Select Medical Holdings Corp (SEM) 2012 Q4 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 fourth-quarter and full-year 2012 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 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. Please proceed, sir.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's fourth-quarter and full-year earnings conference call for 2012. For our prepared remarks I will provide some overall highlights for the Company and our operating divisions, and then ask Marty Jackson, our Executive Vice President and Chief Financial Officer, to provide some additional financial details before opening the call up for questions.

Our reported earnings per fully diluted share were $0.28 in the fourth quarter, compared to $0.25 in the same quarter last year, and $1.05 for the full year, compared to $0.71 for the prior year. In both 2011 and 2012, the Company's reported earnings included nonrecurring loss on early retirement of debt. Excluding these losses and the related tax effects in both periods, adjusted net income per share was $1.07 for 2012 compared to $0.84 for the prior year.

Net revenue for the fourth quarter increased 3.2% to $741.1 million, compared to $718.4 million the same quarter last year. Net revenue for the full year increased 5.2% to $2.95 billion compared to last year.

During the year we generated approximately 75% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab hospitals, and 25% from our outpatient rehab segment, which includes both our outpatient clinics and contract services. Net revenue in our specialty hospitals for the fourth quarter increased 4.1% to $556 million, compared to $534.2 million in the same quarter last year. This growth resulted primarily from increases in our net revenue per patient day and revenues generated from the Baylor joint venture.

Specialty hospital net revenue per patient day increased 3.2% to $1,542 in the fourth quarter, compared to $1,494 per patient day in the same quarter last year. We experienced increases in both our Medicare and non-Medicare net revenue per patient day in the fourth quarter.

Additionally, our patient days increased slightly to 337,522 days, compared to 336,711 days in the same quarter last year. Specialty hospital net revenue for the full year increased 4.9% to $2.2 billion compared to $2.1 billion last year. Growth resulted from increases in our net revenue per patient day, our patient volumes, and revenues generated from services provided in the Baylor joint venture.

Specialty hospital net revenue per patient day was $1,534 in 2012, compared to $1,497 in 2011. The increase in our net revenue per patient day was a result of increases in both our Medicare and non-Medicare rates.

The increase in our Medicare net revenue per patient day was due to an increase in the Medicare base rate that went into effect October 1, 2012. The increases in our non-Medicare net revenue per patient day resulted primarily from increases in commercial contract renewals that occurred during the year, and from Medicaid bonus payments we received during the second quarter of 2012.

Our patient days increased 1.1% to over 1.3 million patient days for 2012. We generate approximately 84% of our specialty hospital revenue from our long-term acute care hospitals and 16% from our inpatient rehab hospitals in 2012.

Net revenue in our outpatient rehabilitation segment for the fourth quarter increased 0.5% to $185.1 million compared to $184.2 million the same quarter last year. During the fourth quarter, a substantial number of our outpatient clinics in the mid-Atlantic and Northeastern states were adversely affected by Hurricane Sandy, which had a negative effect on our net operating revenues and adjusted EBITDA. We have estimated the lost patient revenue from Hurricane Sandy to be approximately $3.0 million dollars for the fourth quarter.

Revenue in our clinic-based business, including our owned and managed clinics, in the fourth quarter increased 2.9% compared to the same quarter last year. For our own clinics, patient visits increased 3%, with over 1.1 million visits compared to the same quarter last year. Our net revenue per visit was flat at $104 in the fourth quarter both this year and last year.

Revenue in our contract services business in the fourth quarter declined 6.1% compared to the same quarter last year. A significant portion of the decline in revenue and contract services was related to the termination of a number of low-margin contracts.

Net revenue in our outpatient rehabilitation segment for the full year increased 6% to $751.3 million compared to $708.9 million last year.

Revenue for the full year in our clinic-based business increased 3% compared to last year. For our own clinics, patient visits increased 2.2% to almost 4.6 million visits, and net revenue per visit was $103 in both this year and last year.

Revenue for the full year in our contract services business increased 16% compared to last year. Growth in our contract services revenue was primarily attributable to the addition of new contracts in the fourth quarter of 2011.

In 2012 we generated approximately 75% of our outpatient revenue from our owned and managed clinics and 25% from our contract services.

