Select Medical Holdings Corp (SEM) 2016 Q1 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 first quarter 2016 results, and the Company's business outlook. Speaking today are the Company's Executive Chairman and Co-Founder, Robert Ortenzio, and the Company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter, 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 Medical'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 over to Mr. Robert Ortenzio. You have the floor, sir,

Thanks Operator. Good morning everyone. Thanks for joining us for Select Medical's first quarter Earnings Conference Call for 2016. For our prepared remarks I'll provide some over highlights for the Company and our operating divisions, and then ask our Chief Financial Officer, Marty Jackson, to provide some additional financial details before we open the call for questions. As most are you aware, on March 4th Select completed the acquisition of Physiotherapy, a national provider of outpatient physical rehabilitation services, with 574 locations throughout the US. Beginning March 4th, Physiotherapy's results were consolidated and reported with Select, and are included is our outpatient rehab segment. Additionally on March 31st, we sold our contract therapy business, which was also part of the outpatient rehabilitation segment. Our outpatient rehab segment results for the quarter include our contract therapy business for the entire quarter. Net revenue for the first quarter increased 36.8% to $1.09 billion, compared to $795.3 million in the same quarter last year. During the quarter we generated approximately 55% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab hospitals, 22% from our Outpatient Rehabilitation segment, which includes our Outpatient Rehabilitation clinics and contract therapy services, and 23% from our Concentra segment. Net revenues in our Specialty Hospitals remain constant in the first quarter at $559 million, compared to $598.8 million in the same quarter last year. Our net revenue per patient day increased to $1,632 per day in the first quarter, compared to $1,575 per patient day in the same quarter last year. And was primarily driven by an increase in our Medicare revenue per patient day. Patient days decreased to 338,000 days compared to 352,000 days in the same quarter last year, primarily due to the hospitals that we have closed. I think it's important to point out that not including our closed hospitals, the volume drop would have been approximately 4,800 days, or 1.3% volume drop from the prior years. In addition, without the closed hospitals, admissions would have been down by 200 or 1.4% reduction. Occupancy was 72% in the first quarter compared to 73% in the same quarter last year. Net revenue in our outpatient rehab segment for the first quarter increased 21.2% to $238.1 million, compared to $196.4 million in the same quarter last year. The increase is attributable to our clinic based business, and a result of visits from our newly acquired Physiotherapy clinics, as well as an increase in visits in our existing clinics. Net revenue in our outpatient clinic based business increased 25.1% to 109, $95.7 million compared to the same quarter last year. For our owned clinics patient visits increased 27.5% to over 1.576 million visits compared to the same quarter last year. Our operators continue doing a great job growing visits. Not including Physiotherapy, our operators grew visits on a same quarter year-over-year basis of 8.5%, growing from 1.236 million visits to 1.342 million visits. Our net revenue per visit was $103 in both the first quarter of this year and last year. Contract therapy contributed $42.4 million of net revenue in the first quarter. Net revenue in our Concentra segment for the first quarter was $250.9 million, including $217.6 million from the medical centers. For the centers patient visits were over 1.84 million, and net revenue per visit was $118 in the first quarter. Concentra also generated $33.3 million in net revenue from the on-site clinics, the community-based outpatient clinics and other services in the first quarter. Overall adjusted EBITDA for the first quarter was $128.6 million, compared to $98.9 million in the same quarter last year, with overall adjusted EBITDA margins at 11.8% for the first quarter, compared to 12.4% margin in the same quarter last year. Specialty hospital adjusted EBITDA for the first quarter was $86.8 million, compared to $96.5 million in the same quarter last year. Adjusted EBITDA margin for specialty hospital segment was 14.5%, compared to 16.1% in the same quarter last year. The decline in adjusted EBITDA in our Specialty Hospitals was due to a decline in adjusted EBITDA at our long-term acute care hospitals. This was primarily attributable to our closed hospitals, as well as an increase in labor costs associated with increased patient acuity and higher wage rate for clinicians we experienced due to patient criteria and a nursing shortage. We also incurred adjusted EBITDA start-up losses of $3.8 million in our inpatient rehab hospitals. Outpatient Rehabilitation adjusted EBITDA for the first quarter increased 30.5% to $28.9 million, compared to $22.1 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 12.1% in the first quarter, compared to 11.3% in the same quarter last year. For the outpatient clinic portion of our business adjusted EBITDA increased $27.3 million in the first quarter, compared to $19.8 million in the same quarter last year. The increase resulted from our newly acquired clinics, as well as growth in our existing clinics. Contract therapy contributed $1.6 million in adjusted EBITDA for the first quarter. Concentra adjusted EBITDA for the first quarter was $34.2 million, and adjusted EBITDA margin was 13.6%.

