Select Medical Holdings Corporation

Good morning and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the first 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 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.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's first quarter earnings conference call for 2020. Before I outline some of our operational metrics, I want to provide you with a summary comments regarding the effects of the COVID-19 pandemic on our operations. As a company, the past two months have proven to be some of the most challenging times we've faced both clinically and operationally. During this unprecedented period, our ability to learn, collaborate, and adapt has been put to the test. I'm proud to say that our team has risen to the occasion and I could not be more proud of the work they have done in the face of this health crisis. Our teams have shown tremendous leadership, passion, and courage in maintaining the highest quality and safest patient care environment. The level of resourcefulness, hypervigilance, and innovation is unmatched. For the past two months, we have had daily virtual huddles led by our Chief Medical and Chief Quality Officer, Dr. Buddy Hammerman, and attended by operational, clinical, and functional leaders from across our organization. These huddles, which began on March 3rd, cover 15 areas to ensure we are informed and responsive in meeting the quickly changing and critical needs of our patients and employees across all lines of business. Among other indicators, we review COVID incidents by region, clinical review of COVID infections, availability and sourcing of PPE and ventilator equipment, patient management strategies, decisions in preparation for treating COVID-19 patients, communication strategies, and staff contingency planning. In broader terms, this pandemic has also cast new light on the role of our critical illness recovery hospitals in the continuum of care. In addition to uniting with our joint venture partners and host hospitals to combat this virus, Newly established coordinated efforts between critical illness recovery hospitals and other short-term acute care hospitals has been occurring daily to maximize the effectiveness of patient care and decompress short-term acute care hospital ICU beds. Select Medical currently has 62 of our specialty hospitals providing care for over 350 COVID-19 patients. On the outpatient front, including both outpatient rehab and occupational medicine, We expanded our telemedicine and telerehab services across our network. This allowed patients to continue their care in the safety of their own home. We now have over 2,000 of our clinicians that are capable of providing telehealth services across the United States. We've seen the volume for these services grow significantly over the past several weeks with the government lockdown as well as increased acceptance by payers and governmental regulators. Our ability to collectively answer this historic calling is anchored in our culture, operational leadership, clinical excellence, and an incredibly dedicated and selfless frontline of clinicians who have been exceptional in this pandemic. The effects of the pandemic began to hit Select Medical in mid-March. As COVID-19 has spread in many markets we operate, we have admitted patients with COVID-19 and have faced the challenging task of modifying our standard operating procedures to account for the high transmission rate of the virus as well as other critical needs of these patients. More specifically, we had to isolate the COVID patients from our general patient population and enhance staffing provisions for this acutely ill patient subset. We developed innovative pathways to treat COVID patients with active disease while maintaining a safe segregated space for the care of our non-COVID population. The pandemic has caused, and will continue to cause, disruption in our operations. In our critical illness recovery and rehab hospitals, we have, in some cases, added or reduced the number of beds, created isolated units and spaces, a temporary increase of restrictions on admissions, eliminated visitation of family, incurred additional costs and increases in the use of contract labor. In our outpatient rehabilitation and concentra segment, volumes have been negatively impacted by a number of issues. This includes state governments implementing mandatory closures of non-essential or non-life-sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel and closure of schools, state mandated suspension of elective surgeries at hospitals and outpatient surgery facilities, reduction of physician office visits, and the unprecedented reduction of the U.S. workforce by 30 million workers all have had significant effects on our patient visit volumes. In our press release, we provided the typical financial information statistics that we always do, but decided it was very important to provide the reader with a more detailed analysis of the financials by bifurcating our operating results on a pre- and post-COVID basis for the first quarter. We believe separate analysis of the quarter to date through February and the month of March provides our investors with greater insight into the financial impact of COVID on our company by business segment. Overall, our net revenue for the first quarter increased 6.8% to $1.4 billion in the quarter. Quarter to date through February, net revenue was up 12.3% over prior quarter. Thank