Edited Transcript of SEM.N earnings conference call or presentation 31-Jul-20 1:00pm GMT

MECHANICSBURG Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of Select Medical Holdings Corp earnings conference call or presentation Friday, July 31, 2020 at 1:00:00pm GMT

* Martin F. Jackson

* Robert A. Ortenzio

* Albert J. William Rice

RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst

* Justin D. Bowers

Good morning. Thank you for joining us today for Select Medical Holdings Corporation’s earnings conference call to discuss the second quarter 2020 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 call over to Mr. Robert Ortenzio.

Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [2]

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical’s second quarter earnings conference call for 2020. Before I outline some of our operational metrics, I want to provide you with some summary comments regarding the effects of COVID-19 pandemic on our operations.

First, let me say how proud I am of the operational leadership and clinical excellence I have seen throughout our organization these last several months. In these unusual times, it is gratifying to see such a dedicated group of clinicians and support staff come together throughout our organization to provide the highest quality care while keeping our patients and staff safe. We continue to adapt, evolve and innovate as we navigate through the pandemic.

As I mentioned on our last earnings call, the effect of the pandemic began to impact our company in mid-March. I also mentioned we thought April would represent the low point for our business, and we would begin to see a rebound in the areas of our business hardest hit by the disruptions. This has proven to be the case, as illustrated in the monthly revenue and patient days and visits we have included in our 10-Q and earnings release.

In our critical illness recovery hospitals, we have held steady during the second quarter on census and occupancy in light of some of the challenges COVID presents. While our cost of care has increased, we have seen increased occupancy and revenues every month throughout the pandemic.

In our rehabilitation hospitals, we had to temporarily restrict admissions in our New Jersey and Miami markets in April and early May due to COVID outbreaks in those regions. This had the effect of reduced volume and higher cost in those markets. We also incurred additional cost to care for our patients in other markets.

Having said that, we saw a significant rebound in this business segment in June as revenue increased over 24% for the month on a same period year-over-year basis. Our June occupancy rate is 78% — of 78% is close to pre-COVID levels and exceeded June last year occupancy of 73%.

In our outpatient rehabilitation and Concentra segments, volumes continue to be our biggest challenge. As we mentioned last quarter, volumes have been negatively impacted by a number of issues in both segments, some of which have lessened as we have progressed throughout the second quarter. Our outpatient rehabilitation volumes and revenues were down year-over-year, 48% and 44%, respectively, in the months of April and May, resulting in adjusted EBITDA losses in both of those months in our outpatient rehab segment.

In June, however, we saw meaningful improvement as states began to ease restrictions, and hospitals and surgery centers began performing elective surgeries again. Volume and revenue shortfalls in June compared to prior year were 19.7% and 17.8%, respectively, which was a significant improvement from April and May, and we experienced positive adjusted EBITDA in June. In our Concentra segment, volumes and revenues were down year-over-year, 39% and 33%, respectively, in the months of April and May, but only down in June 12.4% and 6.4% as restrictions eased and employers started to increase their workforce.

Overall, our net revenue for the second quarter was down 9.4% to $1.23 billion in the quarter. We experienced meaningful declines in both our outpatient and Concentra segments, which were partially offset by revenue growth in both our critical illness recovery and rehabilitation hospital segments.

Net revenue in our critical illness recovery hospital segment in the second quarter increased 12.7% to $520 million compared to $461 million in the same quarter last year. Patient days were up 5.3% compared to the same quarter last year, with close to 277,000 patient days. Net revenue per patient day increased 7.4% to $1,867 per patient day in the second quarter. Occupancy in our critical illness recovery hospital segment was 72% in the second quarter compared to 69% in the same quarter last year.

Net revenue in our rehabilitation hospital segment in the second quarter increased 5.2% to $169 million compared to $160 million in the same quarter last year. Patient days declined 2.8% compared to the same quarter last year. However, net revenue per patient day increased 12% and to $1,831 per day in the second quarter. The entire decline in patient days occurred in April, with both May and June showing improvement when compared to the same period prior year. Occupancy in our rehab hospitals was 71% in the second quarter compared to 75% in the same quarter last year.