Our reported earnings per fully diluted chair were $0.42 in the first quarter of this year, compared to $0.27 the same quarter last year. We had several one-time events in the quarter, including a gain on the sale of the contract therapy business, a loss on impairment of an equity investment, Physiotherapy acquisition costs, and a loss on early retirement of debt. Excluding these one-time events and the related tax effects, earnings per fully diluted share would have been $0.23 in the first quarter of this year.

I would like to provide you with a few other updates since our last earnings call in February. As I mentioned in my lead in, we closed on the acquisition of Physiotherapy Associates on March 4th. Physio has 554 outpatient clinics, and 27 orthotics or prosthetics clinics in the US, and was the largest outpatient rehab provider behind Select. We're excited to have completed the acquisition, and we're in the progress of integrating Physio operations with Select, solidifying our position as the largest provider of outpatient rehab services in the United States. We also sold our contract therapy business on March 31 for approximately $65 million. The contract therapy results for the first quarter are included in our consolidated operating results. On an LTM basis contract therapy contributed approximately $6.7 million of adjusted EBITDA, and had a margin of 4.6%. As I mentioned in our last call, we previously announced an agreement with Kindred Healthcare to swap certain LTAC hospitals under the terms of the agreement Select will transfer five LTACs with a combined 233 beds to Kindred, in exchange for four LTACs with a combined 287 beds plus $800,000 in cash. The swap transaction is expected to close sometime in the second or third quarter. Earlier this week we opened our new 60-bed Trihealth Rehabilitation Hospital in Cincinnati, Ohio in partnership with Trihealth. We are also close to opening our new 138 bed California Rehab Institute in Los Angeles, California, in partnership with UCLA and Cedar-Sinai, which we expect to open sometime in the second or third quarter.

I also wanted to provide on update on our LTAC hospitals transitioning to patient criteria. Through March 53 of our 108 owned LTACs were subject to the new LTAC patient criteria rules. Our reported compliance level for all patients at all of our LTACs at the end of March was 89.3%. This is up from the 86% we disclosed as of the end of January. The 53 hospital subject criteria had an average daily census reduction of 3.9%, or just under 60 total average daily census, which is just over one patient per hospital in the period post-implementation of criteria compared to the three-month period prior to entering criteria. We have an additional 19 hospitals transitioning in the second quarter, and the remaining 36 hospitals in the third quarter. We're pleased with the results our LTAC operators have delivered, and we are ahead of our expectations.

On April 18th CMS issued the proposed LTAC rules for 2017, which effects cost reporting periods and discharges occurring on or after October 1, 2016, the proposed rule includes the standard payment update, as well as some proposed changes to rebasing the LTAC market basket, as well as changes to the 25% Rule. We are evaluating the proposed rule, and we will be providing comments to CMS during the comment period. In addition on April 25th, CMS issued the proposed rehab rules for fiscal 2017. The proposed rules include the standard payment update language, as well as some proposed changes related to the IRF quality reporting program. Again, we are evaluating the proposed rules, and we will be providing comments to CMS. At this point I will turn it over to Marty Jackson, to cover some additional financial highlights for the quarter, before we open the call-up for questions.