Overall adjusted EBITDA for the fourth quarter increased by 5.3% to $98.8 million compared to $93.8 million in the same quarter last year, with overall adjusted EBITDA margins at 13.3% for the fourth quarter compared to 13.1% margins the same quarter last year. Overall, adjusted EBITDA for the year increased 5.2% to $405.8 million compared to $386 million last year, with an overall adjusted EBITDA margin at 13.8% in both periods.

Specialty hospital adjusted EBITDA for the fourth quarter increased 7% to $95.6 million compared to $89.3 million in the same quarter last year. The increase in adjusted EBITDA was driven primarily by both our net revenue increase and a reduction in our bad debt expense.

Adjusted EBITDA margins for the specialty hospital segment increased 17.2% compared to 16.7% in the same quarter last year. The primary driver behind the increase in adjusted EBITDA margins in the segment for the quarter was a reduction in relative bad debt expense.

Specialty hospital adjusted EBITDA for the full year increased by 5.2% to $381.4 million compared to $362.3 million last year. Again, the improvement in adjusted EBITDA for the year was primarily driven by increases in revenue and a reduction in our bad debt expense. Adjusted EBITDA margins for the specialty hospital segment increased slightly to 17.4% compared to 17.3% last year.

Outpatient rehab adjusted EBITDA for the fourth quarter decreased slightly to $18.4 million compared to $18.6 million the same quarter last year. Adjusted EBITDA margins for the outpatient segment decreased slightly to 9.9% for the fourth quarter compared to 10.1% in the same quarter last year.

In the clinic portion of our business adjusted EBITDA declined 5.1% to $14.7 million, and adjusted EBITDA margins were 10.5% compared to 11.4% in the same quarter last year. Had we not experienced Hurricane Sandy, we believe margins would have been 200 basis points higher in our clinic-based business.

For our contract services, adjusted EBITDA increased 19.1% to $3.6 million, and margins were 8% in the fourth quarter, compared to $3.1 million of adjusted EBITDA and margins of 6.3% in the same quarter last year. Thus, even though we experienced a reduction in our net operating revenue from our contract services business in the comparative fourth quarter, we achieved an increase in adjusted EBITDA and adjusted EBITDA margins. The adjusted EBITDA margin improvement in our contract services business was the result of exiting a number of unprofitable contracts.

Outpatient rehab adjusted EBITDA for the full year increased 3.8% to $87 million compared to $83.9 million last year. Adjusted EBITDA margins for the outpatient segment decreased to 11.6% for the year compared to 11.8% last year.

For the clinic portion of our business, adjusted EBITDA increased 1.9% to $72.9 million for the year, and adjusted EBITDA margins were down 10 basis points to 13% compared to last year. The decline in adjusted EBITDA margins in our clinic business was primarily due to increased labor cost in the clinics affected by Hurricane Sandy without any corresponding patient revenue.

For contract services, adjusted EBITDA increased 14.9% to $14.1 million for the year, and margins were down 10 basis points to 7.4% compared to last year. The decline in adjusted EBITDA margin was due to increased labor costs associated with new business and lower productivity resulting from regulatory changes that became effective on October 1, 2011.

I also want to provide a couple updates since our third-quarter earnings call last November. On Wednesday, February 20, our Board of Directors authorized a $100 million increase to our stock repurchase program and extended the program an additional year. The repurchase authorization is now $350 million through March 31, 2014. Through December 31, 2012, the Company had spent $163.6 million of the authorized capacity under the program.

On December 12, the Company paid a special cash dividend totaling approximately $211 million, or $1.50 per share to common shareholders.

On the regulatory front, as many of you know, the statute that has governed LTAC hospitals since 2007 expired at the end of 2012. As a result, the moratorium on new LTAC hospital beds has sunset.

Last May, CMS determined as part of its annual LTAC rulemaking to maintain the so-called 25% Rule at current levels of 50% until the end of 2013 for existing LTAC hospitals. Patient and facility criteria legislation, first conceptualized by the American Hospital Association and then introduced as legislation by 10 US senators, is under consideration by the new Congress.

The goal of LTAC criteria legislation is to ensure Medicare payments are made only to those LTAC hospitals that are providing medically complex care to severely ill patients. Those patients that can be safely seen in lower-cost and less-intensive settings should be referred to those venues of care.