you for joining us. Patient days were up 4.8% compared to the same quarter last year with over 270,000 patient days. Net revenue per patient day increased 4.5% to $1,839 per patient day in the first quarter. Occupancy in our critical illness recovery hospital segment was 70% in the first quarter compared to 71% in the same quarter last year. Net revenue was up 11.2% in the quarter to date through February period but only up 6% in the March period compared to last year. Net revenue in our rehabilitation hospital segment in the first quarter increased 17.8% to $182 million compared to $155 million in last year. Patient days increased 14.2% compared to the same quarter last year with over 94,000 patient days. Net revenue per patient day increased 6.1% to $1,732 per day in the first quarter. Occupancy in our rehab hospitals was 79% in the first quarter compared to 76% in the same quarter last year. Net revenue was up 24% in the quarter to date through February period, but only up 6.8% in the March period compared to last year. Net revenue in our outpatient rehab segment in the first quarter increased 3.4% to $255 million compared to $247 million in the same quarter last year. Patient visits were up 3.3% with over 2.1 million visits in the first quarter. Our net revenue per visit was $104 in the first quarter compared to $103 in the same quarter last year. Net revenue was up 10.8% in the quarter to date through February period Thank you very much. increased 0.6% to $399 million compared to $396 million in the same quarter last year. For the centers, patient visits were down 1.2% at 2.9 million visits in the quarter. Net revenue per visit in the centers was $123 in the first quarter compared to $124 in the same quarter last year. Net revenue was up 5.8% in the quarter to date through February period but then declined 9.4% in the March period when compared to last year. Incentives volumes trended along with revenue as patient visits were up 4.9% in the quarter to date through February period but then down 12.6% in the March period when compared to last year. Total company adjusted EBITDA in the first quarter increased 10.1% to $187.3 million compared to $170 million in the same quarter last year. Our consolidated adjusted EBITDA margin was 13.2% for the first quarter compared to 12.8% for the same quarter last year. The quarter to date through February's adjusted EBITDA was up 32.5% over the prior year with all four of our business segments showing double-digit growth in the January-February period compared to the same period last year. However, in March, overall adjusted EBITDA was down 22.3% Thank you for joining us. and up 10.2% in the March period when compared to last year. Adjusted EBITDA margins were 17.2% in the combined January-February period this year and 18.6% in the March period. A rehabilitation hospital segment adjusted EBITDA increased 49.5% to $38.6 million compared to $25.8 million the same quarter last year. Adjusted EBITDA margin for the... High Hospital Segment was 21.2% in the first quarter compared to 16.7% in the same quarter last year. The first quarter last year included adjusted EBITDA startup losses of $2.8 million. The quarter to date through February adjusted EBITDA was up 72.5% and up 12.5% in the March period when compared to last year. adjusted EBITDA margins were 22.4% in the combined January-February period this year and 18.6% in the March period. Outpatient rehab adjusted EBITDA was $27.1 million compared to $29 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 10.6% in the first quarter compared to 11.7% in the same quarter last year. Justin Ibita was up 33.6% in the quarter to date through February period, but declined at 65.4% in the March period when compared to last year. Justin Ibita margins were 12.9% in the combined January-February period this year, but only 5.3% in the March period. Our consent for Justin Ibita was $61.5 million compared to 66%. Thank you for joining us. in the March period. Earnings per fully diluted share increased over 33% to $0.40 for the first quarter compared to $0.30 for the same quarter last year. Adjusted earnings per fully diluted share was $0.37 for fully diluted share for the first quarter compared to $0.27 in the same quarter last year. Adjusted earnings per fully diluted share excludes the non-operating gain and its related tax effects in both the first quarter this year and last year. While the broader implications of the COVID-19 pandemic on our operational results and overall financial performance remain uncertain, we have seen reason for optimism as states begin to reopen the economy, including elective surgeries. On April 16th, the proposed inpatient rehab rules for fiscal 2021 were posted by CMS. The proposed rule, if adopted, would see an increase in the standard payment amount of 2.2%, as well as a reduction in the high-cost outlier. We expect the rule to be finalized in early August after the required comment period. In response to the COVID pandemic, both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements in our critical illness recovery hospitals and to suspend certain regulations that govern admissions into rehabilitation hospitals in order to facilitate the transfer of patients from general acute care hospitals into specialty hospital settings. That concludes my remarks. I'll now turn it over to Martin Jackson for some additional financial details before we open the call up for questions.