Thanks Bob. Good morning everyone. For the first quarter our operating expenses which include our cost of services, general and administrative expense, and bad debt expense were $966.9 million. This compares to $698.7 million in the same quarter last year. The increase in operating expenses is primarily due to the addition of Concentra and Physiotherapy. As a percentage of our net revenue operating expenses for the first quarter increased to 88.8%. This compares to 87.8% in the same quarter last year. The increase as a percent of net revenue is a 120 basis points increase in the cost of services, which was partially offset by a 10 basis point reduction in G&A and a 10 basis point reduction in bad debt. Cost of services increased to $922.3 million for the first quarter, compared to $664.4 million in the same quarter last year. As a percent of net revenue cost of services increased 120 basis points to 84.7% in the first quarter. This compares to 83.5% in the same quarter last year. Cost of services in our Concentra segment was $213.2 million in the first quarter, or 85% of revenue. The higher relative cost of services in our Concentra segment, as well as an increase in the relative cost of services in our specialty hospital was the primary reason for the increase in our cost of services as a percent of net revenue during the first quarter. As Bob mentioned, we had an increase in labor costs in our LTACs associated with the increased patient acuity, and the higher wage rate for clinicians due to patient criteria. In addition to the aforementioned labor costs, we have elected to maintain certain staffing levels at many of our specialty hospitals in criteria, even though we have experienced a decline in volume. This is due to the current nursing shortage we have been experiencing. Given our belief that we will be successful in replacing reduced volumes, this strategy will allow us to not incur the additional costs of recruiting and training new nurses, as well as avoiding the hiring of agency nurses. G&A expense was $28.3 million in the first quarter, which as a percent of net revenue is 2.6%, this compares to $21.7 million, or 2.7% of net revenue for the same quarter last year. G&A expense in the first quarter included $3.2 million of Physiotherapy acquisition expenses, excluding the Physiotherapy acquisitions costs G&A would have been 2.3% in the first quarter. Bad debt as a percentage of net revenue was 1.5% in the first quarter. This compares to 1.6% in the same quarter last year. Total adjusted EBITDA was $128.6 million, and adjusted EBITDA margin was 11.8% for the first quarter. This compares to an adjusted EBITDA of $98.9 million, and an adjusted EBITDA margin of 12.4% in the same quarter last year.

Depreciation and amortization expense was $34.5 million in the first quarter. This compares to $17.3 million in the same quarter last year. The increase resulted primarily from an incremental $15.4 million of depreciation and amortization expense in our Concentra segment. We generated $4.7 million in equity and earnings of unconsolidated subsidiaries during the first quarter. This compares to $2.6 million in the same quarter last year. These increases are mainly the result of the contributions from our specialty hospital joint venture partnerships. During the quarter, as Bob mentioned, we had several one-time gains and losses. We sold our contract therapy business for approximately $65 million, and recognized a gain on the sale of $30.4 million.

Additionally, we recognized an impairment loss of $5.3 million on an equity investment in which we are a minority owner. This loss was triggered by the planned sale of the Company by its controlling owners. Both of these items were reflected in our income statement as non-operating items. In connection with our financing activity in the quarter, we repaid our series D term loans that were scheduled to mature in December of 2016, and recognized a loss on early retirement of debt of $800,000 during the quarter. Interest expense was $38.8 million in the first quarter. This compares to $21.4 million in the same quarter last year. The increase in interest expense in the first quarter is a result of additional borrowings related to the financing of the Concentra acquisition in 2015. The Company recorded income tax expense of $17 million in the first quarter, the effective tax rate for the quarter was 22.2%, compared to an effective tax rate of 38.3% in the first quarter of last year. The lower effective tax rate during the first quarter of this year is primarily related to the sale of our contract therapy business. Our tax basis in the business exceeds our selling price, and as a result we had no tax expense resulting from the sale. Net income attributable to Select Medical Holdings was $54.8 million in the first quarter, and fully diluted earnings-per-share were $0.42. This compares to fully diluted earnings-per-share of $0.27 in the same quarter last year. Excluding the gain on sale of the contract therapy business, loss on impairment of the equity investment, Physiotherapy acquisition costs, and a loss on early retirement of debt, and the related tax effects, earnings-per-share on a fully diluted basis would have been $0.23 in the first quarter of this year. At the end of the quarter, we had $2.78 billion of debt outstanding, and $85.4 million of cash on the balance sheet, which includes $61.5 million of cash at Select, and $23.9 million of cash at Concentra. Our debt balances at the end of the quarter included $1.1524 billion in Select term loans, $315 million in Select revolving loans, $710 million in the Select 6.375% senior notes, $646.6 million in Concentra term loans. In addition we had $62.8 million in total unamortized discounted premium and debt issuance cost that reduced the balance sheet debt liability. With the balance of $20.5 million consisting of other miscellaneous debt. Operating activities provided $111.2 million of cash flow in the first quarter.

