US Physical Therapy Inc (USPH) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Vanessa and I'll be your conference operator today. At this time I would like to welcome everyone to the U.S. Physical Therapy second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS.) It is now my pleasure to turn the floor over to your host, Chris Reading. Sir, you may begin your conference.

Thank you, operator. Good morning, everyone. This is Chris Reading. I would like to thank you for joining us here this morning for U.S. Physical Therapy's second-quarter 2008 earnings conference call. With me here in Houston I have Larry McAfee, our Executive Vice President and Chief Financial Officer, Glenn McDowell, our Chief Operating Officer, and Johnny [Blanchard] our Assistant Vice President and Controller. Johnny's sitting in for Jon Bates, who couldn't be with us this morning because he's traveling. So before we begin I'd like to ask Johnny to read a brief disclosure statement.

Thanks, Chris. This presentation contains forward-looking statements which involve certain risks and uncertainties. These forward-looking statements are based on the Company's current views and assumptions. The Company's actual results can differ materially from those anticipated. Please see the Company's filings with the Securities and Exchange Commission for more information.

Thanks, Johnny. Larry, you want to do the honors and review our financial performance for the quarter?

Yes. Sure. Thanks, Chris. I will now review the Company's second-quarter results. Net revenues from continuing operations increased 34% to $47.4 million due to a 28% increase in patient visits and an increase in average net patient revenue per visit of approximately 3%.

Clinic operating costs increased by 0.09% to 74.7% of revenue because of business mix change associated with acquisitions and start-up costs for the first OsteoArthritis Center.

The provision for doubtful accounts was 1.6% of revenues in the recent quarter and 1.1% in the comparable period of 2007.

Corporate office costs were $5.4 million in the second quarter of 2008, or 11.5% of net revenues, versus $4.1 million, or 11.7% of net revenues in the second quarter of 2007. Although corporate costs are down year over year as a percentage of revenue, our Q2 costs were up from Q1 of this year due to three factors. The first was because of a corporate staff addition and other costs related to the start-up of OsteoArthritis Centers of America. The second item was legal and other professional fees which we expensed relating to two potential acquisitions which we now do not anticipate closing. And third, an accrual was booked for the long-term incentive plan which is now in the money.

Net income rose 24% in the second quarter to just under $2.9 million. Earnings per share of $0.24 was $0.01 higher than the consensus estimate.

Same-store revenues for de novo and acquired clinics open for one year or more increased 6.4% (sic - see press release). Same-store visits increased 2.9%, while the average net rate per visit increased by 3.2%.

We had a good development quarter. During the period the Company opened seven facilities, acquired nine, and closed three, for a net addition of 13 clinics.

We'll now go over the year-to-date results. Net revenues have increased approximately 32% to roughly $93 million, due to a 27% increase in patient visits, and an increase in average net patient revenue per visit of 2%.

Clinic operating costs were 75.4% of net revenues as compared to 74.3%. The provision for doubtful accounts was 1.6% of revenue as compared to 1.5%.

Corporate office costs were 11.3% of revenue year to date, versus 12.1% of revenues in the first half of last year.

Net income has risen 27% to $5.2 million. Earnings per share has increased to $0.44 from $0.36.

Same-store revenue for de novo and acquired clinics opened for one year or more increased 5.8%. Same-store visits increased 2.1%, while the average net rate per visit increased by 3.6%.

In the first half of 2008 the Company opened 11 facilities, acquired 10 and closed 6, for a net addition of 15 clinics.

We closed the period with $17.2 million in borrowings and $8.1 million in cash, yielding a net debt balance of less than $10 million, despite the recent acquisition closed in June.

Thanks, Larry. The second quarter was a quarter marked by a great deal of activity, operational and development focus, as well as a significant event in the opening of our first OsteoArthritis Centers in Wellington, Florida. I suspect that we'll have a fair amount of questions on the OA Centers. I'm going to cover that in detail in a minute, and then we'll handle the additional questions in the Q&A period.