Net revenue on our outpatient rehab segment in the second quarter decreased 36.2% to $167 million compared to $262 million in the same quarter last year. Patient visits declined 39.1% to 1.34 million visits in the second quarter. Our net revenue per visit was $106 in the second quarter compared to $102 in the same quarter last year. Net revenue declines were most significant during April, which was down 45.6% year-over-year; and May, which was down 43.3% year-over-year. June showed improvement from those trends, with net revenues down 17.8% year-over-year. Volume trended along the same lines as revenue for the same monthly periods when compared to the same months last year.

Net revenue in our Concentra segment for the second quarter decreased 24.5% to $312 million compared to $413 million in the same quarter last year. For the occupational health centers, patient visits were down 30.7% to 2.15 million visits in the quarter. Net revenue per visit in the centers was $124 in the second quarter compared to $121 in the same quarter last year. Similar to outpatient, net revenue declines were most significant during April, which was down 34.9% year-over-year; and May, which was down 30.7% year-over-year; with June showing improvement from those trends, with net revenue down only 6.4% year-over-year.

Total company adjusted EBITDA for the second quarter was down 4% to $178.8 million compared to $186.2 million in the same quarter last year. Our consolidated adjusted EBITDA margin was up at 14.5% for the second quarter compared to 13.7% for the same quarter last year. We recorded $55 million in other operating income in the second quarter related to payments received under the Provider Relief Fund. $54.2 million was recorded with our other activities, and $800,000 was recorded in the Concentra segment. The adjusted EBITDA results for our critical illness recovery hospitals, rehabilitation hospitals and outpatient rehabilitation hospital segments do not include any recognition of these funds. Their respective portions of these funds recognized in the second quarter were included in other operating income.

Our critical illness recovery hospital segment adjusted EBITDA increased 39.9% to $89.7 million compared to $64.1 million in the same quarter last year. Adjusted EBITDA margin for this segment was 17.3% in the second quarter compared to 13.9% in the same quarter last year. Adjusted EBITDA and margin growth were driven by our revenue growth, which was partially offset by higher operating expenses related to COVID.

Our rehabilitation hospital segment adjusted EBITDA was $27.6 million compared to $30 million in the same quarter last year. Adjusted EBITDA margin for the rehabilitation hospital segment was 16.4% in the second quarter compared to 18.7% in the same quarter last year. The decline in adjusted EBITDA and margin were primarily driven by temporary admission restrictions in several of our hospitals in New Jersey and south Florida and higher operating expenses related to COVID.

Our outpatient rehab incurred an adjusted EBITDA loss of $6.3 million in the second quarter compared to $42.6 million adjusted EBITDA contribution in the same quarter last year. Adjusted EBITDA was adversely impacted by the significant decline in volume during the quarter. We did incur adjusted EBITDA losses in both April and May that had positive adjusted EBITDA in June as our volume shortfalls to prior year improved.

Our Concentra adjusted EBITDA was $41.5 million compared to $76.1 million in the same quarter last year. Adjusted EBITDA margin was 13.3% in the second quarter compared to 18.4% in the same quarter last year. Adjusted EBITDA was impacted by the significant decline in our volume during the quarter. We had adjusted EBITDA shortfalls to prior year results in both April and May, but adjusted EBITDA in June exceeded both April and May as well as June of last year.

Earnings per fully diluted share increased over 18% to $0.39 for the second quarter compared to $0.33 for the same quarter last year. Adjusted earnings per fully diluted share was $0.38 per diluted share for the second quarter. Adjusted earnings per fully diluted share excludes the nonoperating gain and its related tax effect in the second quarter of this year.

I’ll now turn the call over to Marty Jackson for some additional financial details before we open the call up for questions.

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [3]

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Thanks, Bob. Good morning, everyone. For the second quarter, our operating expenses, which include our cost of services and general and administrative expenses were $1.12 billion and 90.5% of net operating revenues. For the same quarter last year, operating expenses were $1.18 billion and 86.8% of net operating revenue. Cost of services were $1.08 billion for the second quarter. This compares to $1.15 billion in the same quarter last year. As a percent of net revenue, cost of services was 87.8% for the second quarter. This compares to 84.5% in the same quarter last year.

G&A expense was $33.5 million in the second quarter compared to $31.3 million in the same quarter last year. G&A as a percent of net revenue was 2.7% in the second quarter. This compares to 2.3% of net revenue for the same quarter last year.