Thanks, Bob. Good morning, everyone. Before I provide financial details for the quarter, I wanted to highlight some of Bob's comments. The first quarter for Select was really the tale of two periods, the pre- and post-COVID periods. We had nice revenue growth, double-digit adjusted EBITDA growth, excuse me, and even our margin expansion in all four of our business segments in the quarter to date through February. Then in March, we saw the stay-at-home requirements of most states being mandated, along with the suspension of elective surgeries, which had a significant negative impact on our outpatient occupational medicine businesses. Our operators have done a terrific job making the appropriate changes to right-size our costs, but the key area they are spending most of their time on now is regaining volume. Volume is the primary driver to get us back to pre-COVID status. Moving to the financial details, for the first quarter, our operating expenses, which include our cost of services in general and administrative expense, was $1.23 billion and 87.3% of net operating revenue. For the same quarter last year, operating expenses were $1.16 billion and 87.7%. of net operating revenues. Cost of services was $1.2 billion for the first quarter compared to $1.13 billion in the same quarter last year. As a percent of net revenue, cost of services were 84.9% for the first quarter. This compares to 85.5% in the same quarter last year. G&A expense was $33.8 million in the first quarter. This compares to $28.7 million in the same quarter last year. G&A as a percent of net revenue was 2.4% in the first quarter compared to 2.2% of net revenue for the same quarter last year. As Bob mentioned, total adjusted EBITDA was $187.3 million and adjusted EBITDA margins were 13.2% for the first quarter. This compares to total adjusted EBITDA of $170.1 million and adjusted EBITDA margin of 12.8% in the same quarter last year. Depreciation and amortization was $51.8 million in the first quarter. This compares to $52.1 million in the same quarter last year. We generated $2.6 million in equity and earnings of unconsolidated subsidiaries during the first quarter. This compares to $4.4 million in the same quarter last year. The reduction in equity and earnings was the result of a decline in performance of the other healthcare-related businesses in which we own a minority interest. We had a non-operating gain of $7.2 million in the first quarter of this year and a $6.5 million non-operating gain in the first quarter last year. Interest expense was $46.1 million in the first quarter. This compares to $50.8 million in the same quarter last year. The decline was the result of a reduction in variable interest rates as well as the refinancing activity we did during the second half of last year. We recorded income tax expense of $21.9 million in the first quarter this year, which represents an effective tax rate of 23.7%, compared to tax expense of $18.5 million and an effective tax rate of 25.7% in the same quarter last year. Net income attributable to non-controlling interests was $17.3 million in the first quarter. This compares to $12.5 million in the same quarter last year. Net income attributable to select medical holdings was $53.1 million in the first quarter, and fully diluted earnings per share was $0.40. Excluding the non-operating gain and its related tax effects, our adjusted earnings per share was $0.37. At the end of the first quarter, we had $3.57 billion of debt outstanding and $73.2 million of cash on the balance sheet. Our debt balance at the end of the quarter includes $2.1 billion in term loans, $165 million in revolving loans, $1.2 billion in 6.25% senior notes, and $78 million of other miscellaneous debt. Operating activities provided $44.1 million of cash flow for the first quarter. This compares to $41.8 million in the same quarter last year. Our Days Outstanding or DSO was 53 days at March 31st, 2020. This compares to 51 days at December 31st, 2019 and 53 days at March 31st, 2019. Investing activities used $44.7 million of cash in the first quarter. The use of cash included $39.2 million in purchases of property and equipment, and $16.7 million acquisition and investment activities. This is offset in part by $11.2 million in proceeds from the sale of business during the quarter. I will also point out, until we have a better handle on the timing of the recovery from the pandemic, we have slowed down cash outflows to primarily be maintenance capex. Financing activities used $262.1 million of cash in the first quarter. This includes $366.2 million to purchase shares in Concentra from our minority partners, which select and now own 68.8% of the voting interest in Concentra. The use of cash also included $39.8 million in prepayment of term loans, $8.7 million to repurchase common stock, and $10.8 million in net payments and distributions to non-controlling interests. This was all set in part by net borrowings of $165 million on revolving loans during the quarter. As a result of the developments and uncertainty surrounding the impact in our operations of COVID, we have previously withdrawn our business outlook for the year on April 3, 2020. Beginning the second week of April, we started receiving grant dollars related to the $100 billion set aside as part of the CARES Act for hospitals and health care providers. Our understanding is the Department of Health and Human Services has distributed $50 billion of the $100 billion fund. Select and its consolidated subsidiaries have received $93.7 million related to those grant dollars beginning April 10th. We also received an additional $10.1 million in entities we manage where we are a minority partner. These funds are designated to reimburse providers for lost revenue and incremental healthcare-related expenses in dealing with the COVID pandemic. We also applied for and began receiving advance payments under the Medicare Accelerated and Advanced Payments Program. Beginning April 9th, We received a total of $316.1 million in advance payments from our Medicare fiscal intermediaries. These funds are designated as advances and are scheduled to be repaid beginning 121 days after receipt and no later than 210 days after receipt of funds. We also received an additional $25.6 million in advance payments in entities we manage where we are our minority partner. In addition, we've begun deferring the employer portion of Social Security taxes allowed for under the CARES Act. These payments may be deferred through 2020 and must be repaid 50% by December 31st, 2021, and the balance by December 31st, 2022. We estimate this amount to be in the range of $90 to $100 million through 2020. We have taken these actions and additional measures to help improve our liquidity position, including deferring or suspending discretionary capital expenditures, reducing compensation and furloughing employees in some areas of the organization, and negotiating with landlords to receive rent deferrals at certain facilities where we have temporarily closed. Another point I'd like to make is that the refinancings we executed on the latter part of last year has provided us with additional liquidity. Between cash on hand and our credit facility revolvers, we have close to $1 billion of available liquidity today. 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.