As most of you are aware, Congress acted somewhat late to forestall the 10.1% physician fee schedule reduction, as well as to put in place legislation for the next 18 months, continuing the exception process which had been set to expire as well under the Medicare cap system. We applaud Congress's actions and although it came late and gave us a little heartburn, we felt that this was the right thing to do for our senior population. We made the decision, however, based upon our prior experience in 2006, to continue to see all those Medicare patients in that interim period and ignore the temporary legislative gap that occurred, thus preserving visits, revenue, and most importantly, the continuity in the needed care of our elderly patients. Thus, as things turned out we think it was the right thing to do. So now we would look forward in what we feel is a slightly positive environment over the next 18 months to carry out our business plan.

Also notable in the quarter was our development, which produced a nice balance of new partner and de novo openings along with the previously-announced acquisition of a very strong practice with nine locations based in Maryland and Pennsylvania. In preparation for that deal and others that we expect to add, we increased our credit facility with Bank of America from $30 million to $50 million. I'd like to just mention, Bank of America stepped up in large fashion and due, to a significant extent, to Larry's work we were able to get that facility extended on terrific terms. The credit facility we expect to use as we continue to acquire and develop new centers and companies with strong vested leadership.

The work that we started early last year on the same very focused program development initiative is paying off in the form of solid same-store visits, as well as revenue growth. For the quarter we realized a significant improvement in our overall net rate compared to the year-earlier period, the rate for the quarter coming in at 98.14, which is the highest quarterly rate we have produced yet for the Company. Our same-store volumes have also been solid this year, coming in for the quarter with an increase of 2.9%, a combination of revenue and volume producing a healthy 6.9% increase in same-store revenue for the quarter.

I'd like to give a quick thanks to our operations team as well as our partners on the work that they have done rolling out these new initiatives and service improvements. They have made a nice impact on our overall business and will continue to be important as we work to move the Company forward.

Likewise, our managed care team has been hard at work adding and renegotiating contracts. Recently we have seen a number of significant contract improvements that will help us as we look to the future periods.

Now let's shift gears a little bit and discuss our OsteoArthritis, or what we refer to as our OA Centers project. This is a project that has been in the works now for some time. We have a partner in this venture, a group out of South Carolina, who has assembled a team of nonsurgical specialists and has partnered with us on this venture. The concept of the Centers that we are rolling out on the OA Centers project combines MD services, which will either be in the form of a physical medicine and rehabilitation specialist physician or a doctor of osteopathic medicine. Our first Center physician is PM&R specialist, physical medicine an rehabilitation specialist .

We will combine that with a strong complement of orthopedic physical therapy in a proven program utilizing synovial replacement therapy generally delivered under fluoroscopic guidance, along with the proven algorithm of physical therapy intervention which has produced very consistent results in the neighborhood of slightly greater than 80% success rate, with significant pain reduction as well as functional improvement in a great many number of patients that have been treated over the last few years under this program format.

The significance of this project is multifaceted. For one, it delivers a superior clinical product to patients, with excellent outcomes, allowing them to return to activity with less pain and the avoidance, at least for an extended period of time, in terms of a joint replacement, saving them significant pain as well as costs and buying time for improved technology and possibly avoiding surgery altogether.

Secondly, it allows us to be in a significantly elevated food chain position. And what I mean by that is traditionally physical therapy has been lower on the food chain. We receive referrals for 98 or 99% of our business that have to come through physicians, and that comes about through marketing and relationships, as you all are aware. Having a physician on site who can further our relationship expansion -- in other words, they market to physicians also -- as well as our marketing staff and our physical therapy partner, increases the potential throughput for patients.

The real difference, however, in what we believe will be the success of this program, has to do with what has been established in terms of a direct-to-consumer marketing program. Again, the primary means of driving patients is through this marketing program which uses a variety of methods, including newspaper and radio ads which announce and inform the potential patient population out there, the public, about this new program. We've set up a seminar that we invite people to. We serve food, so they have a meal that's provided. We've got the doctor, the marketing staff and the physical therapist there to do the presentation, which is very structured, and then handle the Q&A session afterwards. It lasts about an hour, although the Q&A session can go for a considerable length of time. On average, we've seen about 100 people turn out for one of these events. And our sign-up rate, in other words the patients that come through to us after attending the event, is about 40%. So it's been very significant.