We support the LTAC criteria legislation and have done so for many years. We support the American Hospital Association and appreciate their efforts in Washington to explain to policymakers the unique role of LTAC hospitals and the type of care we provide. We are committed to ensuring that any LTAC criteria is a saver for the Medicare program, and we will do all we can to support legislation that is put forth in that area.

At this point I'll turn it over to Marty Jackson, our Chief Financial Officer, to cover some additional financial highlights for the quarter and the full year.

Thanks, Bob. For the fourth quarter our operating expenses, which include our cost of service, general and administrative costs, and bad debt expense, increased 2.9% to $644 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter were down slightly at 86.9%, compared to 87.1% in the same quarter r last year.

For the year, our operating expenses increased 5.2% to $2.5 billion. This compares to $2.4 billion last year. As a percentage of our net revenue, operating expenses were 86.4% both this year and last year.

Cost of services increased 3.4% to $620.3 million for the fourth quarter compared to the same quarter last year. As a percentage of net revenue, cost of services was 83.7% for the fourth quarter compared to 83.5% in the same quarter last year.

For the full year, cost of services increased 5.8% to $2.44 billion. As a percent of net revenue, cost of services was 82.9% for the full year compared to 82.3% last year.

The increasing cost of services as a percentage of net revenue resulted primarily from increases in relative labor costs in both our specialty hospital and our outpatient rehabilitation segments. These increases were associated with the increase in relative cost associated with providing labor services under the Baylor JV services agreement in both segments, and increased relative labor costs in our outpatient clinics as a result of the effects of Hurricane Sandy, where we continued to incur labor cost in the affected clinics without corresponding patient revenues.

G&A expense was $16.3 million in the fourth quarter, which as a percent of net revenue was 2.2% compared to $14.7 million or 2% of revenue for the same quarter last year. For the full year, G&A expense was $66.2 million, which is as a percent of net revenue was 2.2% compared to $62.4 million or 2.2% of net revenue last year.

Bad debt as a percent of net revenue was 1% for the fourth quarter compared to 1.6% for the same quarter last year. Bad debt as a percentage of net revenue was 1.3% for the full year compared to 1.8% last year. The reduction in our bad debt expense continues to be driven by favorable collection experience, primarily in our specialty hospital segment.

As Bob mentioned, total adjusted EBITDA was $98.8 million for the fourth quarter, and adjusted EBITDA margins were 13.3%. This compares to adjusted EBITDA of $93.8 million and 13.1% adjusted EBITDA margins in the same quarter last year.

For the year, total adjusted EBITDA was $405.8 million for the full year and adjusted EBITDA margins were 13.8%. This compares to adjusted EBITDA of $386 million and 13.8% adjusted EBITDA margins last year.

Depreciation and amortization expense was $16.1 million in the fourth quarter. This compares to $18.8 million in the same quarter last year. During the fourth quarter last year, we incurred an incremental $1.5 million in depreciation expense, related to an asset which we previously had held-for-sale.

For the full year, depreciation and amortization expense was $63.3 million. This compares to $71.5 million last year. The reduction was primarily due to the assets acquired in the HealthSouth transaction becoming fully depreciated, as well as the reduction in amortization due to the expiration of the HealthSouth noncompete.

We generated $1.3 million in equity in earnings during the quarter. This compares to $1.6 million in the same quarter last year. The decline in the quarter was primarily the result of losses incurred in startup companies where we own a minority interest.

We generated $7.7 million in equity in earnings during the full year. This compares to $2.9 million last year. The increase was primarily the result of incremental income contributed by the Baylor JV.

Interest expense was $22.7 million in the fourth quarter, which is down from $24.1 million in the same quarter last year. For the full year, interest expense was $95 million, which is down from $99.2 million in the prior year. The reduction in interest expense for both the quarter and full year is primarily related to lower interest rates on the portions of debt that we refinanced on June 1, 2011, and during the third quarter of 2012.

The Company recorded income tax expense of $18.2 million in the fourth quarter and $89.7 million for the full year. The effective tax rate for the year was 36.8%. This compares to an effective tax rate of 38.6% in 2011. The decline in our effective tax rate is primarily the consequence of an IRS penalty abatement and a lower effective state tax rate.

