previously that the PIP payments are modified or changed every six months, based on volume incent -- the ADC and because of the seasonality of the business. It's just the normal process. If you go back the last five years you'll see that what happens is A/R builds up over the fourth and the first quarter and then that's relieved as the PIP payments change over the second and third quarter. So you can expect to see some additional benefit in the third quarter with A/R.

Okay, great. So little more to go. Just a general kind of cap structure kind of question. You guys have done a good job pushing out some of your bank debt maturities. I was just curious, though, with kind of a multi-tiered debt structure, is there any value to you to simplify that structure and think about refinancing? Or do you kind of view your bonds as further out and not really needing as much attention right now?

Kevin, I'm assuming you're talking about the Holdco notes?

Correct.

Yes. I mean, right now both those Holdco notes are sitting on 2015. And currently they're pretty attractively priced. So we're always evaluating that but currently we're comfortable with where we are.

Okay, great. And then last one, Bob, I know we've kind of touched on this topic in the call today, but I just wanted to focus on the outpatient side. And, again, getting back to whichever metric you want to look at, doc visits down 4%-plus in the first couple quarters of this year and how that is related to the volumes on the outpatient side, which you guys showed very strong positive volumes this quarter. I'm just curious as to whether you can give us some general thoughts about correlation or things that are influencing that side of the business related to some of the broader issues?

I'm very pleased with the performance of our outpatient all the way around. And when you consider that's a business that's 90% commercial HMO insurance and it's only 10% Medicare, you'd expect it to be probably for us -- the general state of the economy to have a greater impact on that business. And it has not. And to me that's -- it's been a bright spot. And I really don't know what to attribute that to. When things are -- we tend to drill down more on things when they're going the wrong way than to try to get better explanation when they're going the right way.

So I really don't have any great insights to you about why that business is stronger. I can tell you that we continue to make a lot of progress with the HealthSouth clinics that we've integrated. And I think our -- the geographic presence, where we are -- have a lot of clinics. They have good geographic presence. And I'm talking about Philadelphia and South Jersey. I'm talking about North Jersey. You look out at SSM area. Those have all been bright spots for us. And there's generally a trend toward outpatient. And we are still I think the beneficiary of that. (Inaudible) I didn't give you a lot of hard evidence, but that's kind of the best commentary that I can give you on it.

No, that's always helpful. Okay, thanks a lot guys.

A.J. Rice; Susquehanna.

I'll ask a couple of questions if I could. I know, like you said, you can't say too much about the Baylor JV, but obviously that's a big-name system that you're aligning with there. Other JVs have been with big-name systems. Is the economics on -- generally speaking, of the way the joint venture's structured similar to your others or does this one have -- at a high level can you say if it's just a meaningfully different situation?

No, I would say that this one's not a unique -- you know, they're all different. So I hate to say that it follows the SSM or doesn't. But it's generally the same concept, that the rehab assets are contributed to a joint venture, which is then managed by Select with the intention to grow the presence in a geographic market. And I would say Baylor, like SSM -- I mean, SSM is the kind of greater St. Louis market. SSM I think has -- I think I'm right -- it has seven general acute-care hospitals. And Baylor has I think 25 acute-care hospitals that are either owned, managed or affiliated over across -- they consider their market to be what they call down there as the Metroplex, which is a fairly wide geographic area and one that's fairly well known to us, because we've been down there in the LTACH business.

So for us it's very exciting. We're pleased that Baylor has put their confidence in us and our operating team out of Kessler to take over the operations or the -- and the management of those rehab assets that we'll be doing jointly with them. And Baylor will stay actively involved, which is what we want. And so I see great opportunity. And you see that there's, as was announced, there's rehab units that are included as well as the freestanding and the Frisco rehab hospital that we have had under construction and will soon open under the joint venture flag. So I'm pretty excited about it. And we're really looking forward to it.

Okay. Obviously earlier in the year there was some press coverage around the LTACH business and then that involved -- resulted in some questions being asked by the Senate Finance Committee. Is there any update on any of that from the inquiry side, anything new to report there from you guys?