Our days outstanding, or DSO, was 52 days at March 31st, 2016. This compares to 53 days at December 31st, 2015, and 56 days at March 31st of 2015. Investing activities used $397.7 million of cash during the first quarter. The use of cash was related to $412.9 million in acquisition-related payments, primarily related to the acquisition of Physiotherapy, and $46.8 million in purchases of property and equipment. This was offset in part by the $62.6 million in net proceeds from the sale of the business during the quarter.

Financing activities provided $357.5 million of cash in the first quarter, the provision of cash was primarily the result of Select's financing the Physiotherapy acquisition and refinancing of certain term loans. Net activity on Select and Concentra credit facilities were $388.2 million of net proceeds, offset in part by the repayment of bank overdrafts of $28.6 million and $4.4 million in repurchases of distributions through non-controlling interests.

Additionally, in our earnings press release we provided revised financial guidance for the calendar year 2016. This includes net revenue in the range of $4.15 billion to $4.35 billion, adjusted EBITDA in the range of $500 million to $540 million, and fully diluted earnings-per-share to be in the range of $0.87 to $1.06. The update to our guidance includes changes in the full year expectations resulting from the acquisition of Physiotherapy, the sale of our contract therapy business, and the financing activity completed in the first quarter. 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). Our first call is from the line of Frank Morgan from RBC Capital Markets. Your line is open.

Good morning. It looks like really good success so far on criteria implementation, but when I do the math here, it looks like about 46% of the beds have actually converted versus 54% that remain. So of the facilities I'm guessing these are slightly, the ones that are remaining are slightly bigger in terms of number of bed size. My question is, how do you think that affects the ability to avoid census loss? Do you have any color on the impact of census loss relative to hospitals with bigger bed counts?

Yes, Frank. That's a great question, and I think the response to that is when you take look at the portfolio, the portfolio really isn't that much different. You're right. There are fewer additional beds, but at the end of the day there really isn't that much of a difference.

Got you. And with regard to holding your staffing levels on the buildings where you did see census drop, I hope I'm thinking about this right, but relative as to bring those back up, as you fill those beds, I'm assuming the incremental margins on that volume are pretty stout. Do you have any numbers you may want to share with us there?

You're absolutely right, Frank. I mean when you take a look at the decision to not really flex, and the other issue is that when you think about the variable expense on salaries, wages and benefits, it really isn't linear. It's a step function. So the way that we staff is, we will staff RNs for four to five patients per nurse, based on the acuity of the patient, and as Bob had mentioned, we're basically down ADC on a per hospital per day basis about 1.1 patients, so in essence what we expect to see is when that volume comes back you will see no incremental cost on the labor side.

Got you.

So all of that incremental revenue from the increased volume should basically with the exception of pharma and supply costs drop right to the EBITDA line.

Okay. Great. And then one final question, and I'll hop back in the queue. Just as you talk to the people in the field talk to discharge planners at hospitals, some of these case managers, do you get a sense that the velocity at which they're kind of getting used to this criteria is that increasing, and do we think that the chances of getting a quicker and larger capture rate, what do you think of the odds of that happening on a quicker base going forward? I'll hop. Thank you.