So this gives us a new method, which will continue to be refined, to go out and look at program initiatives, including this OA project, as well as other things that we might do in more of a direct consumer format. And that we think is going to help significantly improve our growth curve, particularly as we get more of these under our belt. Now we're working right now on the next several projects, a couple of which will be in the surrounding areas near Wellington, which is a community adjacent to West Palm Beach, Florida. And then we've begun preliminary work on a market outside of Florida which also has a significant population of retired individuals.

Now the programs and services that we'll provide in these centers will not just be limited solely to arthritis. They'll be a full range and complement of muscular-skeletal services. We'll have a full range of normal physical therapy programs and services, but a majority of the patients will certainly fall into that age group who are beginning to have the aches and pains associated with degenerative joint disease as well as arthritis.

Let me say in closing, and then I think what we'll do is open it up for questions, we continue to be very focused on growing this company. We expect to do more accretive acquisitions. The acquisitions that we've done so far we've been very, very pleased with. The STAR group has done a great job. The Life Fitness guys will do a great job. We've had that one just now a little over a month I guess. They're doing well. The other acquisitions done in prior periods for the most part are all doing well. We were out in Phoenix recently with our partner out there, Chris Reynolds, and he's doing a great job in that market. So that's been going well. We've worked hard on the development de novo program. We had a very good quarter. We continue to work on that area and that will be a continued focus for us.

And then really, we're just continuing to focus on the metrics and the operational structure of the business. We've got a little bit of cost to take out, I think, at some of these facilities. That's been the work that the Ops team has focused on this most recent period. We've seen our productivity continue to improve slightly on a sequential basis, as well as year over year. We've seen a nice improvement in our net rate.

And we continue to work with our partners. In fact, we've got 25 or 30 partners that we were with until about ten o'clock last night who are here with us again today looking at new products, new services, new initiatives, trying to understand those so that we can send them back fired up, ready to hit the ground and grow this business.

Now the market in general I think remains a tough market. It's not an easy hiring market. The economy is having its very well publicized and understood challenges. And yet these things we've been working on have allowed us to continue to move forward and demonstrate sequential growth, same-store growth, revenue and profits growth. And I'm encouraged by that and I think we'll be able to continue that. At least that is what we're going to work very hard to do.

So with that, operator, I'd like to close out this portion and open it up for questions.

(OPERATOR INSTRUCTIONS.) Larry Solow; CJS Securities.

Congratulations. Excellent quarter. Actually the revenue per patient over $98 is magnificent, especially in light of I know STAR has a considerably lower rate, or a modestly lower rate. Can you maybe just talk about do you think it's sustainable to keep rising? And secondly, maybe go over your productivity measures, units billed per visit and daily visits per therapist?

All right. Well, I guess to answer your first question, is it sustainable, I'm not going to give you a target, although we have some internal goals that we set toward the end of last year and I think we'll get there. Safe to say we're not quite there yet. STAR's net rate is in the mid to upper $89 a visit range. That's a slight improvement over where they were. They're working hard on improving that. I think that will improve and that alone will help our net rate because that gap will close. So, yes, I think in the short term we can continue to move that. We've seen, and I'm pleased -- we met with our managed care group again yesterday and they had a couple of nice success stories. So I think they're making some progress across the country. And so I think at least in the near term we can continue to see some positive motion in that. I don't know that we'll have absolute quarter-over-quarter positive motion, but I think in the next few quarters we'll see that number pick up a little bit.

And in terms of some of the program things, they're really the things we've been working on over the last year. The interesting thing about our clinical partners is that they usually come with a particular clinical specialty and then we add to that over time. So things like cancer-related fatigue and some of balance of [small] prevention things that we've worked on most recently in the cash-based programs, we don't have a systemic deployment of those throughout the whole Company, and as we bring in these groups and they attach themselves to one or the other of these programs, that gives us a little boost and some growth. And I think there's still a lot of opportunity to continue to benefit from that right now.