Net income attributable to Select Medical Holdings was $39.4 million in the fourth quarter, and fully diluted earnings per share were $0.28. This compares to $0.25 in the same quarter last year.

For the full year, net income attributable to Select Medical was $148.2 million and fully diluted earnings per share was $1.05. This compares to $0.71 for the prior year.

During both 2012 and 2011, we incurred losses on early retirement of debt related to refinancing activities. Excluding these losses and the related tax effects in both periods, adjusted net income per share was $1.07 for the full-year 2012 compared to $0.84 for the full-year 2011.

We ended the year with $1.47 billion of debt outstanding and $40 million of cash on the balance sheet. Our debt balances at the end of the year included a little bit more than $1.1 billion of term loans outstanding, which is net of the original issue discount; $167.3 million of HoldCo senior floating rate notes; $130 million in revolving loans outstanding; $70 million of the 7 5/8% senior sub notes; with the balance of $6.3 million consisting of other miscellaneous debt.

As we mentioned in our press release issued yesterday, we entered into a new $300 million incremental term loan with a three-year maturity. We also issued Call Notices on the remaining $70 million of the select 7 5/8% senior sub notes and all of the remaining $167 million of the Holdings' senior floating rate notes. The call period is 30 days, and we expect to redeem those notes on March 22.

Operating activities provided $104.6 million of cash flow in the fourth quarter and $298.7 million of cash flow for the year.

Days sales outstanding was 45 days at December 30 of 2012, compared to 51 days at September of 2012 and 53 days at the end of last year. The decrease in DSO is primarily due to the timing of the periodic interim payments we receive from the Medicare program at our specialty hospitals and a reduction in our non-Medicare receivables.

Investing activities used $32.2 million of cash flow for the fourth quarter and $72.4 million for the full year. For the year, this includes $68.2 million for the purchase of property and equipment; $14.7 million of investment in businesses; and $6 million in net acquisition-related payments, which were offset in part by the sales of assets of $16.5 million for the year.

Financing activities used $81.9 million of cash for the fourth quarter. The use of cash in the quarter primarily resulted from the payment of the special cash dividend of close to $211 million, offset by borrowings under the revolving portion of our credit facility of $130 million.

Financing activities used $198.2 million of cash for the year. The use of cash resulted primarily from the refinancing activities during the year, the special cash dividend, and stock repurchases of close to $47 million.

As Bob mentioned, our Board of Directors authorized a $100 million increase in our share repurchase program. This brings the capacity to $350 million.

During the fourth quarter, we did not repurchase any shares of our common stock. During the year, we repurchased a little bit more than 5.7 million shares at a total cost of $46.8 million. Under the share repurchase program, we have spent a total of close to $164 million of the now $350 million authorized, and have repurchased almost 22.5 million shares.

I would like to close by again confirming our 2013 business outlook initially provided in our January 7 press release. This includes net revenue in the range of $2.95 billion to $3.05 billion; adjusted EBITDA in the range of $400 million to $415 million; and EPS in the range of $0.98 to $1.04.

As mentioned in our January 7 press release, the current business outlook includes adverse financial impact of the MPPR changes for our outpatient services that became effective April 1 of 2013, but does not include any potential adverse impact from sequestration should that occur, absent further congressional action.

This concludes our prepared remarks, and at this time we would like to turn it back to the operator to open the call up for questions.

(Operator Instructions) AJ Rice, UBS.

Thanks. Hi, everybody. First of all, maybe a quick comment on the bad debt. Obviously, getting a 60 basis point improvement on a line item that's fluctuated between 1% and 2% is a nice margin swing. Do you think the level you're at now is sustainable, or is that a little bit of an anomaly?

No, AJ, we are pretty comfortable now. I know we have talked about bad debt being in the 1.8% range. I would say the range now is closer to 1.5% or maybe even a little bit less than that.

The operators have done a great job collecting a lot of the older receivables, and we are more comfortable with that 1.5% range.

Okay. You mentioned exiting some contracts in contract therapy. Is that -- can you give us some flavor for how many contracts we are talking about or the portion of book?

And is that contracts that became unprofitable because of the recent reimbursement changes? Or is that something that has been a trouble spot for a while?

