Select Medical Holdings Corp (SEM) 2013 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 its second-quarter 2013 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 the 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. Over to you.

Good morning, everyone, and thank you for joining us for Select Medical's second-quarter earnings conference call for 2013. For our prepared remarks I will provide some overall highlights for the Company and our operating divisions, and then ask our Chief Financial Officer, Marty Jackson, to provide some additional financial details; and then we will open the call up for questions.

Our reported earnings per fully diluted share were $0.20 in the second quarter, compared to $0.31 in the same quarter last year. Our earnings per share in the second quarter of this year included a nonrecurring loss on early retirement of debt. Excluding this loss and its related tax effect, adjusted earnings per share was $0.27 for the second quarter.

Net revenue for the second quarter was $756.7 million, compared to $750.2 million in the same quarter last year. During the quarter, we generated approximately 74% of our revenues from our specialty hospital segment, which includes both our long-term acute care and our inpatient rehab hospitals, and 26% from our outpatient rehab segment, which includes both our outpatient clinics and contract services.

Net revenue in our specialty hospitals for the second quarter increased slightly to $559.4 million, compared to $557.1 million in the same quarter last year. This growth resulted primarily from increases in patient volume, offset by a mandatory 2% reduction in our Medicare payments due to sequestration cuts that became effective on April 1.

This reduction had a $9.1 million impact to our specialty hospital revenues in the second quarter and was the principal reason for the decline in our net revenue per patient day, which was $1,532 in the second quarter compared to $1,554 per patient day in the same quarter last year.

Our patient days increased 1.7% to over 341,000 days in the second quarter, compared to 336,000 days in the same quarter last year. And our occupancy was 73% in the second quarter, compared to 71% in the same quarter last year.

We generated approximately 84% of our specialty hospital revenue from our long-term acute care hospitals and 16% from our inpatient rehab hospitals during the second quarter.

Net revenue in our outpatient rehabilitation segment for the second quarter was $197.1 million, compared to $193.1 million in the same quarter last year. In the second quarter, revenue in our outpatient rehabilitation segment was negatively impacted by sequestration and the increase in MPPR from 25% to 50%, which both became effective on April 1. We experienced a decline in revenue of $400,000 due to sequestration and $1.7 million due to MPPR in the quarter.

During the second quarter we generated approximately 77% of our outpatient revenue from our owned and managed clinics, and 23% from contract services. Net revenue in our outpatient clinic-based business, including our owned and managed clinics, increased 5.5% to $150.8 million compared to the same quarter last year.

For our owned clinics, patient visits increased 4.4% to over 1.2 million visits compared to the same quarter last year. Our net revenue per visit was $103 in the second quarter compared to $102 in the same quarter last year.

Net revenue in our contract services business in the second quarter declined 7.7% to $46.3 million compared to the same quarter last year. The primary reason for the decline was related to contract terminations.

Overall adjusted EBITDA for the second quarter was $106 million compared to $110.3 million in the same quarter last year, with overall adjusted EBITDA margins at 14% for the second quarter compared to 14.7% margins for the same quarter last year. Our decline in adjusted EBITDA and our adjusted EBITDA margins was primarily due to the Medicare sequestration cuts and the MPPR payment reductions with no corresponding reduction in costs.

Specialty hospital adjusted EBITDA for the second quarter was $96.4 million, compared to $102.2 million in the same quarter last year. The primary reason for the decline in adjusted EBITDA in our specialty hospitals was due to the Medicare sequestration cuts, which we were not able to offset with corresponding reduction in operating costs. Our EBITDA margins for the specialty hospital segment were 17.2%, compared to 18.3% in the same quarter last year.

Outpatient rehabilitation adjusted EBITDA for the second quarter increased slightly to $26.1 million, compared to $25.8 million in the same quarter last year. We were able to increase our adjusted EBITDA while offsetting reductions that resulted from the sequestration cuts and the MPPR payment reductions. Adjusted EBITDA margins for the outpatient segment were 13.2% in the second quarter, compared to 13.4% in the same quarter last year.