Okay. And then, could you talk about for the OsteoArthritis Centers, do they have similar type start-up costs? And would you expect their profitability to be maybe better than, once they're up and running? And do you have any particular growth plans you could share with us as far as how many centers you expect to open over the next two or three years? I don't know how you look at it but --

Yes. A couple of things -- in terms of start-up costs, the footprint is a little bit bigger. We've got a procedure room embedded in these facilities where we do our fluoroscopic procedures, both on the spine and on the peripheral joints. Our first center we have, and in many of our centers we expect to have physical therapy on site. And so when that's the case the footprint will be a little bit bigger, somewhere in the 3,500 probably to 4,000 square foot range as compared maybe to 2,000 to 2,500 square feet for traditional physical therapy. Equipment cost is a little bit greater, somewhere in the 140 to 170 range, including some of the X-ray equipment that we'll have there and some of the other medical equipment, but not dramatically different.

And in terms of the total contribution we expect that once it's through its ramp-up period the contribution will be more significant than a standalone physical therapy facility. Now I don't want to get stuck right now, and I know it makes it a little bit hard for you on a model basis. I don't want to get stuck giving an absolute number. We expect to do one or two more this year. We have a couple that we're working on right now. We're looking at our next market. We expect to do several more in 2009. I don't want to throw a number out, but we're in discussions with a number of payers who are very intrigued by this model and the results that it's getting. Those discussions may influence a little bit our rate. We're still working the kinks out, although the early results have been good and we've been very pleased. And I think it's probably a little early to say how many we'll have in the next three years. But we think that we'll add in kind of a progressive, systematic, steady kind of a way. And if that changes, we'll give you an update when that occurs.

Yes, I wouldn't put in your model yet an earnings contribution certainly for this year when the business is just getting going. It's going to be a while before it's a significant earnings contributor. But the early results have been very positive.

Okay, great. And then just a last question -- the breakdown between new and satellite partnerships for the seven new openings -- do you have that?

No, I don't know that, didn't bring it in with me, off the top of my head.

But this quarter we had three new partnerships and four satellites.

Got it. Great. Okay. Excellent. Thanks a lot and we look forward to seeing you guys next week at our conference. Thanks.

David Bachman; Longbow Research.

This is actually Bonnie Cybulko in for David Bachman. Just a couple of quick questions. I don't believe -- did you give your productivity numbers for the quarter, your -- ?

Glenn, why don't you -- no, I don't think we mentioned any absolute numbers.

Yes. Our productivity on our visits per FTE -- Q2 of '08 we improved to 11.10, up from 10.88 in Q1 of '08. This is per FTE.

Okay. And one more housekeeping -- on your payer mix for the quarter?

Yes. The payers were as follows. The mix was private 26%; managed care 34%; workers comp 16%; Medicare 20%; and other was 4%.

Okay, great. Thanks. I'd like to just ask a follow up here on some of your same-store growth. Looks like, particularly at the same-store, your revenue per visit saw a lot of improvement this quarter sequentially. Anything in particular behind that? Can you give us a little color on that?

Yes. I think that really goes down to our service offering focus in terms of program development, some of the educational things that we've done in terms of adding products and services that have solid reimbursement and renewed and persistent focus on managed care contracting. So it really isn't anything new. It's just the things that we've been working on that are beginning to take hold, that we expected. It's no different -- we're about in the position that I expected we'd be in a mid-year basis, looking forward this time a year ago. So, we're making the progress that I expected to make.

Okay, great. And just one final question in terms of your regional footprint -- have you been experiencing any particular softness in any markets given the economy? You mentioned that in your some of your opening remarks. Is there anywhere that you're a little bit concerned in terms of economic conditions maybe having an impact on some of these service offerings or repeat visits? Anything like that that you could comment on?

I don't know that it's on an isolated basis. I think we've paid attention to what's going on. We've paid attention to the country and trying to keep the pulse. We've had particular attention on Michigan with some of their troubles, although I will say, to the credit of our partners, the Michigan market continues to be very steady. I just mentioned that we just signed on for the second year with our Ford deal. We were able to get a pricing increase on that deal as well. But no, I think anecdotally we have partners talking about patients who are struggling with gas prices and other things. And that's been going on now for really the last six months and yet we've continued to make progress. So, I don't know what the economy's going to do. I just know that we've got certain things that we can control, the economy not being one of those things. And we have to control what we can control to try to move the ball forward. So we're just focused on those things right now.

Okay, great. That takes care of my questions. Thanks very much and great quarter.

Rob Hawkins; Stifel Nicolaus.