AJ, we dropped about 10 contracts in the quarter. They were just contracts that we continued to have very, very little margin in them, and it didn't make any sense to continue them.

Okay. On the guidance, does the guidance include any benefit from either the refinancing or ongoing buybacks?

They do not.

Okay. Then final question for me. We are at the end of the -- obviously the moratorium has expired. You could conceivably start building new LTACs. Are we assuming that there are any new additions this year?

Also, maybe just comment on acquisitions and joint ventures and what the pipeline looks like there.

AJ, this is Bob. In the current year, I wouldn't look for the Company to start construction on new LTACs. I think our first focus is to expand bed capacity in those LTACs that over the years have enjoyed very high or virtually full occupancies. So that is really our priority; we get our best return on investment on that and our best pull-through. And we will wait for a bit more certainty in the regulatory and legislative environment before we would embark upon a lot of new allocation of capital to the construction of new LTACs.

In terms of the other segment of our business, we do see potential of more growth in the rehab segment, rehab part of our business, mainly through our model of joint-venturing. So while you can't move those as quickly because they are obviously dependent on future partners, that is still our focus.

Okay. Thanks a lot.

Frank Morgan, RBC Capital Markets.

Good morning. In your guidance what would be the implied cash flow from ops outlook for 2013? And then how much CapEx do you think you will put out in 2013?

Frank, the CapEx, our expectation on CapEx is probably somewhere in the neighborhood of $70 million to $80 million.

Okay. Then on the cash flow from ops, is it safe to grow it at some level off the annual number for '13 -- I'm sorry, the annual number for '12? Is there anything unique we should be thinking about in terms of the cash flow from operations in '13?

Yes, I actually think it's going to be a little bit less than 2012.

Okay.

Cash from operations.

Okay. It is just -- any particular reason?

Yes. It is really a function of the AR. If you take a look at the AR that we experienced in 2012, it was a significant improvement. And consequently, I think that 45 days, we don't anticipate it going down much further than that. As a matter of fact, it may bounce back a little bit.

Okay. Well, I guess that ties in with the improvement in bad debt you saw this year. And just a technical question, just making sure. The $20 million hit from sequestration, that is a nine-month number, right?

The impact of a 2% cut to your specialty hospital business, that is what it would be for the period of the sequester, isn't it? Not an annualized number, but for the amount that it would be in effect for '13.

Yes, Frank, the $20 million is a ballpark number and it really is an annualized number.

Okay.

I think one of the -- it is really a function as to how sequestration is applied. Historically the way sequestration or any hit has been applied is against the base rate. If it is applied against the base rate, then the cost-based business, being the short stays, are in the high-cost outlier, would not be impacted.

So I know in a lot of the -- when a lot of you and your peers take a look at it, they take a look at the total Medicare dollars. It is actually the Medicare dollars that are only associated with DRG payments as opposed to that which is associated with the short-stay outliers and the high-cost outliers.

Okay.

I think across the industry the cost-based reimbursement typically is in the 25% to 30% range of the total Medicare dollars.

Okay, so you take that out, then do the 2% of the --?

That's correct.

-- balance of it. Okay. And any guidance you might be willing to share with us on some of the below-the-line items? With all this refi activity going on in terms of maybe like interest expense or anything unique in any of these other lines, the JV equity income lines, or some of these other below-the-line.

Yes, I think as far as the financing was concerned, I think on an annualized basis it is probably in the ballpark of $7 million.

Okay.

But again that is an annualized number.

Okay. All right. Then one last one. Case mix in the quarter on the specialty side, case mix growth in the quarter?

Case mix was about 1.17, I believe.

Okay. I will hop off. Thanks.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, great. I wanted to get a sense of what you guys thought, when you think about long-term what the growth of your business is going to be. It makes me think about 2015 and 2016.

I guess the 2013 guidance basically has adjusted EBITDA roughly flat and EPS down slightly in 2013, even though you are not assuming that sequestration happens. So I know there's a few more rate cuts in 2013 than there are going to be in '14 and '15; but you are still going to have Market Basket adjustments and the phase-in of the budget neutrality adjustment.

Do you expect 2014 and 2015 to be similar EBITDA type growth years for the Company? Or is there reason to think that you will accelerate off of this base?