As Bob mentioned, total adjusted EBITDA was $178.8 million, and the adjusted EBITDA margin was 14.5% for the second quarter. This compares to the total adjusted EBITDA of $186.2 million and an adjusted EBITDA margin of 13.7% in the same quarter last year. We recorded $55 million in other operating income in the second quarter related to payments received under the Provider Relief Funds. I would like to reiterate that with the exception of $800,000 grant money to Concentra, no grant monies were included in our segment reporting.

Depreciation and amortization was $52.3 million in the second quarter. This compares to $55 million in the same quarter last year. We generated $8.3 million in equity in earnings of unconsolidated subsidiaries during the second quarter compared to $7.4 million in the same quarter last year. We also had nonoperating gain of $300,000 in the second quarter this year.

Interest expense was $37.4 million in the second quarter. This compares to $51.5 million in the same quarter last year. The decline was a result of a reduction in the variable interest rates as well as the refinancing activity we did during the second half of last year.

We recorded income tax expense of $23.3 million in the second quarter this year, which represents an effective tax rate of 25.7%. This compares to the tax expense of $20.8 million and effective tax rate of 25.8% in the same quarter last year. Net income attributable to noncontrolling interests were $15.8 million in the second quarter. This compares to $15.2 million in the same quarter last year. Net income attributable to Select Medical Holdings was $51.7 million in the second quarter and fully diluted earnings per share is $0.39. Excluding the nonoperating gain and its related tax effects, our adjusted earnings per share was $0.38.

At the end of the second quarter, we had $3.4 billion of debt outstanding and $510 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $1.2 billion in 6.25% senior notes and $77 million of other miscellaneous debt.

Operating activities provided $642 million of cash flow in the second quarter, which include $317 million in Medicare advances and $100 million in Provider Relief Funds, $55 million of which was recognized in operating income. Also contributing to operating cash flow in the quarter was a reduction in our accounts receivable balance and increased accrued liabilities and taxes payable. Our accrued liability includes $33 million in deferred employer FICA tax allowed for under the CARES Act.

Investing activities used $35.9 million of cash in the second quarter. The use of cash included $32 million in purchases of property and equipment and $5 million in acquisition investment activity. This was offset in part by $1.2 million in proceeds from the sale of businesses during the quarter.

Financing activities used $169.5 million in cash in the second quarter. This includes $165 million in net repayments on revolving loans and $2.6 million in net repayments of other debt during the quarter. Our total available liquidity at the end of the second quarter was over $1 billion, which is evenly split between cash on hand and revolver availability.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Frank Morgan with RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [2]

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I appreciate all the detail and the color around the volume recovery. I’m curious, can you take that a step further, maybe give us some early indications about how July is trending across those segments. And any impact that you’ve seen perhaps in some of the flared up markets around the country that you’ve heard about? That would be my first question.

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [3]

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Sure, Frank. This is Marty. What we can do is we’ve got month-to-date numbers for July, and they continue to move in a positive trend. If we take a look at where we were in June for our outpatient business, it was close to 20% down. We’re about 16% down in July, so obviously, a bit of an improvement. Concentra is flat at about 12% down. Our critical illness recovery hospitals are up a bit. They’re about — we were about 7% in June. We’re about 8% in July, and IRFs are about almost 6.5% up.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [4]

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Got you. And while we’re on the topic of CCUs and IRFs, obviously, very strong pricing growth there of 7.4% and 12%. Can you provide any more color? Like what was the mix there? Was it with payer mix? Was it acuity? Any kind of attribution to the strong growth there?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [5]

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Certainly. On the critical illness recovery hospitals, Frank, what we saw was — and you’ve seen this. I mean our case mix index typically runs in that 1.25 to 1.26 range. This past quarter, we’ve done about 1.3. And it was really just the acuity of the patients coming in the door.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [6]

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Got you. And then on the subject of the volumes, I guess, the one we’re watching the recovery on the most obviously is outpatient and Concentra there. And so good progress on the recovery there, but still below the early pre-COVID levels. But are there any seasonal considerations that we could — should consider either for the outpatient business or for Concentra when we think about the rest of the year as you continue to recover?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [7]

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Typically, on the outpatient rehab, the third quarter is typically a lower period. The numbers that I gave you for July, though, are — address that because it’s a same month year-over-year basis.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [8]

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Got you. And I guess my last one here is just, you called out start-up losses in the IRF segment last year in this quarter. What were the start-up losses this year, if any?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [9]

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Yes, there were no losses, start-up losses for the IRFs this quarter.