For the outpatient clinic portion of our business, adjusted EBITDA increased 5.3% to $22.8 million, compared to $21.6 million in the same quarter last year. Adjusted EBITDA margin for our outpatient clinics were 15.1% for both the second quarter of this year and last year.

For our outpatient -- for our contract services, adjusted EBITDA was $3.3 million and margins were 7.1% in the second quarter compared to $4.2 million of adjusted EBITDA and margins of 8.4% in the same quarter last year.

I also want to provide a couple of updates since our first-quarter earnings call in May. In conjunction with our earnings release yesterday, the Company announced that our Board of Directors declared a quarterly dividend of $0.10 per share at its meeting on August 7. The dividend is expected to be paid on or about August 30 to shareholders of record on August 20.

The Company also announced in late June the acquisition of two inpatient rehabilitation hospitals, one in San Antonio, Texas, and one in Scottsdale, Arizona. Select Rehabilitation Hospital San Antonio is a 42-bed majority-owned hospital; and Global Rehab at Scottsdale is a 50-bed rehabilitation hospital managed by Select and operated as part of a joint venture with Scottsdale Healthcare, a three-hospital system in Scottsdale, Arizona.

More recently, the Company entered into an inpatient rehabilitation joint venture in Columbus, Ohio, with OhioHealth, a multi-hospital system based in Columbus. OhioHealth Rehabilitation Hospital, a 44-bed rehabilitation hospital serving the Central Ohio market, took its first patient on August 1.

On the regulatory front, on August 1 CMS released the final rule for its policies and payment rates for fiscal-year 2014 for long-term acute care PPS. This was fairly consistent with the provisions of the proposed rule that were put out in May.

The net Market Basket increase to the standard federal rate was 0.5%, which included the second-year phase-in of the Budget Neutrality reduction, among other adjustments. As indicated in its proposed rule, CMS will allow the current regulatory moratorium -- what we refer to as the 25% rule -- to lapse in fiscal-year 2014.

Our LTACs will begin to be subject to this more restrictive rule for their respective cost reporting periods beginning on or after October 1, 2013. Because each of our LTACs has a unique Medicare cost reporting period that commence on various dates throughout the year, the effects of the rule will be phased in over time, and we would not realize the full impact of the lower admission threshold until calendar-year 2015.

As we previously indicated, we expect the impact this year, calendar-year 2013, to be less than $1 million.

On July 31, CMS released the final rule for policies and payment rates for fiscal-year 2014 for inpatient rehab PPS on July 31. The standard payment amount was increased by 3.5%, which included a net market basket increase of 1.8% and an additional 1.7% increase related to various Budget Neutrality adjustments to the standard payment rate.

In addition, CMS announced that in fiscal-year 2015, which affects discharges occurring on or after October 1, 2014, it will eliminate several codes currently used in compliance with the 60% [tag].

At this point I will turn it over to Marty Jackson to cover some additional financial highlights for the quarter before we return for questions.

Thanks, Bob. For the second quarter, our operating expenses, which include our cost of service, general, and administrative costs and bad debt expense, increased 1.8% to $652.5 million, which compares to the same quarter last year. As a percent of our net revenue, operating expenses for the quarter was 86.2% compared to 85.5% in the same quarter last year.

Cost of services increased 2.1% to $625.7 million for the second quarter compared to the same quarter last year. As a percent of net revenue, cost of services was 82.7% for the second quarter, which compares to 81.7% in the same quarter last year. The primary reason for the 100 basis point increase in our cost of services was the mandatory Medicare sequestration and MPPR reductions which we were not able to offset with a corresponding reduction in operating costs.

G&A expense was $17.9 million in the second quarter, which as a percent of our net revenue was 2.3%; this compares to $18.6 million or 2.5% of revenue for the same quarter last year. Bad debt as a percent of net revenue was 1.2% for the second quarter; this compares to 1.3% for the same quarter last year.