Thank you. And to ask the question, you will need to press the star key and the number one on your telephone. To withdraw your question, press the hash key or pound key. Please stand by while we compile the Q&A roster. Our first question is from Frank Morgan with RBC Capital Markets.

Good morning. I noticed in the Commentary, as you talked about, since the end of the quarter, some optimism as states start to open up, specifically more ambulatory surgical centers opening. I'm curious, can you maybe tell us what percentage of your overall outpatient and concentra business comes or is the result of outpatient surgeries and just any more color around what you've seen so far or what states you would expect to see the early recovery.

Yeah, Frank, this is Marty. You know, quite candidly, we really can't give you what states we expect to open up. I mean, that's a crystal ball type of thing. What we can tell you is that about 21% of our outpatient rehab visits come from elective surgeries. You know, and that's basically what we've seen over the past year. So when these elective surgeries come back, we expect to see some nice volume increases.

And Frank, we are starting to see that in some states that there have been approvals for elective surgeries down in the Texas market. Certainly we've seen that, and we're starting to see the opening of some elective surgeries here in Pennsylvania and some of the southern states. So that's starting to happen kind of as we speak, although it's not... as they say, flipping the switch. It'll take a little bit of time for those to, you know, for the precautions and for the surgeries and then there's a lag time before we'd see the patients. Gotcha. And then on the concentric side, how do you think about that in terms of just, you know, what's happened with unemployment? What are your thoughts around the ramp up there and what are you hearing from some of your customers there?

And I'll hop, thank you.