This is Bob, Frank, at this point, we think that as time goes on those facilities that have gone into criteria will naturally continue to get better. So we certainly don't think that the success that we have had with backfilling criteria patients is as good as we can do. I mean as I mentioned in my remarks, we're very pleased with the results so far, and they are above our expectations. We think for the hospitals that have already gone in they can certainly do better just with the passage of time.

As to how we work with referral sources that obviously will change market to market, but we try to make this as seamless to our referral partners as we can, and basically what you see is our hospitals are evolving into being very high acuity Specialty Hospitals. So there are certain patients primarily the wound care patients that are going to probably have to stay in the acute care hospital a bit longer, and then find an alternatives post-acute discharge destination. But for the high acuity patients that's how we're setting ourselves up be to those centers of excellence in the market, and I would have to say that we think that strategy has been successful, and we think that the results so far on the 53 that have gone on, that have gone into criteria pretty much demonstrate that. I will say as we have said in each quarter that the results can always be a little choppy, and we use, we try to give the data that we can to give investors a sense of where we are, and so we say it's a little over one patient per hospital reduction, but obviously we have some hospitals that are doing better under criteria, and we have some that are lagging behind. So it's just a function of each market and continuing to work and improve in each of those markets. I think the other thing that makes it difficult to do a really, to really see how we have performed is that I think that we, and I think other providers are seeing it, we are entering one of the of most severe nursing shortages in the last six or seven years, and we do have bed holds at some of our hospitals, where we are not taking admissions because we simply don't have the qualified staff to take higher patient volumes. So we think when it comes to criteria, we may be even doing a little better than the data suggests.

Frank, I think as a follow-up to Bob's comments, I think the other thing to remember and we have talked about this, is that the approach, the multi-prong approach that we're taking we think is having some success here, and as you recall that multi-prong approach is having the clinical liaisons that are on the ground at each of our LTACs, the amount of time that they spend with the case managers, the discharge planners. We have our Chief Medical Officer and his staff out talking to the discharging physicians from the short-term acute care hospitals, and we have our finance people spending a bunch of time with the finance people at the short term acuity hospitals. So I think over time, it really is an educational process an over time we think we will become more and more successful.

Okay. Thank you.

Thank you. Our next question comes from the line of Chris Rigg from Susquehanna. Your line is now open.

Good morning. Sort of a follow-up just to some of the comments you were making near the end there with regard to the phase in of criteria. Is there any meaningful difference between, you have had some facilities that have been phased in for more than six months at this point, versus the ones that have just phased in the last month or so. So when we think of a 3.9% decline in census, is that most heavily skewed towards the facilities that have just flipped to the new reimbursement model, or is it still pretty uniform across all 53 facilities?

Yes, Chris. It's a great question. It's interesting if you take a look at those facilities that have been in criteria from October through February, and you take a look at the reduction in ADC pre versus post criteria, that's about 2.6%, and yet Bob had said that we're at 3.9% in total. That's really a function of what's going on with the last group of March hospitals. We anticipate that will improve just like it's done historically. So yes to your question is that as the hospitals come onboard, and as they mature, we see improvement.

Got you. And then when we think about sort of the real wage pressure, not the sort of dynamic around the churn, I guess how much pressure does that actually put on the SW&B line, like the wage increase, just trying to quantity, some way to quantity or think about what's really going on sort of a per nurse basis?

Yes. The larger part of the cost that you saw in the first quarter is really associated with what I'll refer to as the step function, as well as our election not to flex on nursing as opposed to the wage increases.

And then just one final one here more conceptually. As you sort of have more facilities at least equal to, more facilities in criteria now than you're going to phase in the second quarter. So should we think about this sort of being the transition period where hopefully we will start to see some margin improvement in the hospital division, just because the benefits that you're going it see from the higher revenue per admission in the 53 facilities, versus the potential churn in the 19 in the quarter? Is that the wrong way to think about it? Thanks a lot.