I apologize; I had to jump from another call, so I missed all your comments. And again, I apologize if I ask you to repeat something you've already said.

That's okay.

I guess a couple of things. On the margins the numbers look really great here. Should we be thinking about this as kind of a good quarter and the margins maybe falling back, or is this kind of like a new plateau you guys are reaching because of new deals, et cetera?

We went through, if you listen to the --

Okay. I can listen to the replay, too, if you'd rather not go over it.

We mentioned several items. There were costs, both in clinic operating costs and corporate costs, relating to the start-up of OsteoArthritis Centers of America. We expensed -- in terms of corporate costs there were two acquisitions we had been working on. And at this point we don't anticipate closing those two deals, so we had previously capitalized them, went ahead and expensed the legal and other professional fees related to those two transactions. And then the third thing was the long-term incentive plan based on current stock prices now in the money so we took an accrual related to that. So there was a little bit of margin contraction, but obviously we more than offset that with the revenue enhancement and the earnings were better than expected.

To add to that, just remember that we have some seasonal flux and the second quarter usually is a pretty strong quarter from a volume standpoint. Obviously that gives us some overhead spread too. But in general I think it was, even though we had some additional costs, I think it was a solid quarter. I think as long as we can keep our net rate up and keep our costs at bay, and the Ops team is focused on that right now, I think the next reasonably foreseeable period we should be able to do pretty well.

Okay. And some detail color on the Osteo program -- what kind of doctors are you targeting? Does this involve infusion drugs related to chronic inflammation procedure-wise or bone densitometers? Are those some of the kind of things we should be kind of thinking about related to this?

Yes. The two doc subspecialties will be physical medicine and rehabilitation and osteopathic physicians, board and osteopathic doctors. The first center is with a PM&R doctor, a very accomplished young lady. The procedures -- I don't know that I would characterize them as being infusion-based. The procedure that we're doing a lot of, in addition to facet blocks and injections and other things, are the synovial replacement procedures that are fluoroscopically guided. And those involve, obviously, synovial replacement drugs, (technical difficulty) and others, and then just a gamut of muscular/skeletal services. We don't have right now bone densitometry planned in these centers. That's something that we have discussed, will evaluate, but it's not in the mix right now. I think there's adequate, generally, service availability for that. But a broad gamut, including electrodiagnostic testing and other things, all of which spin off a fair amount of muscular/skeletal physical therapy.

Okay. And then I guess one final question is a kind of bigger picture. You guys have been doing a little more acquisition work than de novo and it seems to be working out really well for you. Any kind of challenges that you're seeing that you maybe hadn't foreseen before related to some of the acquisitions versus de novos that we should think about, or maybe even opportunities too?

I don't know. Let me give my answer and then I'll ask the guys what they think. I think in general we're not -- as you've seen in the past, we're not loading up on acquisitions. We've tried to be very careful in terms of the people that we've selected to work with and what those businesses look like. As Larry mentioned, we had a couple that we've had to expense because as we've gone through due diligence there've been some things. And some of it is just the business has changed a little bit in those and so we've not moved forward. But we've continued to be very selective.

I think the market is such right now that it's a challenging market for a lot of people. We're doing okay and I think generally we're doing pretty well. I think we continue to be an attractive home for some of these folks. But I don't think the discipline that you've seen so far will change. I don't think the pace will change dramatically. And I think the market will continue to be difficult enough that people will look for a long-term, stable home with a partner that can bring them some resources and added benefits. Aside from that, I really don't think much has changed in the last six months.

No. I mean, we're not a roll-up. We still have good internal de novo growth. We supplement that with acquisitions. We're not a kind of deal-of-the-month club. I mean, we've done a couple of really small ones this year. We'll probably do another one I would suspect. The integration's not been particularly different from deal to deal other than with STAR because they were larger. It's taken us a little longer, but I'll be honest with you, I haven't really had any significant surprises in terms of the integration.

No. I mean things have gone about as expected. So -- and I think we continue to see opportunity and synergies working together and sharing practice ideas that will benefit not only the acquisitions but our company as a whole. So I think more of the same.

Thank you. I'll jump back in the queue.

Mike Petusky; Noble Research.