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Operator [10]

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Next question comes from the line of Justin Bowers with Deutsche Bank.

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Justin D. Bowers, Deutsche Bank AG, Research Division – Research Associate [11]

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Second that. We really appreciate all the detail that you guys have been providing. And then I just wanted to — with the LTAC, it sounds like they’re still going strong. And is the acuity also running higher at this point?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [12]

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Justin, yes. Typically, we’re running in that 1.25 to 1.26 range. This quarter, we ran at 1.3, and we continue to see higher acuity patients.

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Justin D. Bowers, Deutsche Bank AG, Research Division – Research Associate [13]

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Okay. And then with the IRFs as well — I’m sorry, with the IRFs, too, is that — are you — is the acuity kind of month-over-month also similar? And do we think that’s kind of sustainable for the rest of the year?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [14]

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Justin, it is similar in the IRFs. We are seeing an increased acuity patient population in our IRFs. Whether that continues through the rest of the year, I would hesitate to comment on that.

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Justin D. Bowers, Deutsche Bank AG, Research Division – Research Associate [15]

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Okay. And then just — is there any kind of insight you can offer us with kind of the difference between the 2 outpatient businesses. Like Concentra, obviously, like they recovered a little more quickly than the outpatient rehab. And just trying to get a sense of what’s really the difference between the 2 drivers there in terms of the volume recovery?

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [16]

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Yes. Well, this is Bob. When you look at Concentra, which is a workers’ comp, employer-driven, and workplace injuries, as employment goes up and companies are working, when there are injuries, this is — you can think about Concentra as a lot less discretionary. If there’s an injury on the job, on a workplace, work site, construction site, those patients will — we’ll tend to see those at our Concentra occupational health centers.

On the outpatient rehab, these are oftentimes patients that are pre or post elective surgery. And while I think that most physicians would say they’re not discretionary, you may have patients that are less confident coming into an outpatient location, may delay their therapy or they may delay their elective surgeries. So while we think that ultimately, that business — we capture that business, I’ll use the term, it is a little more discretionary than a worker that is injured on a job site. So I think that’s the best and easiest way to understand the difference.

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Justin D. Bowers, Deutsche Bank AG, Research Division – Research Associate [17]

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Yes. Okay. That makes sense. And then just one last one, really strong cash flow during the quarter. And just what are — how are you guys thinking about that through the rest of the year? I know there’s a few moving parts, but any directionality there would be helpful.

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [18]

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Yes, Justin, I think the cash flow has been strong. It will continue to be strong. When we take a look at our liquidity through the balance of the year, what we’ve assumed is that we will be paying back starting in September the advanced payments from Medicare. And that’s about, as we talked about, that was $317 million. By the end of the year, our liquidity availability will be in the $900 million range. So it kind of gives you an idea. We’re at $1 billion now. You’re going to see a couple of hundred million more come in.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [19]

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And that could change dramatically if there’s a change in policy regarding the repayment of the Medicare advance funds, which has been discussed. But — so I would just — if you’re watching liquidity, you could watch for any regs that come through on that as well.

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Operator [20]

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Our next question comes from the line of Bill Sutherland with The Benchmark Company.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [21]

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Okay. Wanted to ask a little bit on outpatient rehab. Maybe some color on how you’ve managed the labor force there and your utilization of telehealth, how much that’s been used.

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [22]

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Yes, Bill, let me start with telehealth first. We do have telehealth capabilities. We have had those. I think it’s fair to say that the volume through February was very light on a telehealth visit per day or telerehab visit per day, I think we were less than 100 per day. At the height of the — at the height of April and May, I think we were in the — we were in the — I think it was about 1,500 telerehab visits a day.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [23]

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Okay. And it’s coming down from there, obviously, as you can get people in.