As Bob mentioned, total adjusted EBITDA was $106 million for the second quarter and adjusted EBITDA margins were 14%. This compares to an adjusted EBITDA of $110.3 million and 14.7% adjusted EBITDA margins in the same quarter last year. The primary reason for the decline in the adjusted EBITDA and our margins were the mandatory Medicare sequestration and MPPR reductions, as we previously discussed.

Depreciation and amortization expense was $15.9 million in the second quarter, compared to depreciation and amortization expense of $15.4 million in the same quarter last year. We did incur a loss on early retirement of debt of $17.3 million due to the refinancing activities that occurred in the second quarter.

In May, we completed a private placement of $600 million of aggregate principal of 6 3/8% senior notes, which are due in 2021. We used the net proceeds of the offering to prepay a portion of term loans outstanding that were scheduled to mature in 2018. In addition, we extended the maturity -- the majority of our revolving credit facility and repriced approximately $521 million of the balance of our term loans due 2018, reducing borrowing spreads by 75 basis points to LIBOR-plus-3% and our LIBOR floors from 1.75% down to 1%.

We generated $600,000 in equity and earnings during the second quarter compared to $2.8 million in the same quarter last year. The decline was primarily the result of losses incurred in the startup companies where we are minority owners.

Interest expense was $21.9 million in the second quarter, which is down from $23.8 million in the same quarter last year. The reduction in interest expense for the quarter is primarily related to lower interest rates on the portions of debt that we refinanced during the third quarter of last year and the first quarter of this year.

The Company recorded income tax expense of $19.8 million in the second quarter. The effective tax rate for the quarter was 39.8% compared to an effective tax rate of 38.2% in the second quarter of last year. The primary reason for the rate increase was relative growth in income in states with higher tax rates.

Net income attributable to Select Medical Holdings was $27.8 million in the second quarter, and fully diluted earnings per share was $0.20. Excluding the loss on early retirement of debt and its related tax effect, net income excluding that loss would have been $38.3 million; and fully diluted adjusted earnings per share was $0.27 in the second quarter, compared to $0.31 in the same quarter of last year.

We ended the quarter with $1.53 billion of debt outstanding and $8.8 million of cash on the balance sheet. Our debt balances at the end of the quarter included $811 million in term loans, which is net of the original issue discounts; $600 million in 6 3/8% senior notes outstanding; $105 million in revolving loans outstanding; with the balance of $14.9 million consisting of other miscellaneous debt.

Operating activities provided $34 million of cash flow in the second quarter, which resulted primarily from cash income generated in the quarter, offset by increases in our accounts receivable and a reduction in accounts payable and accrued expenses, as well as cash tax payments that exceeded our tax liability in the quarter. Days sales outstanding remained stable at 51 days at both June 30, 2013, and March 31, 2013.

Investing activities used $32.9 million of cash flow for the second quarter. The use of cash included $14 million for the purchase of property and equipment, and $18.9 million related to business investment and acquisition activities during the quarter.

Financing activities provided $3.1 million of cash for the second quarter. The provision of cash in the quarter resulted primarily from refinancing activities in the quarter and proceeds from bank overdrafts, which were offset by dividend payments in the quarter.

During the second quarter, we did not repurchase any shares of common stock. Under the share repurchase program we have spent a total of $173.6 million of the $350 million authorized and have repurchased 23.6 million shares.

I will conclude my comments by outlining the financial guidance for calendar-year 2013 that we provided in our earnings release. This includes net revenue in the range of $2.925 billion to a little bit north of $3 billion; adjusted EBITDA in the range of $375 million to $390 million; and fully diluted adjusted earnings per share, which excludes the loss on early retirement of debt and its related tax effects, to be in the range of $0.87 to $0.94.

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

(Operator Instructions) Frank Morgan, RBC Capital Markets.

Good morning. Hey, thanks for quantifying the impact of the 25% rule in '14. I believe you made some earlier comments in previous calls about the ultimate impact somewhere in the $5 million to $10 million range. I was just curious; is that still your latest estimate on the full phased-in that you would probably see in 2015?

Or are there any other steps that you can take, mitigation steps to reduce -- or any other things you are doing to maybe reduce that?