Kevin, this is Bob. The out-years could be the same if the Company doesn't make any strong moves to accelerate growth. Our history has been that we are fairly -- we try to be opportunistic and look for good value in acquisitions and when we deploy capital to grow.

So there is obviously a lot of things that we could do. The judgment is whether we think it is prudent to do so.

So what you saw last year was a fairly large dividend; you have seen stock buybacks. So I think what you can take from that is that we are not comfortable with any other opportunities that are out there such that our capital has been used to look to reward shareholders in other ways.

I think this current year is an important year. If we get some more visibility on what the environment is going to look like in 2014 and beyond we can obviously makes some bolder moves, if I can use that term.

But failing that, we won't go out and deploy capital either to build new hospitals or to make acquisitions if we think in hindsight that they can look like bad moves for shareholders. So we are hanging around and we are keeping an eye on things, and we are still the type of company that can move quickly.

So there are opportunities out there to make acquisitions, but the question is -- is that they're at the price; and given where the macro environment is right now for the postacute services, is that the right move? So we will be watching it, and so I'm not really prepared to give any guidance for 2014 or 2015 or beyond.

Okay. I think that's very helpful. I guess so what you are saying is obviously as a Company you have had a lot of history of buying things accretively and buying back stock or giving dividends. So that is just all a function of where you are on the rate visibility side of things.

And you figure that as rates become more stable you may flip back from share repurchase and special dividends, back towards acquisitions. Or it is easier to do that, I guess, if you get more visibility.

Absolutely. And it is not just rate, you look at things -- the industry has been working for a couple years to get patient facility criteria passed. It hasn't happened yet. But that I think would certainly give the industry a little bit more stability and visibility on the LTAC side.

We have a strategy on the rehab side. The outpatient has been a stable, highly non-Medicare business, which we like very much.

So we will be watching what is going on in all the segments and the development of ACOs and what is happening with bundling and what is happening on the regulatory front and whether sequestration happens or doesn't happen, and make moves accordingly.

Okay. Then just one last quick question. The equity earnings in the quarter you mentioned it was down because of losses in some startup companies where you own a minority interest. I guess, what kind of startup companies are you investing in?

I think we have that in the -- we have a list of those companies in our filed 8-K. But we have an investment in NaviHealth which is a Welsh, Carson company, which is focused on postacute payment and risk-taking.

We have an investment in a rehab-based physician practice management company. We have an investment in an inpatient hospital within a hospital psychiatric company. And we have an investment in a rural hospital health -- hospital management service in joint venture with the Mayo Clinic. And we have an investment in an alarm alert technology company that we are using in our hospitals.

So those are five hospital -- five investments that we have right now.

I guess the one that just jumped out at me from that list is the NaviHealth. Is that something that you guys are really looking at doing, as far as taking risk from a postacute care perspective?

Well, we are not doing it right now. But through our involvement in that company, which is I think doing some unique things, that is really where we are monitoring it and participating in it from a Board level, to really -- to get a better understanding. So that when we have to move in that area we will have, hopefully, a level of sophistication that we won't have to learn on the job, if you will.

Okay, great. Thanks.

Gary Lieberman, Wells Fargo.

Thanks, good morning. This is Ryan Halsted on for Gary. I guess my first question was going back to the environment in DC. It seemed like at the beginning of the year there may have been some negative rhetoric coming up. I guess, I know you gave a brief update on the legislation. I was just curious if you are hearing, I guess, some negative rhetoric in DC; and any general comments on the outlook, on the regulatory outlook there.

Yes, I guess I don't know that I can give great insight here. If you follow this industry historically there has always been noise, particularly around the LTAC and the LTAC industry. In this day and age with a lot of bundling demonstrations, Accountable Care Organizations, nothing really surprises me.

I don't think that -- I think the one thing that is consistent, whether you look at the Congress or look at CMS or look at MedPAC, I think that they all continue to say for the right type of patient the LTAC hospital makes both clinical and economic sense for the Medicare program.

So that is why, above everything else, our primary public policy goal remains adoption of LTAC patient facility criteria. But yes, from time to time you do get that; but a lot of other segments get it as well, including home health and SNF and a lot of others.

So I think as a small industry we certainly get our share. And that is why we have a public policy initiative.