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [24]

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Yes. Yes, it is coming down. But it’s not approaching anything where we were before the pandemic started.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [25]

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I’m sorry. It doesn’t really have any impact on your cost structure, right, Marty?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [26]

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It does not. I mean when you think about the number of hours that the therapists are spending with patients, it’s the same.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [27]

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And is the issue with as far as the activity in the clinics have to do with how many appointments you can actually schedule given the issues with capacity and distancing and whatnot? Is that — or is it more of a demand and not enough elective surgeries in these places?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [28]

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Yes. It’s more of a demand. So — and you’re right, Bill. I mean the focus there. I think we had mentioned on the call, our last earnings call, we talked about, historically, 21% of our visits are associated with elective surgery. And that it still has not come back full bore yet.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [29]

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And then as far as the labor situation, Marty, did you have to furlough? Or how did you handle that?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [30]

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Yes. What we did, Bill, was we took a look at volumes going on specific geographic locations and in some cases, consolidated some of the clinics. A number of our employees were able to take PTO. And to the extent that, that exhausted, we furloughed some people. Most of those people have been brought back.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [31]

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Okay. Okay. What would you — just 1 or 2 more. I know you didn’t reinstate guidance. What are the main uncertainties as you guys look at your second half holding it back from doing that?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [32]

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It’s a great question. It’s mainly on the outpatient side and what’s going on with the flare-ups as far as COVID’s concerned.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [33]

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Right. Okay. That makes sense. And Marty, do you happen to have — one little detail question, the working days for third quarter and fourth quarter?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [34]

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Bill, what we can do is, I’ll get ahold of you off-line, and we’ll get you that information.

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Operator [35]

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Our next question comes from the line of A.J. Rice with Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [36]

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Everybody thanks for the information. Let me ask a couple of questions. One cleanup on the critical illness recovery items. Admits were down or basically flat, 0.1%, but patient days were up 5.3%. Is that just a function of the acuity metrics you’re seeing? Is there anything else going on there that’s seemingly pushing — building up the patient day aspect even if the admissions aren’t?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [37]

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Yes. You’re absolutely right, A.J.. Typically, what will end up happening, as acuity goes up, your average length of stay goes up, which is going to increase your patient days.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [38]

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Okay. All right. I know last time you talked about one of the strategies was to change some of the critical illness recovery facilities over to COVID-only type of patients. How much of that was done? And what percentage of your LTACs — I’m assuming it’s still fairly small, but what percentage roughly has COVID-only patients these days?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [39]

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There were a couple of hospitals where we did that, in particular, up in the Michigan area.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [40]

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Early on in the hot spots in Detroit and a couple of other locations. But I would say that none are COVID-only at the current time and even at the height, A.J., it was less than 10%.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [41]

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Okay. Okay. So today, you would have an LTAC that might have COVID patients and non-COVID patients and you have them together.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [42]

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Yes. That’s correct.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [43]

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Okay. The CARES Act, $55 million. We had actually thought you might get more than that. Is there some that you think you’ll get — record that you just didn’t record this quarter that you’ll pick up in the back? I know we got this uncertainty around this next relief package. But putting that aside, is there some that you know that you’re going to get in the back half of the year that you just haven’t recorded yet? Or you’ll find yourself on?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [44]

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Yes, A.J., we actually received $100 million of grant monies. And what you’ve got to do is you’ve got to detail and document either reduced revenues or increased expenses associated with COVID by tax identification number. What we’ve done is we’ve done that for the second quarter. You saw the $55 million. We anticipate that there’ll probably be another $15 million to $20 million throughout the balance of the year.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [45]

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And then — so you’ve got $100 million and you’ve got $55 million and you get $15 million to $20 million more, so take you up to $75 million. Will the other $25 million, you just give back? Is that what will happen? Or what do you think?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [46]

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Yes. That’s what our thoughts are right now. There is some question as to how the government is going to treat that. But for the time being, we’re assuming we’re going to have to pay that back. That will not be — it will not be until next year sometime, though.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [47]

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Okay. It’s been a while since we’ve talked through Concentra relative to the economy. And I know it’s a general sense that it has a little more economic sensitivities you’ve already alluded to on the call. But can you just remind us, I think the focus of the industry that it tends to serve might be different than just taking the general unemployment picture and extrapolating that out. Can you just sort of talk a little bit about those industries that tend to use their services a lot? What you’re seeing in terms of the rebound there?

And then we talk about as the economy down as a negative. I guess I’ve always heard on workers’ comp that sometimes as industries at risk from layoffs, people actually go out on work — on disability more and that actually can have a positive impact. It doesn’t sound like you’re seeing any of that at this point. But can you comment on that as well?