Frank, this is Bob. Now that the 25% rule is really a reality, I think what you can expect is we're going to continue to study it pretty carefully over the balance of this year and take some steps. It is likely that we will quantify the impact when we come out with guidance for next year, so I am a little hesitant to try to hang a number on what it would be for next year, a definitive number on it for what it would be for this year.

We still have a number -- a bunch of time between now and the end of the year. And as you remark and as we commented, the impact for this year is not great. It doesn't fully phase in till '15.

So we will do some work on that and probably quantify it with a bit more specificity when we come out with guidance for next year.

Okay. How many of your hospitals do you think will actually be impacted by it based on their fiscal years or their cost reporting years in 2014? Would it be half your hospitals, or a quarter of your hospitals? Do you have any just general idea or high-level thought?

Frank, if you take a look at -- as you know, it occurs based on year-end, the hospital cost report. If you take a look at each quarter -- what I will do is I will provide you with each quarter as opposed to each month.

But in Q4, we have 17 hospitals that are impacted. In Q1 of 2014 it would be 37. In Q2 of '14 it would be 20. In Q3 of '14, it would be 34.

So that gives you the breakout of the hospitals. Now within each of those quarters, some hit in the first month of that quarter and some will hit in the second and third quarter. So it will vary.

Understand that. Okay. Then maybe over on the rehab side, with that rule out you referenced some of the changes, taking away some of the codes out of the presumptive. Is that much of a headwind for you, or is that something you think you can adjust to fairly quickly? How should we think about that on the IRF side?

Frank, we're going to look at that a little closer, but I don't think you should think of that as a game-changer or a lot of headwinds for us, particularly with the year and our number of rehab hospitals and where we are placed and our market share and the test we look at.

So we have a little bit more work to do on that, but I would not look at that to be a significant headwind.

Okay, thanks.

Kevin Fischbeck, Bank of America.

Great, thank you. Just maybe following up on the regulation, I guess, any thoughts about the patient assessment criteria and where CMS is leaning around that, versus what the industry has been lobbying for? I think I read somewhere in the reg that one analysis that they did said that only 31% of industry admissions would fit the criteria that they seem to be honing in on. Just wanted to get your sense about how that seems to be shaping up.

Yes, Kevin. It is really pretty tough to figure out how it is shaping up, because everybody has weighed in with some policy ideas. You had a lot of information or some policy ideas that came out of MedPAC. You had some narrative that was -- came out of CMS rule. You have the Roberts-Nelson bill that is out there. And then you have some more work that is being done by Ways and Means and Senate Finance.

So there is a lot of different crosscurrents on the discussion. We try to follow them all pretty closely. And obviously there are some policy statements that -- your CMS or MedPAC, some are of interest and some are of concern for us.

But we are also maybe sensing an opportunity here. We have been trying to push for the patient facility criteria for some time, and it may actually look like we're going to get an opportunity to get something done.

In terms of what the impact would be to the industry and to Select in particular, we have a fairly high-acuity patient base. And I have said this before, that I would certainly be willing to accept some loss of patient volume in exchange for some long-term clarity about where the role of the LTACs fits.

There is some consistency going through it. I think when I look at some of the information that has been put out by CMS on the five types of patients that would be presumptively qualified for LTAC, we are encouraged very much by that. On the flip side of that, there is some discussion about the requirement of an ICU stay in a general acute care hospital as a prerequisite for an LTAC stay. That gives us a bit more of concern, because that has a tendency to be much more limiting.

The Roberts-Nelson bill is still out there. A number of weeks ago at a Senate Finance hearing, Senator Roberts told CMS officials that he is preparing a new draft and he was looking to get that scored and continue to push with it, maybe as part of the SGR fix at the end of the year.

So, there is a -- I don't know how to narrow it down much more than that, other than to say that there seems to be a lot going on. Some of it encouraging and some of it discouraging. Some of it looks good, some of it looks pretty risky.