Well, as you know, and we've said in the past, Concentra is an employment-driven business. So, you know, this hits them pretty hard. But as employment comes back, and if we have a B or a U-shaped, I mean, we would expect to see the Concentra business, you know, respond correspondingly. If the recovery and employment is slower, then I suspect we'll see that in the consensual volumes as well. So, again, you know, hard to tell. But, you know, it will improve as employment continues to go back up. And as businesses, even not just driven by unemployment statistics, but just as general economic activity returns, the consensual volumes will grow.

Do you have any early color on the month of April?

Some of the other companies have kind of given us some insight. Anything you could share with us there and I'll be done.

Thanks. April is going to be a very, very tough month in particular on our outpatient businesses, both outpatient rehab and Concentra. I mean, the early part of April we were seeing 50% reductions in our outpatient, about 45% on Concentra. We have seen that basically bottom out, and we started to see growth come back in the last two weeks of April.

And on the other hand, in our critical illness recovery hospitals, I think we see them as being strong because of the position that they have taken in the face of the pandemic. So I think that part of the business will be stronger. Thank you.

Thank you. Our next question is from Justin Bowers with Deutsche Bank.

Hey, good morning, everyone, and congrats on the performance, especially during the first two months. And I think, you know, putting up double-digit EBITDA growth over the entire quarter is nothing to scoff at, given the last few weeks there. And I appreciate all the disclosure and the press release and the 10Q last night. Just kind of piggybacking on Frank, can you help us kind of understand where volumes are, maybe on the critical illness side, like relative to March or how they're trending? It sounds like that you've kind of picked up a little more on the LTAC side, just the commentary with 350 COVID patients. And then on inpatient rehab, I was a little surprised at kind of the decline toward the end of March there and just kind of trying to get a sense of if you feel like you're bottom there and where things are now in that part of the business.

Yeah, Justin, this is Marty. Let me take you through where we are with LTACs and the IRF with regards to volume. I mean, the LTACs have had a pretty strong April, and we expect those numbers to continue. ADC is up. and we expect that to probably continue through June. On the inpatient rehab side, we were hit relatively hard up in the North Jersey area with Kessler and one of the things that we had decided to do was a number of the Kessler hospitals had semi-private rooms and what we've done is, in essence, moved those semi-private to private. So we have basically limited the number of patients we can take in one per room just because of the transmission of the virus. So as soon as we start to see that decline, we will ultimately go back to semi-private.

Okay, got it. So it sounds like disproportionately hit in Jersey and not as steep in some of the other markets. And then Maybe just flipping to cost structure. Excuse me. Has there been – I mean, it sounds like you're comfortable with where you are now, just with the commentary focusing on volumes now versus costs. And so can you kind of give us a sense of maybe some of the additional actions you've taken at the end of the queue and then, you know, more broadly how you think about variable versus fixed costs? on the cost of services line?

Sure, Justin. On the inpatient side, there really hasn't been, I mean, our group there, the operators have done a terrific job. And for the most part, the volumes are, in particular, the critical illness recovery hospitals are maintaining or exceeding where our expectations were. So there's really not many changes that are happening there. On the inpatient rehab side, we've seen a little bit of reduction or flexing of staff there. And then on the outpatient and rehab side and concentra, we have flexed pretty significantly on staffing. And as you probably know, salaries, wages, and benefits represent a significant portion of our cost structure. So the interesting thing is on our outpatient rehab, I mean, Select's model is to have critical mass in the geographic locations where we are. So if we've seen a 50% reduction in our volume, we have 20 clinics in a certain marketplace, what we have done is dropped, we've temporarily closed 10 of those clinics and furloughed those, you know, basically the employees that were working in those 10 clinics and moved all the volume over to the other 10 clinics. And then on Concentra, the same type of thing. We took a look at that same type of activity. And then when the volume comes back, our expectation is we will very quickly bring those clinics up, those centers up, with the employees coming back.

Got it. All right. So we should see some improvement. I mean, you guys just didn't have any chance to respond. Like in March, things just happened so quickly. I will hop back in queue and congrats again.