Okay. That's helpful. I guess going back to some of those initiatives you have investments in, I saw the announcement about the Mayo JV. I guess I was just curious what you were looking at with that venture, and what you may hope to learn from that.

Well, this is the providing of services similar to that that we currently provide, not exactly at the same level, in more rural settings. Because as you find, that is important and it is something that Mayo had developed some really outstanding clinical protocols and some operational areas. And they teamed up and partnered with us to move that across a larger geographic area.

Okay. I guess my last question, so you have talked about potentially expanding bed capacity. Any specifics you can offer there? What kind of capacity availability do you think exists, and how aggressively you could potentially build in 2013 on some of that.

Yes, we haven't really put out any specific guidance on the amount of beds, what we are looking at. Because many of our hospitals are hospital-within-a-hospital, obviously having -- negotiating to be able to get more space is always an issue, even if we have a demand profile.

Then in some of our locations we do have some construction that we would want to do to add on to those hospitals, and we are going through the regulatory and the real estate processes to do that. So I am not comfortable at this point really giving a bed number and a financial impact; but we do have a number of hospitals that enjoy fairly high occupancies.

Okay. How about as far as a runway, I guess, on the regulatory approval side of that, that you just mentioned?

Well, I think it varies depending on what state you're in. For example, we have some that we're going to be wanting to do in the state of Florida, for example. So you may have anywhere from 30 to 90 days to get local real estate approvals.

And then in some of our markets where we have hospitals-within-hospitals we really have to work with our host hospitals to free up space, and then get in and do any renovations that are necessary. And sometimes that can be anywhere from 30 days to 120 days. So it is a mixed bag.

Okay, great. Thanks a lot.

Miles Highsmith, RBC.

Hey, Bob. Just a follow-on from the earlier question. I am just curious, following some of the commentary out of MedPAC in December if there has been any specific initiative on your part to educate them just in terms of the value of LTACs. Or do you guys have bigger fish to fry and maybe that comes later?

I want to always be respectful of the stuff that is coming out of MedPAC, and I was -- notwithstanding some of the negative that seemed to come out of there, I was still gratified to see that a number of physicians and others who serve as MedPAC Commissioners added positive comments about the role of LTACs in their local communities. And it is important for us to continue to engage with them and work with them.

But at the end of the day, the Congress engaged on MedPAC matters as far back as 2007. And CMS obviously has a very big role, and we are looking really toward the April proposed rule that comes out.

So we always have to try to make judgments on where we put our resources. So all are important and some more than others. So yes, we will continue to engage policymakers or advisors to policymakers wherever we can.

So I think we have a pretty good story to say, and there isn't all negative. There is a fair amount of positive.

Again it comes back to this -- for the right type of patient the LTAC hospitals make really great clinical and economic sense for the program and for patients. And we fit I think very solidly, although not in a large area, in the continuum of care.

The big debate that is going on right now is this whole coordination of care. All these bundled payments and these Accountable Care Organizations is really about where patients should be treated and how they should move through the postacute.

That is a debate that is just going to -- I think that is just going to continue, because the reality is that there is a lack of coordination during what they consider this episode of care in the postacute. That is I think what everybody is trying to wrap their arms around it.

You see us doing it through our joint ventures. You see it through the demonstration projects. It is a theme and a thread that is running through some of the comments coming through MedPAC and others, which is -- how do you deal with this lack of coordination through this episode of care in the postacute?

So we are trying to engage at all levels on that, and this is not an issue that is going to be resolved soon. I don't think anybody that is involved in this area or is thoughtful think that this is something that is going to happen this quarter or even this year. It is going to be very much in the out-years.

okay. Thanks for your perspective on that. Marty, just a quarterly question on the restricted pay capacity. I guess with the income you generated this quarter, is it right to think you got just over $100 million following the dividend that was done in Q4?

Miles, you are always very good with that. Yes, that is appropriate.

Just a follow-up. Is that governed by your credit agreement? The reason I ask is, if the bonds go away will that number still apply?

Yes, it will still apply.

Okay, thank you.

There are no further questions at this time. I would now like to turn the call back to management for closing remarks.

No closing remarks. I appreciate your attendance and your interest in the Company, and we will look forward to updating you next quarter.

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