But I do think it is -- as we need to look at it as an opportunity to engage in a debate and hopefully get something that can finally bring some certainty. I think there is some consistency that goes throughout all of the discussions, and that is that for the right type of patient there is pretty good support for LTACs. And that is at MedPAC and that is at CMS and that is certainly in Roberts-Nelson, and that is certainly from what we have been hearing from the appropriate committees on the House and the Senate side.

So I am sorry I cannot be more definitive than that. But I think the next 12 months is going to be pretty active.

No, that is actually very helpful commentary. I guess just going to the guidance, just want to clarify. Because I guess the first time you provided guidance -- or I guess last time you provided guidance I assume it did not include the acquisitions or the three facilities that you mentioned before, and now it does.

What is the net impact? Now, the two ones you bought were probably additive, but maybe this JV in Ohio maybe has startup losses associated with it. I just wanted to see how those things impacted the guidance.

Well, I will let Marty address that specifically, but let me say this. Of the three facilities that were either two the acquired and one was signed as a joint venture, two of the three are startups. We acquired the interest in the one in Scottsdale right as it was beginning, it was opening its doors. So there are certainly some startup losses associated with that one.

And the same thing with the deal in Columbus, which we like very much, and we think they are all going to be strong deals. And the deal with -- the joint venture with OhioHealth, that is also a startup. We took our first patient August 1.

So as you know, you have to go through your surveys and your certification process and so forth. So I don't know if Marty has any other comments, but in terms of the accretion of those operations, I just want to point out that two are startups and are going to have some losses.

Yes, Kevin, there is minimal impact in 2013 associated with those transactions. But you will see some benefit, you will see some nice benefit in 2014.

Okay. That's helpful. So the guidance is really kind of apples-to-apples because the start-up plusses wash off the benefit from the San Antonio.

That's correct.

Probably a good way to look at it.

Okay. All right. Then I guess maybe this answers the question that I had. I just was trying to bridge from EBITDA down to EPS, and it seemed like there was something going on below the line.

It may be that there is a lot more D&A now, that the Q2 D&A is not the right run rate because of these three facilities coming online. Is that the way to think about the rest of the year? Or is there something else going on below the line?

No, I am not -- it is certainly not anything associated with the three facilities. And there is nothing else going on below the bottom line.

All right. So like D&A and expense in Q2 are good run rates for the rest of the year?

Yes, I think so.

Okay, all right. Great. Thanks.

AJ Rice, UBS.

Thanks. Hello, everybody. Maybe just following up on the comment about the Ohio joint venture. Does that look similar to the other types of JVs you have done, or is there any new wrinkles there?

And then maybe stepping back more broadly, comment on anything you are seeing in terms of a pipeline for joint ventures or acquisitions.

I think the OhioHealth deal is consistent. I mean, they are all a little different. It is consistent with our strategy.

And it is with a major player. OhioHealth is a very reputable, well-thought-of player based in Columbus; they're really throughout Central Ohio. So we are pleased to be partnering with them.

It is in an existing building. It is a little different in that regard, and that helped us really get operational as quickly as we did.

The other thing that I think is a little different with the OhioHealth deal is that is impatient-only at this point, not outpatient. So that would be a bit different.

It is also the same, AJ, in that we think that there is going to be pretty good opportunity for growth beyond just the initial 44-bed rehabilitation hospital. So we are really pretty excited about that deal and being with a good partner, as we are in Scottsdale, with Scottsdale Health which we think is similarly a great partner.

Scottsdale Health recently announced that they had a Letter of Intent to form a statewide system with John C. Lincoln Health Network. So they are growing, and we look to be growing as well in Scottsdale.

I would also say that we feel good about those two deals because we also have LTACs in both of those markets. So in Scottsdale we have an LTAC HIH inside one of Scottsdale Health hospitals; and in Columbus we have three long-term acute care hospitals and have a pretty good significant presence in the market.

So from those standpoints -- and again, they are all different, but there is some good consistency and it is very consistent with our strategy.

Okay.

The pipeline was the second part of your question. I will tell you that in some prior conference calls I have said that I have been disappointed about our pace of getting the rehab joint ventures done. We have two that have been done now and I feel very good about our pipeline.