Great quarter. One housekeeping -- did you guys by any chance have the sales rep and facility coverage numbers handy?

Yes, we do. For Q2 we had 44 sales reps. Those included the sales reps from STAR and from Life Fitness. They covered 232 locations. And that's up slightly from Q1 when we had 41 sales reps with 223 locations.

And Larry, can you quantify the whatever we're calling them, unusual or one-time expenses related to the acquisitions that didn't happen, the accrual and the --

Several of those items are broken out in the Q, which we'll file either tomorrow or Monday. Rather than just do selective disclosure, I think it's better for you to look at the Q. And then if you want to call me and follow up and ask specific questions. They weren't huge costs, but it's several hundred thousand dollars, and so it definitely affected corporate and to a lesser extent operating costs. But you'll see that data in the Q. We tried to provide a significant amount of detail about it. But after that comes out if you want to follow up with me give me a holler.

Okay. All right, great. And since you guys happen to mention, I guess you renewed with Ford. Is that an annual? Is that how that works?

Yes. Annual renewal; we'll have to go through the same process August 1, 2009.

Okay. Just one last question -- I'm just I guess kind of curious about this. In a somewhat related field pricing has gotten quite a bit better in the orthotics and prosthetics area and I know that Benchmark at least in the past had kind of married up orthotics and prosthetics and PT and hand therapy. Basically, they had both going on. I was just wondering, have you guys at least recently considered trying to do anything in orthotics and prosthetics?

I guess the short answer would be no. It doesn't fit in with where we think our strategy and our resources need to be focused right now. Just as a point of clarification, we do have a number of centers that offer hand therapy. We do have centers that also deliver, create, and fit a variety of different simple orthotic devices, not many prosthetics quite honestly. But in terms of doing something like a [hanger]-like product line, not at this time, Mike. I'm not saying it's not good for somebody. It's just not what we're focused on right now.

Just out of curiosity, as long as I've been around you guys I don't think I've ever fully understood why Q2 does have that seasonality. Is it just simply a function of there's not any major holidays and people are -- and kids are still in school so people aren't traveling? Is that basically it?

Well, I think you have a few things. People are outside now after being, at least in a significant part of the country, kind of holed up for the winter. They begin to become more active. With more activity comes more things to happen. You're in school. You don't have the vacation pressure that you have during the summertime with doctors particularly on vacation. And as long as I've been in the business, which is more than 20 years, it's been a pretty consistent seasonal pattern company to company and year to year. It really hasn't changed that much.

There's some months too which fall in the second quarter -- March, April, May historically are good months and then in the fall September and October are good months. So it just depends on where those months fall.

Got you. Okay. Well, great job, terrific execution. Thanks, guys.

Mitra Ramgopal; Sidoti.

Just a few questions -- again, you had really nice same-store growth and it clearly seems like the investment in the sales force is paying off. Should we continue to expect additions going forward in light of the results you're getting?

We're looking to add a few sales positions but honestly I don't think our sales force will grow much beyond where it's at now. We've pretty much got sales coverage in the market density areas that we need to have it. After that it becomes somewhat problematic from a resource standpoint due to the fact that you have single clinics out in rural areas. We'll probably add a few reps but I don't believe that we're going to add a lot more.

Mitra, I think it'll be proportional to where we are from a facility count perspective. I think as we add facilities, as we add new companies, that rep number will grow. We expect to have sales reps as we go into new markets with our OA Centers product. So it's not that we'll -- as Glenn said, it's not that you'll see exponential growth from here, but it'll be relative to our facility density and to the number of facilities we have on board. So you'll see some growth, but it won't be necessarily dramatic.

Okay. And again, if you can give us an update on the STAR and mid-Atlantic acquisitions. Are they both fully integrated now or -- ?

The one that we just did in Baltimore we're just on the very front end of that, although we expect that to happen and be done in terms of all the back office integration much quicker than we initially planned with STAR. STAR has gone as planned. We're in the final processes of the payroll and the a/p and the IT conversion, which will be done and wrapped as we close the summer. And I think both of those are as planned and on schedule. Larry, would you say --

Yes. Most of the work is being done, in terms of payroll and payables for both those deals, this month and we've already got STAR's payroll on line here. And we'll be putting Life Fitness's on shortly.

