Select Medical Holdings Earnings Call Nuggets: 25% Rule and Patient Assessment Criteria

Select Medical Holdings Corporation (NYSE:SEM) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

25% Rule

Frank Morgan – RBC Capital Markets: Thanks for quantifying the impact of the 25% rule in ’14. I believe you’d 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 kind of 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’re doing to maybe reduce that?

Robert A. Ortenzio – CEO: Frank, this is Bob. Well, now that the 25% rule is really a reality, I think what you can expect is we’re going to continue to kind of study it pretty carefully over the balance of this year and take some steps. It’s likely that we will quantify the impact when we come out with guidance for next year. So, I’m 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. I mean, 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 and it doesn’t fully phase until ’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.

Frank Morgan – RBC Capital Markets: How many of your hospitals you think will actually be impacted by based on their fiscal years or their cost reporting years in 2014? Will it be half your hospitals or quarter of your hospitals, or do you have any just general idea or high level thought?

Martin F. Jackson – EVP and CFO: Yeah, Frank, if you take a look at – as you know, it occurs based on (year-end) – the hospital cost report. And if you take a look at each quarter, what I’ll do is I’ll 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; and 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…

Frank Morgan – RBC Capital Markets: No, understand that. 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? Is that something you think you can adjust to fairly quickly? How should we think about that on IRF side?

Robert A. Ortenzio – CEO: 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’re placed in 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.


Patient Assessment Criteria

Kevin Fischbeck – Bank of America Merrill Lynch: Just maybe following up on the regulation; I guess, any thoughts about the patient assessment criteria and where CMS is kind of 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. I just want to get your sense about how that seems to be shaping up.

Robert A. Ortenzio – CEO: Yeah, Kevin, it’s really pretty tough to figure out how it’s shaping up because everybody has kind of wade in with some policy ideas. You had a lot of information or some kind of 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’s out there, and then you have some more work that’s being done by Ways and Means and Senate Finance. So there’s a lot of different crosscurrents on the discussion. We’ve tried to follow them all pretty closely, and obviously there are some policy statements that either CMS or MedPAC, some are of interest and some of – are of concern for us. But we’re also maybe sensing an opportunity here. We’ve 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’ve said this before but 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 LTAC fits. There is some consistency going through it, and I think when I look at some of the information that’s being put out by CMS on the five types of patients that would be – presumptively qualify for LTAC, we’re 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 the Senate finance hearing, Senator Roberts told CMS officials that he was preparing a new draft and he was looking to get that scored and continue to push with it is and 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’s at MedPAC and that’s at CMS, and that’s at, certainly, Roberts-Nelson, and that’s certainly from what we’ve been hearing from the appropriate committees on the House and the Senate side. So, I mean I’m sorry, I can’t be more definitive than that, but I think the next 12 months is going to be pretty active…

Kevin Fischbeck – Bank of America Merrill Lynch: Yeah, no, that’s 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? It sounds like the two ones you bought were probably additive, but it maybe this JV in Ohio maybe – as start-up loss is associated with it. I just wanted to see how those things impacted the guidance?

Robert A. Ortenzio – CEO: Well, I’ll let Marty address that specifically. But let me say this, of the three facilities that were either – two acquired and one was signed as a joint venture, two of the three are start-ups. We acquired the interest in the one in Scottsdale right as it was beginning – it was opening its door. So, there’s certainly some start-up losses associated with that one. And the same thing with the deal in Columbus which we like very much and I think it’s – they are all going to be strong deals and the joint venture with OhioHealth; that’s also a start-up, 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 the two our start-ups and are going to have some losses.

Martin F. Jackson – EVP and CFO: Yeah, Kevin, there is a minimal impact in 2013 associated with those transactions but you’ll see some benefit – you’ll see some nice benefit in 2014.

Kevin Fischbeck – Bank of America Merrill Lynch: So the guidance is really kind of apples-to-apples because the start-up loss is wash-off benefit from the San Antonio?

Martin F. Jackson – EVP and CFO: That’s correct.

Robert A. Ortenzio – CEO: Right. Good way to look at.

Kevin Fischbeck – Bank of America Merrill Lynch: Then, I guess maybe this answers the question that I had. I just was trying to bridge from EBITDA down to EPS and it seems like there was something going on below the line and 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 on line. Is that the way to think about the rest of the year, or is there something else going on below the line?

Martin F. Jackson – EVP and CFO: No, I’m not. It’s certainly not anything associated with the three facilities and there is nothing else going on below the bottom line.

Kevin Fischbeck – Bank of America Merrill Lynch: So like D&A and interest expense in Q2 are good run rates for the rest of the year?

Martin F. Jackson – EVP and CFO: Yeah, I think so.

A Closer Look: Select Medical Holdings Earnings Cheat Sheet>>