I think we have some great deals that are teed up. It is always hard to get them across the finish line, and I have given up on trying to predict timing per quarters of when they would be signed and closed.

But we have got a number of we think very exciting deals and a pretty good pipeline. So I am actually more optimistic today than I have been in the past.

Okay. Then maybe just stepping back a little more broadly, capital deployment in general, priorities there. I know Marty mentioned you didn't buy any stock this quarter. What -- any thoughts on the buyback relative to spending money on acquisitions and development?

Sure, AJ. AJ, you've been around us for a long, long time. We are opportunistic. When something -- when a good value presents itself, we certainly take advantage of that.

We are taking a look at a number of acquisitions currently. We have had the dividend. And I think periodically you will see us purchasing stock back.

Okay. Maybe just asking an operational quarter, clearly one of the big themes across the sector, broadly defined, the provider sector, this quarter and first-half has been the soft volumes. Obviously this quarter you guys are above that trend.

When you drill down on it, is there anything behind that? You actually had pretty good volumes relatively speaking in both the specialty hospital and the outpatient business. Anything to highlight there or talk about there that drove that?

You know, AJ, you are absolutely right in terms of what is going on throughout the industry. I will say that I am very pleased with our volumes across the Company in the second quarter.

I mean, as you know we were disappointed with the volumes in the first quarter. We talked about what the reasons could be for the soft volumes in the first quarter.

For companies that have operations spread across the entire country, it is very difficult to give good, hard reasons for why volumes are down or whether they are up. On a month that they are -- or a quarter that they are up, I feel very good about how our operators have maintained their focus on each individual hospitals and pushing the volumes.

It is hard for me to see anything that I can really point to that is systemic across healthcare in general or more broadly, as you put it, to say that are either driving or not driving. I mean, sometimes we track with the general acute care volumes and sometimes we don't.

The second quarter was really strong, but that came on the heels of a first quarter that we were disappointed in. There is seasonal business, particularly a seasonality in the LTAC business. And sometimes it appears as though the season either doesn't start as quickly as you think it would or it tails off quicker.

So I can't -- it is really difficult for me to give a lot of color. Although I think we were hitting on all cylinders in the second quarter, and we have added some strength to our operational team. I think we did a much better job controlling expenses in the second quarter than we did in the first quarter.

So all of those I think combined for what we consider a pretty good, strong quarter.

Okay, maybe one last one I will slip in. On the equity earnings line or the non-consolidated line, obviously there is a lot of stuff in there, or it sounds like there is. Can you just comment on how the Baylor joint venture is going versus you referenced, Marty, I think the startup losses. Are those startup losses associated with investments that you have talked about before, I know, on that line? Or are you continuing to make new investments on that line?

Yes, AJ, the Baylor -- obviously we have talked about Baylor being in that line before. Baylor has been pretty consistent, so you can assume that in that line Baylor maintains that consistency.

It is really a function of the investments that we have talked about previously. And we have talked about those being primarily startup companies that we have invested with. We are just reflecting the losses associated with those startups in that line.

Okay.

If you look at -- and we talked about before about NaviHealth and Haven Behavioral; those are both investments. Amplion and our joint venture with the Mayo Clinic, and those are generating losses. We think they are good long-term investments. I feel good about them.

But we are absorbing some losses on our percentage of the business there, and I don't think there is any thought on our part that we would pull back from those. We haven't made any new investments in that area that would show up below the line, but we feel pretty good about the ones we are in.

Okay. All right. Thanks a lot.

Walter Branson, Regiment Capital.

Thanks a lot. Actually just to follow up on the last answer. Do you have any use or broad outline of expectations as to when those kind of startup losses would abate?

No, I don't think I would want to go out on it. I mean, those are not companies that we control. We have some input.

So that would be difficult and even a little presumptuous for me to try to predict when those startup losses will fall off. I would say that each of the investments I feel very good about the management and the strategic direction of all of them. But in the nature of the startup and the kind of investments and directions that they go, it would just be too difficult for me to give a prediction.