Yes. We made a decision when we did the STAR acquisition not -- and we made that with them -- not to fool with anything initially, to leave it intact as it was. We've made -- we expected over the first year or so that we would integrate a lot of those support back-office functions. We've made that decision collectively together. And I think that was the right decision. And so the timing has really been as expected. On the Life Fitness deal we expected to get out of the box and make that integration happen really from the get-go, and that's been the process. It's been orderly and I expect it to be closed out here in another month or so. So, so far so good.

Okay. And then just coming back to the '08 strategy -- if you can give us a little sense more of the kind of market and how competitive it is, the sort of reimbursement outlook there? And again, would it prove a distraction or slow up in any way your clinic growth on the patient rehab side?

It's a great question. Let me handle the last one first, in terms of will it be a distraction. The quick answer and the right answer is that it will not, absolutely, be a distraction. This is something we've been working on for a while. It's been a methodical, thoughtful process. We've brought in a partner who has experience with this. And we've hired the infrastructure in term of leadership who -- these folks are very capable of carrying this forward under our existing structure. Reports up through Glenn on the operations side. But we've got a good group of people in place right now, so no distraction. I think we'll learn from this. One of the things I expect that we'll learn is how to go direct to public more effectively. We'll make some revisions, but I think it will be steady.

Now, Mitra, help me -- the other part of your question?

The reimbursement.

Oh, the reimbursement. Yes. It's largely federally reimbursed, although we certainly see a subset of the population that are my age and but -- pre-Medicare -- my age and older up to Medicare that are active that are beginning to have joint problems, pain-restricted function that benefit from this kind of care absolutely. And we've got good long-term results to show that. I would guess somewhere in the 60 to 75% range will be Medicare. However, until you've got that reimbursement, the rest will be private HMO and commercial-based payers.

In terms of competition, it's interesting, the orthopedists are probably the biggest single group that deliver these kinds of services, but they don't want to. It's kind of a necessary evil in order to get past the hurdles that they have to get past to get to the joint replacement, which is what they're concerned about. The primary care doctors don't do these kind of things. They're looking for typically a non-surgical alternative for the patients, which is what the patients ultimately want, surgery as a last resort. And so I think my early assessment is that there's a market for this and some demand on the payer's side, particularly with the Medicare replacement plan, Medicare Advantage Plans, to direct patients into what would be a surgery-delaying, or surgery-eliminating opportunity. But we're just on the front end of this so we're learning too.

The cost of the IAJP Program in particular is a fraction of the joint replacement cost. So to the extent that the patient and ultimately the payers can either defer or put off the joint replacement, they save significant dollars.

Okay. And I'm assuming again the approach here initially will be a de novo approach as opposed to looking to make acquisitions to grow faster?

I don't know that there are acquisitions to make necessarily at that (inaudible) in the subset. This will be a de novo growth strategy.

Okay. And finally, are there any sort of synergies we can expect from this in terms of cross referrals or sales force making the same or similar calls?

Yes, absolutely. We've rolled out some of these programs that we're able to offer and we've offered to our sales force some of the electrodiagnostic study things that we think will, again, help us to partner more effectively with doctors in various markets across the country. Where we go into a market where we have existing facilities, we expect that there will be a synergistic referral pattern, both from the OA Center to our facilities potentially for ease of access and convenience sake, as well as from the facilities who have patients who are struggling with various aspects of their recovery, looking to avoid joint replacement surgery, or needing other diagnostic studies. And we think that will be a referral source as well. So we think the synergies make sense. And as we add to our facilities, which we expect to do in the coming quarters, we'll have a better sense of what that looks like.

Okay. Thanks again, guys.

There appears to be no further questions at this time. I would now like to turn the floor back to Chris Reading for any closing comments.

Okay. Thanks, everybody. We appreciate your time this morning. Larry and I are available over the next few days if you have existing follow-up questions. As Larry said, we'll have some additional filings in the next day or so, so take a look at those. And again, we appreciate your time and, always, your support. Thanks and have a great day.

Thank you. This concludes today's U.S. Physical Therapy second-quarter 2008 earnings conference call. You may now disconnect, and have a great day.