Sure, Chris. No. I think it's the right way to think about it. The real question for us is as Bob had mentioned, there is a nursing shortage right now, and we're going to monitor that, and not be quick to flex down, because again, we anticipate we will get that volume back. And as you recall in the third quarter, we talked about the educational process, the educational costs that we incurred, and from our perspective as you well know as all of the investors know, is that when you flex down the nurses can't get their hours, they're going to go someplace else, which means when the volume comes back that would really require us to go out and recruit, retrain, and the incremental cost of doing that just doesn't make a lot of sense.

Got it. Thanks a lot.

Yes.

Thank you. Our next question comes from the line of Gary Lieberman from Wells Fargo. Your line is open.

Good morning. Thanks for taking the question. I guess as additional LTACs have to deal with the criteria, are you seeing anything in the markets where that's happening in terms of the competition for the compliant patients? Is it getting greater and do you think that there's any potential as we sort of get into the third quarter when everybody has to deal with it that, what might occur in some of your markets?

Yes. I think there are a lot of things going on in the market. Because Select just out of happenstance was really what we will call the early adopters of criteria, I think some of the activity in the markets will be a little delayed until many of the other providers go into criteria, but yes, I would tell you that we do see a lot of activity in the markets. I mean CMS has already come out and projected that LTAC spending will be down by 7%. I think my estimation is that it could go down faster and further than that in the out years. So yes. And I'm really not talking about the larger companies in the space. I'm really talking about some of the smaller providers, the one-offs, the nonprofits. I think we see signs of some stress against their operations, particularly those that have a lot, much greater percentage of patients that are currently noncompliant.

The other thing that you have going on that's a little hard to predict is to what extent providers, LTAC providers will be successful in adopting a site neutral strategy, and that's something that we just can't quantity, and frankly we have no experience in it because in all 53 of our hospitals, we are 100% compliant patients, so we really have no experience with how that's going to work, and I do know that many of the other providers that have a larger noncompliant population, are going to be moving toward a site neutral strategy. So it will be I think interesting to see how that plays out, and I think potentially can put more stress on certain providers in markets that perhaps don't have the clinical expertise, don't have the programs to deal with the pulmonary, and the high acuity post-ICU patients.

Okay. And then you mentioned the statistic of [death] being down about the one day average, on average at each of the hospitals. Is there anything significant about that one day? Is that kind of like it tougher to get over that goal line of getting back to parity with where you were in prior year, or it just happens to be, kind of fall out there?

Well, I will have Marty take a shot at that as well, but I want to emphasize that we kind of give that one just to kind of give investors a sense of the magnitude of the shortfall that we have experienced, in terms of getting to where they were, but you have got to remember a lot of that is artificial, and at its worst could potentially be misleading, because you don't know how the facilities were doing prior to going in. It's three months. It's not seasonally adjusted for example, and also it's certainly not an average of one across 25 or 50 of those hospitals. Obviously you could have 10 at one hospital, and you could have three other hospitals that are over by three each on their ADC. So I don't want to be I think you take it in the totality of how we're doing on that 53, but there is some variation across the 53 hospitals, but I think, I will reiterate our judgment is, that we are doing better than I anticipated quicker than we anticipated, that we have replaced the noncomplaint patients with compliant patients.

Yes. Gary, as Bob mentioned the 1.1 of patient or ADC reduction is really an average, and I mean there is span. One of the charts that we put out we show how many are above pre-criteria, and how many are below pre-criteria, on those that are above, there's 21 of our 53 hospitals are above, and of that 21, 12 of that 21 hospitals have an increase of zero to 2 days, eight have an increase of 3 to 5 days, and one has an increase of 6 to 10 days. Now on those that are, there are 32 that are a little bit below zero to 2 of those hospitals, or zero to two ADC reduction there's 16 of the 32, three to five ADC reduction, there's 10 of those. So the majority are in that range right there, and then we have six that are above six. So that kind of gives you a range, but for the most part, we're, as Bob mentioned I mean we're very pleased with where the operators are, and we think we're going to continue to be, we'll see some continued success here.

All right. Great. That is very helpful. Thanks a lot.