Okay, thanks. Then just one other thing. You indicated some concern about potentially a requirement for an ICU stay in a patient and facility criteria rule. Can you give us any sense as to what proportion of your LTAC payments don't have a prior ICU stay? I was under the impression it was close to all.

No, it is not close to all; and no, I probably couldn't give you at this point the profile of actually the origin of patients. It is going to become a more important area for us on data; we now have to track exactly where all of our patients' origins come from for the 25% rule.

And the discussion about an ICU stay is early; it is preliminary. I think it is going to be part of the debate, but I just don't know where that is going. And I wouldn't -- I don't feel comfortable giving you any data on that from our Company or the industry.

Okay, thank you.

Blake Goodner, Bridger.

Yes, hi. It's actually following up on the last question, just to get a little more color around this. It seems to me MedPAC has a little different view on this than even CMS on the LTAC side, where they seem to be going beyond patient criteria and focusing more on perhaps changing the payment system.

And they do focus in on this CCI versus non-CCI categorization, where a CCI patient -- I think it is actually defined as a patient staying 8 or more days at an ICU, not just one day. So that is the statistic I would be interested in.

How many of your patients are CCI patients? Because the direction MedPAC seems like they are going is they want to reduce LTAC payments for the non-CCI patients. So if you could give us a feel for what percent of your patients fall in CCI versus non-CCI, that would be helpful in terms of trying to figure out what the ultimate impact might be. Thanks.

Yes. When you refer to CCI patients, you're talking about the chronic critically ill?

Yes.

Well, I mean, that is the issue. There is no definition for the chronically critically ill. What you see is a theme going throughout all of these ideas -- whether it is MedPAC or CMS or Roberts-Nelson or the committees -- is they are trying to find some proxy for acuity.

Everybody -- I think there is broad agreement that the chronically critically ill patient is the one that belongs in the LTAC. But really the issue is, how do you define it? And this is what people are struggling with.

Roberts-Nelson attempts to define it through comorbidities. I mean there are a half a dozen different ways to define it.

This idea of an ICU is just another kind of crude instrument to say whether a patient is a measure of acuity. You have to appreciate that even patients that stay in ICUs -- I mean, an ICU patient at UPMC in Pittsburgh is going to be different than an ICU patient that has an ICU stay in a small Midwestern city. So you see these variations all across the map, so it is different to quantify.

So it is important, I think, for you to understand, this is what the policymakers and the industry are struggling with -- is, how do you define the chronically critically ill patient? I think that is the debate.

There are going to be some that you can pick categories, you can pick comorbidities, you can pick it through MS DRGs, you can pick it through all -- there is a whole varieties of ways that you could do it. And an ICU stay is another one.

I would say, I think a crude measure because there is variation of that across the country. And there is variation about the presence of ICU beds.

So I think that is the struggle. That is the exercise. That is the debate.

So that is why trying to quantify or putting out a lot of data on what it would be and how many days I think is just not worthwhile at this point. We are obviously looking at all of those things and trying to insert ourselves in the debate, as the industry is, as the AHA is, and others.

So, I appreciate that this is frustrating for investors. It is frustrating for the companies as well.

But it has been since 2007 that at least the industry and I know Select has been pushing for patient facility criteria. And now the debate is really heating up. And it is going to be tough, but we do welcome it because I do think it gets us to a point where we do get some stability.

And then just one follow-up, which is, CMS also suggested they were going to be releasing their contract report. Do you have any insights or thoughts as to what that report might be discussing or showing or the conclusions from that report? Thanks.

I do not. Anything that has not been released by CMS I can assure you I don't have any insights in what it says before it is released.

Thank you.

Thank you. There are no further questions in the queue, and so I would like to turn the call back over to the management for closing remarks. Thank you.

I have no closing remarks. I want to thank you for being part of the conference call. We will look forward to updating you again after the third quarter.

Thank you very much, ladies and gentlemen. That now concludes the conference call for today. You may now disconnect. Thank you very much.