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [48]

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Well, on that last point, A.J., no, we — in the Concentra area, we would not tend to see that, which is an acceleration of the use of work comp benefits in anticipation of layoffs. So I would say no to that.

In terms of the industries that Concentra sees, it is it is a profile across the U.S. economy. So the easiest ones to think about are construction, warehouse, airlines. But as you see, certain industries get hit harder. That’s where Concentra will be affected.

So you take hospitality. You’re going to tend to see in this time, that’s going to be probably pretty dramatically hit. Probably a lot of our work with the airlines, while we have some of it, that’s going to be hardest hit. But if you look at the fulfillment centers, the Amazon, the UPS, the FedEx, you’re going to see more from that. So the one thing about the Concentra platform is they are the only national provider. And through a network of over 500 locations, you could get an appreciation of where there’s certain areas of the country where the business is going to be robust, while in other areas, it may not be.

In certain markets, maybe that are — or cities that maybe are heavy on hospitality, you’re going to see volumes impacted there. Whereas other areas that maybe are regions where there’s a lot of transportation, fulfillment centers, the business is going to be more robust. So it’s hard to — the best way internally for us, you obviously can’t, is we see it on a regional basis and even on a citywide or location business rather than think about it as a national.

But in general, as you pointed out earlier, I mean, this business is again, in general, impacted, has sensitivity toward unemployment. Because when you have higher unemployment, we see more employment — preemployment physicals, we see less drug testing, which is also a component of the business outside of actually just treating the injured worker.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [49]

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Okay. And then — well, that just begs the question to me. As you — it sort of sounds like you’ve done some of this on the outpatient rehab side, where you said, look, maybe the demand is sort of impaired a bit. Going forward, it’s going to be different. It seems like there might be that same opportunity with Concentra to consolidate locations and say, look, this — because this area supports this particular industry that’s been pretty hard hit and may not recover for quite a while, we have an opportunity to consolidate and take costs out that way. Has any of that been done? Are you looking at that? Is there an opportunity, do you think?

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [50]

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On the Concentra side, A.J., I would say no, that, that really is not the model. We think that most all of our centers that we have — the consolidations that were done when we did the merger with U.S. HealthWorks have been pretty much done. And I don’t think we do see these consolidation opportunities with the Concentra operations. They tend to be bigger clinics, and we do think that the employment will come back.

Now the outpatient, that is a bit of a different nuance business. They’re — because it’s dependent upon a lot of referrals from orthopedic surgeons, as Marty pointed out earlier, from elective surgeries, we do think that a lot of that business will come back. I mean an elective surgery postponed is not an opportunity loss for us. Those will come back. And when they do, we believe that we’ll — assuming all other things are equal in the environment and from a safety standpoint, we think that if patients are getting elective surgeries for their knees or their shoulders or their backs, they’re going to participate in outpatient rehab. So we think that we will get that business.

And also having said that, there is probably a little bit more opportunity to consolidate outpatient centers. They tend to be smaller, lower lease payments, and there tend to be many more of them. I mean we have close to 1,800 outpatient locations. Some of them tend to be small. Some of them tend to be clustered in a market for the convenience of patients. Not really the case in the Concentra segment.

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Albert J. William Rice, Crédit Suisse AG, Research Division – Research Analyst [51]

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Okay. Maybe one last thing I’ll put out there is, there was always discussion about aversion to nursing homes, discharges going elsewhere to nursing homes. Is that — are you seeing any impact either in the critical illness recovery or the IRF segment to pick up patients that might have otherwise gone to nursing homes? And to the extent that some of those are going home, is that — you’re hearing anything about that helping you on the outpatient rehab side.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [52]

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Well, we have heard a lot about. I mean our census in the rehab hospital is strong. And as for those of you who followed this industry for a long time, you know that there has always been this debate about what they call the substitution issue. And simply stated, that is that nursing homes, skilled nursing facilities can take care of many of the patients that are seen in rehab hospitals in kind of an equivalent basis at less cost.

You know that the company, we have always pushed back vigorously against that, not only in our local markets, but also with policymakers. And I would say that in the aftermath and in the continuing environment of the pandemic, I think that the difference between a rehabilitation hospital or an LTAC for that matter and a skilled nursing facility, those differences have become clearer than ever. I mean, both segments are important, but they serve and should serve really dramatically different patient populations. So yes, I do think we see a lot about that.