Yes.

Thank you. Our next question comes from the line of A.J. Rice from UBS. Your line is now open.

Sure. We continue obviously to beat the horse of criteria, but maybe just asking a little differently. In your discussions with the hospital referral sources, I am assuming that net number of what's happening with the census is, you're not taking some patients you may have taken before, but you're trying to market and get additional ones. Is the hospital, the acute hospital finding other outlets for those patients? Is that creating any back and forth between you and your referral sources as they have to do that, or maybe you're still mostly taking those patients? Just some flavor on that if possible?

Well, they absolutely are having to find other discharge destinations for the patients that we historically took that we're not taking. So yes, you can absolutely assume that for every patient that we took that's not a criteria compliant patient, is going to have to find another discharge destination. Now that can manifest itself in a couple of ways, A J. the patient may stay in the acute care hospital a number of days longer, and then be discharged to a skilled nursing facility. Arguably it could go to a competitor in the market that's still taking that patient, but one of the questions that we got routinely before criteria when we announced that our strategy would be to take compliant patients only, was would our referral sources really push-back hard against us, for not taking patients that we historically did that would be otherwise called site neutral patients,

I mean I can't say universally, but I would say generally the results would suggest that hasn't been the case. I think the results and our general experience has been that we have just become a more specialized hospital that is taking the higher acuity patient, which you can see in the average revenue per day the acuity is going up, and we have become a specialty provider to take those higher acuity patients. We would like to think that as we become, as we hone that skill and become just more specialized, that our acute care referral sources will come to rely on us more heavily to take that high acuity population, and they will adapt to have those other noncompliant patients go to other post-acute care providers.

So as with most things whether it's modifications to the 75% rule for rehab, or changes in SNIF regulations, the provider community is constantly adapting to where patients in the post-acute are being driven, and that's usually Medicare patients, and it's usually driven by Medicare payment policy. So it isn't something that is absolutely unique, or first time experience out there in the post-acute market.

Sure.

I hope that's responsive to your question.

Yes. No. Definitely. And then maybe just switching gears on Concentra. Nice rebound in margins there. Some of that may be seasonality, but there's also the ramp-up in synergies. Can you sort of tell us where you're at with respect to synergies? Is Concentra sort of on plan for you? Is it ahead of plan?

We would say Concentra is on plan right now. First quarter was a little bit better than we anticipated. There is seasonality in the occupational medicine business, but it's really the down quarters are typically the fourth and the first quarter. The second and third quarters are typically the best, and with regards to synergies, I mean we still have some more synergies to achieve there, but all-in-all we think we're very happy and pleased with what's going on with Concentra right now.

Okay. Great. Thanks a lot.

Sure.

Thank you. Our next question comes from the line of Kevin Fischbeck from Bank of America. Your line is open.

Okay. Great. Thanks. I just wanted to confirm when we were looking at the guidance, it looked to me like you were basically reaffirming kind of the core numbers and just simply updating the guidance for the asset sales and for the acquisitions. Is that right? Any underlying change to the core business?

That's correct, Kevin. If you take a look at both on revenue EBITDA and EPS line that's what it reflects. On the EBITDA, it's a net differential of about $30 million. What we have done is we have assumed that for full year Physio would be at $37 million, and we needed to back out the EBITDA so it was a contract therapy of $7 million. And then.

Okay. Perfect.

On the EPS line, it's a net $0.15 and the way that we arrived at that was taking a look at the $0.19 gain on the contract therapy sale, plus approximately $0.03 for the Physio transaction, less about $0.06 associated with the refi, less about a penny for the contract therapy sale. So netting out all of that is about $0.15 and that's what you see in the guidance.

Okay. Perfect. So I guess you mentioned the proposed rule 25 day stay, it looks they're trying to put that back in place. If that was to go back in place, what would the impact of that be?