I do not have any update on that other than what we -- what I had in my prepared remarks. I mean, so that was a process that was commenced back in March and it's August and I think that what could be made is these things do not have a definitive end point. I mean, you don't get a letter that says the -- this is over. I mean, I've always been careful and I think pointed out that it was never characterized by anybody, including the Senate Finance Committee, as an investigation or even an inquiry. It was a follow-up and questions from the New York Times article.

And I make a point of telling everybody that the only real problem in the New York Times article was the data that was presented about our history vis a vis our peers and the general acute-care hospitals on quality as measured by survey results. And if you'll look at the work that we've done and you look at I think the definitive piece that was done by [RBC] Capital I think it shows definitely that that information in the New York Times is completely discredited. And we've said that the data that they presented was flat wrong. And I've certainly presented that to the Committee and I think that that's what they were investigating.

So I don't -- we -- as the time has passed and more of the true data and information has come up, I mean, the Company has nothing to be apologetic for and we're quite proud of our survey and our quality history. And I think that when you look at the data it proves that out.

Okay. Great.

I'm optimistic.

And then finally I'll just ask on -- maybe a little more drilldown if there is anything to be said on the labor expense trend generally with the therapists. Can you sort of comment on where -- what you're seeing there, turnover, year-to-year, wage level? Is there any pressure? Is it pretty stable? Is it maybe even better given the weak economic background? Anything on productivity? Just any flavor around what you're seeing in both businesses with the therapists and all.

Hey, A.J., I think you've hit the significant point and that is that it's stable given the economy.

Okay. And just remind me, do you do you wage updates -- is it facility by facility or do you tend to do those once a year across the portfolio?

Yes, it's typically once a year.

Okay. All right. Thanks a lot.

Whit Mayo; Robert W. Baird.

Just had one follow-up question, Bob. As an industry, meaning the LTACH industry, you guys have operated for a long time now with some unsettling long-term uncertainty, seeing as at some point there will be some patient admission criteria to better define who you are and what you do and who you care for. I'm sure there's a larger political power that you understand more so than I as to why we haven't seen this yet. But is there anything you can do as an industry to perhaps expedite this process, if at all possible?

Oh, absolutely, and we are doing that. And I think that's very important and one of the most important initiatives for the industry. And I'm pleased that over the passage of time that the industry has come together. And a point that I like to make is that I think there's been a general perception sometimes that CMS does not look favorably upon the LTACH industry. I'm not sure that that's completely true. I think that most industry executives would say that CMS doesn't look kindly upon them, whether you're in home health or hospice or imaging or oxygen. And so maybe the LTACHs are not particularly singled out for that.

But the fact of the matter is that I think the Holy Grail for this industry is patient facility criteria. I think that with the 2007 legislation they thought -- we thought that we might have something in 2010 before the expiration. It was clear that that was not going to happen, which often happens in a complicated industry and with a relatively small industry. So the extension in 2010 to take the moratorium out to 2012 I think gives ample opportunity. And I think the industry has come together and is working diligently to get patient and facility criteria. And we have a lot of cast of supporting organizations, including the American Hospital Association, the Federation, and also the rehab organizations.

So, unlike a lot of industries, the LTACH industry I think enjoys broad support from the other post-acute and acute providers. And so I think that that's really very much a positive for our industry. So yes, I do think we'll be moving towards patient and facility criteria and the industry is very engaged in that.

And then, maybe can you give us a flavor for what you as an association or industry are trying to do? And maybe do you think you have enough of a voice in Congress that's listening to you? And can you move forward through that direction?

Well, I think it will be in that direction. I mean, Congress has indicated a willingness to engage in LTACH issues. And you saw that in 2007 and you saw it again in 2010. So they have engaged and they understand that the patient -- a greater patient and facility criteria is important for this industry to remove any of the questions that are sometimes thrown at it. So I think that's what has to happen. And yes, I hope that they will engage. I mean, politics is an uncertain science to predict. I mean, we've got some midterm elections coming up and I don't think anybody knows how that's all going to settle. But we're busy working on the policy right now. And we need to have good policy, thoughtful policy and get some consensus around that among the LTACH associations and the general acute care associations. And once we do that and we have a united voice, I'm hopeful that the legislature will engage.

Okay. Thanks a lot.

And that concludes the Q&A portion of today's call. I'd like to turn the call over to Management for closing remarks.

No closing remarks. Thank you all for participating and we'll look forward to updating you at next quarter. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.