I would also have to comment that the substitution issue has been more hotly debated in recent years between skilled nursing facilities and home care and less between skilled nursing facilities and rehab hospitals or LTACs. We still see some of that. But in our view, on a clinical side, a lot of that question has kind of been asked and answered.

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Operator [53]

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Your next question comes from the line of Kevin Fischbeck with Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [54]

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All right. Great. Just wanted to clarify something. Marty, the volume numbers that you gave as far as July, I think you gave volume numbers year-over-year for each of the segments, but I thought maybe I heard that you said that the IRF number was up 6.5% versus June, not versus year-over-year. Did I get that right? If so, is there a year-over-year number for that?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [55]

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No, it was — the 6.5% number I gave was for July.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [56]

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It’s a July year-over-year, July-July?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [57]

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That’s correct.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [58]

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Okay. And then June, it was up 24%. That just compounds? Is that just anniversarying start-ups?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [59]

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No, the 24% had to do with revenue. We’re talking volume.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [60]

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Okay. All right. Perfect. And I guess, how many COVID patients were you treating in Q2 in the LTAC business?

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [61]

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I don’t think we’ve put that number out. We could probably get it for you. I don’t have that off the top. We’ll see if we have it, and then we’ll come back to you.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [62]

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And I guess one of the things that we struggle with, like, when we look at hospital volume, broadly speaking, it looks like somewhere around 8% or 9% of occupancy is COVID volumes, so kind of « core volumes » are 8% to 9% below average. Is there a way to think about that for the LTACs? I mean when you look at the volume that you have in the LTACs, the improvement that you’re seeing year-over-year, how do you think about core volumes versus COVID volumes? If we get a handle as a country on COVID into next year, are you able to sustain these volumes? Or is there going to be a headwind into next year?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [63]

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Yes. No, the — it’s a relatively modest number with regards to COVID patients. I think we had somewhere in that 1,500 to 2,000 COVID patients was what we were looking at. So relatively modest.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [64]

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Okay. And then I guess one of the things that we see is that, obviously, this has caused huge disruption. You guys seem to have managed through a lot of this well. How are your competitors managing through this? I mean do you feel like there’s share gains that are happening? Do you feel like referral sources are looking at you in a different way? Is there going to be a positive at the other end of this? Or are smaller players struggling? And how do you think about the long-term implications of COVID?

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [65]

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Competitors in which segment, in all segments.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [66]

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Well, you can go through all of them. I’d say go through all of them, if you could.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [67]

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Yes. Well, I think on the critical illness side, I think that it’s not really share gains from competitors. The way I think about it is, as much as it is a strengthened relationship with large, tertiary, acute care hospitals that have seen a lot of success in decompressing their ICUs with high-acuity patients, COVID and non-COVID. So those relationships have been strengthened. So I think that there’s — we’ll see that opportunity, and I believe that will continue. And we have seen that in many markets, including, by the way, requests in some markets that perhaps for a development project for one of our critical illness recovery hospitals. On the inpatient rehab, I — it’s hard for me to see that there’ll be differences in share gains. So I don’t think there.

Outpatient rehab, I think it’s difficult for us to have any visibility on competitors. I think it’s a tough time to be an outpatient rehab-only company. And many of our competitors are private equity-backed companies that are outpatient rehab only, and we see in some of our markets that those clinics are closed. Now they can reopen. If they don’t reopen, that obviously could translate into some share gains. So I really can’t comment on that.

On Concentra, I don’t think we think about the competitive environment as much as we think about deepening the relationships that we have with our employer clients. So I think that Concentra has performed very well and used the pandemic as an opportunity to deepen those relationships. So hopefully, we’ll continue to see the volumes grow there. But I don’t think that we could point to other occupational medicine centers closing. There may be some in markets, but when we’re in 500 locations, it’s hard to say that, that — anything like that could in any way be meaningful.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [68]

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Okay. And then I guess the acuity number in the OpEx side, trying to understand that a little bit better because it kind of seems like acuity is something we’ve seen broadly speaking across all the sectors. But it seems to be attributed more to low-acuity volume not coming in, leaving just higher-acuity volume in place. But you guys have actually been growing occupancy and seeing higher acuity. Is there a certain patient type that you’re seeing a lot more? And is this kind of a new normal? Or is there a reason to believe that this will come back to that 1.25, 1.26 acuity over time?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [69]

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Yes. I mean what we are seeing is more pulmonary patients, Kevin. So — and case mix index for pulmonary patients is significantly higher than the regular standard critical illness recovery hospital patient. And that’s why you’re seeing case mix index go up.