Well, as to the rule, what the 25 Percent Rule is scheduled to go back into place in July of this year. The proposed rule had some proposal about a different calculation for the 25 Percent Rule. We will be commenting on that with CMS and the proposed rule, but we typically don't give any impact related to proposed rules and we will probably wait in the rule is final, and the other thing the 25 Percent Rule is kind of a moving target, particularly will change probably for us as hospitals go into criteria.

Well, I guess then does the 25 Percent Rule impact your ability to deal with criteria? I guess if you're mostly HIH, I wasn't clear whether there was going to be some difficulty in getting enough compliant patients if you had to deal with the 25 Percent Rule as well?

Well, it depends on the market. We have been fairly consistent that the old 25 Percent Rule that CMS proposed back in 2004 has really been overcome by events, particularly criteria, I mean the 25 Percent Rule was put into place back in 2004, and then in 2007, and every two or three years after that the Congress has stepped in to keep the 25 Percent Rule at 50%. The original thinking behind the 25 Percent Rule was a couple fold for CMS. It was the absence of criteria really a way potentially to slow the growth and some concern over LTAC margins going back all the way to 2004. If you look at today, you have stringent criteria by CMS' own admission, 7% reduction in Medicare spend for LTACs. LTACs have not been growing at all, primarily because of the moratorium, but also now because of criteria and the Medicare margins for LTACs are probably the lowest in the post-acute.

So we're hoping that Congress steps in an keeps the 25 Percent Rule at 50%. It will have an impact on the Company's business if it goes to 25%, particularly when you think about criteria, and getting patients for Select, primarily from intensive care units. So those beds tend to be more concentrated in bigger acute care hospitals. So we're pleased to support Congressional legislation that's been introduced in both the House and the Senate to keep the 25% rule at 50%, as they have done consistently since 2007, and so we will see how that plays out, but we're not quantifying, but an acknowledgement that yes, it would have an impact, but we're hoping that Congress will step in and keep it at 50%, as they have since 2007.

Okay. Great. And then the nursing commentary about the nursing shortage, are you seeing that differential across your business lines? Is it harder to get skilled nursing, so it impacts more the IRFs and the LTACs, or is it broader to Concentra as well, thoughts there?

Well, I will have Marty comment. We obviously can't comment on skilled nursing. Or on skilled nursing facilities. I would say that for us primarily in the LTACs for us, because as we converted to criteria, we need higher trained nurses, greater certification, and frankly it's a tough environment, so I think we're seeing it more there, but we believe that a nursing shortage exists across all segments, including general acute care hospitals but more--

Yes. With regards to your question on Concentra, no, we don't really see the same type of issues in Concentra that we see on our specialty hospital side.

Okay. The last question. You mentioned that EBITDA declined at those 8 hospital business, you mentioned the higher costs on the labor. I think you covered that well. And then you also mentioned the hospital closure. Can you break out how much it was the hospital closure versus the nursing pressure?

Yes. There was a $10 million reduction in Specialty Hospitals on a same quarter year-over-year basis. $3.8 million of that had to do with, on the inpatient rehab facilities. That was $3.8 million of start-up costs. There was about $1.3 million associated with the closed hospitals, and then the balance had to do with the labor that we talked about.

And then you had fair losses last year, right? So it $3.8 million, that's higher losses year-over-year, or that was just the losses?

No. $3.8 million in total this year versus I think it was $5 million, a little bit more than $5 million last year.

Okay. So sort losses actually like a tailwind for that number for you?

What I am doing is giving you an idea that the $10 million component, yes. So it would have been a little bit of a tailwind.

Okay. So just trying to figure out. So that's a tailwind, the 1.3 is a headwind?

Labor, when you walk it through it's the labor costs. I want to make sure that people are aware that on the inpatient rehab side there's $3.8 million worth of start-up costs.

Okay. All right. Perfect. Thank you.

Thank you. (Operator Instructions). That is all of the questions that we have in the queue at this time, so I would like to turn the call back over to management for closing remarks.

No closing remarks, Operator. Thanks for joining us, and look forward to updating you next quarter.

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program, and you may all disconnect your telephone lines at this time. Everyone have a great day.