I think Bob had really mentioned a very important point, and that is the continued improved relationships with our referral sources. I think through this whole pandemic, what they’ve learned is that we can take care of a much higher-acuity patient population. So our hopes are is that, that case mix index will continue to climb.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [70]

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And this has been consistent with what we’ve been saying for quite some time even before the pandemic, is that our challenge in education is that the referral sources, ICUs really have a confidence level that our profile of hospital, our clinical programs, our infection control, safety, are really adequate to take care of highly acute patients.

I think the other thing that I think is important to recognize is that the experts that we talk to in our markets and infectious disease doctors believe that even when there is a vaccine for COVID, this is — this is not going to go away. We always think about our business in terms of flu season where our business picks up. Even after there was a vaccine for COVID-19, we still think that this is not going to be stamped out entirely, and you’re going to still see patients in years to come that are going to have the kind of conditions that perhaps seasonally or perhaps not seasonally, you will still see a percentage of these patients. So I think that we’ll have the capacity and the clinical programs to take care of these respiratory-type patients for probably for years to come. I do think it — and I’ve said this before that, that pandemic has, I think in many ways, solidified the position of value of the LTACs or our critical illness recovery hospitals in the continuum of care even deeper than it was prior to.

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [71]

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Hey, Kevin this is Marty. Are you going to be around later on today? I need to talk to you about some disconnects that we’ve found in some of your models and some of the information that you’re getting out to the Street. I’d like to talk to you about that.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division – MD in Equity Research [72]

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Sure. Yes, I’m around.

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Operator [73]

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Your next question comes from the line of Frank Morgan with RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, Research Division – MD of Healthcare Services Equity Research & Analyst [74]

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Just a real quick follow-up. You sort of touched on this in one of the answers when you talked about consolidating outpatient clinics. But as you look at what you’ve done to your cost structure, are there any real other kind of leverage points? So as volume recovers, you can hold your cost structure down and get some leverage as you return the other way?

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Martin F. Jackson, Select Medical Holdings Corporation – Executive VP & CFO [75]

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Yes, Frank. Absolutely. I mean, right now, we take a look at the efficiency factor by our — in the outpatient side by our physical therapists and the amount of visits per day that they’re seeing. And that can stand to be increased quite a bit. So there is some real benefit to volume and scale.

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Operator [76]

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Your next question comes from the line of Bill Sutherland with The Benchmark Company.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [77]

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Yes. My — actually, my follow-up was answered. But since I’ve got you, just thinking about the M&A landscape and if you have any color there as far as what’s happening, to Bob’s point, about in outpatient rehab in particular, whether there’s any opportunities in particular that are emerging in this whole deal.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [78]

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Well, I think from — I’ll comment on the broader M&A. I mean, I think we feel in the 4 business segments that we’re in that we have a lot of great development opportunities. And that’s really where we’re going to allocate capital. So I’ve said that if you look at the inpatient rehab or the outpatient or the critical illness recovery or even Concentra, there’s probably not a significant acquisition in any of those segments.

The way we think about M&A is really the acquisition of the remaining minority interests of Concentra. We probably won’t have any puts from the minority owners for 2020. And so that will be probably a total clean up at the end of ’21 that we’ll do in early 2022, and where we’ll pick up the 33% plus or minus of Concentra that we don’t own now. We — our plan is to do that mainly out of cash flow and accumulated cash on the balance sheet, and that will — that’s the other reason why we’re really not that interested in other M&A activities. That’s really the M&A that we are looking forward to.

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Operator [79]

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I am showing no further questions at this time. I would now like to turn the conference back to Robert Ortenzio.

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Robert A. Ortenzio, Select Medical Corporation – Co-Founder & Executive Chairman [80]

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Yes. We have no further comments. Thanks, everybody, for joining us.

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Operator [81]

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Ladies and gentlemen, this concludes today’s conference. Thank you for participating. Have a wonderful day. You may all disconnect.

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