Thank you. Thanks, Jeff.

Thank you. Our next question is from Peter Costa with Wells Fargo.

Good morning. And thanks for stepping up with the COVID patients here this past quarter and a great job in January and February before all this started. My question is, what's going to happen when we get to the other side of this, having seen the changes that you've seen? What do you think will happen in particular in the critical illness recovery business with your relationships with providers and what they've seen in their dealings with you in terms of your referral sources? And then also, on the outpatient side, do you think that's going to go and stay more mobile going forward? And what does that mean to you in terms of your flexible costs in that area?

Yeah, thanks, Peter. On the critical illness recovery hospitals, I firmly believe that we will come out of the pandemic stronger than we went in for a number of reasons. We've had many hospitals that have been in the hot spot, you know, northern Jersey that services kind of New York City, Detroit, New Orleans, and other markets. I think we have and probably over 60 hospitals that are treating COVID patients. So we have become critically important to many of the big hospitals, ICUs. I mean, we have gotten referrals from hospitals that we had never gotten before. And there was, I think, a very strong appreciation and recognition of the kind of services that we can provide. We are probably one of the largest providers of ventilator services in the United States with probably over 2,000 ventilators in all of our hospitals. And I think that the other thing that has become more appreciated is for all the talk about the shortage of ventilators, I think there's become a greater appreciation that it's just not the ventilators, that it is important because of the sophistication because of the acuity of the patient and the sophistication of the machines, it's not just enough to wheel a machine in. You have to have the kind of staffing and protocols with not only pulmonologists but infectious disease doctors, respiratory therapists who can work and calibrate these machines in order to get the maximum efficiency and to successfully wean patients off the ventilators. I never thought in my career that I would get to a point where virtually everybody in the United States knows what a ventilator is. I mean, that was certainly not the case a couple months ago. And I think that our hospitals have very much, you know, run into the fire, if I could use those words, to treat the COVID population. So that's not been easy for us because of the The things we've had to do to have more isolation, more PPE and the like. But it is right down the center of the fairway for what it is that we do. So I think most people believe that these kind of respiratory infectious diseases are going to be with us for a long period of time. And so we have some hospitals that have really Thank you very much. I have no way of knowing what the shape of that recovery is going to look like, whether it's a V or a U. But it's really not a question of if that comes back strong. I just think it's a question of when. And it could be a month here or there. And I think the same thing with Concentra. The market share that Concentra has across the United States, the largest by far in the occupational medicine as employment comes back, They'll be the beneficiary. And I think all of our divisions have done work to not only look at the short term, but also have their eye on the long term, strengthening the relationships that we have so that hopefully we can come out of this stronger than we went into it.

Pete, one of the things that we have seen change on the outpatient rehab side as well as Concentra on the OCMED side is telerehab and telemedicine. Prior to COVID, we were doing about 50 visits a day. In April, we averaged a little over 1,600 a day. As Bob mentioned, we have trained over 2,000 clinicians to provide this type of service. While we think that's terrific, a lot of the payers have seen the benefit of tele-rehab, telemedicine, and are now paying for it. We think some of that will, in particular with the Medicare population, we think that that will, and now that Medicare is taking a look at paying for it, we think that the Medicare population will probably continue to utilize that. In many cases, we think the commercial patients will be coming back to the clinics or the centers.

All right, just as a follow-up, Ben, Thanks for all that, Colmer, on the critical illness recovery hospitals. But on the outpatient question, can you talk a little bit about the financial impact to you in terms of how you get paid and what your cost is for a mobile visit versus a regular visit?

Yeah, it's a great question. For the most part, the rates are basically fixed for telerehab and telemedicine. So there is really not any difference between a visit, a physical visit, versus a tele-rehab or a telemedicine visit.

And your cost? Is it similar?

It is very similar. Yeah, because remember, it really is the amount of time that you're spending with the patient. It's in essence a one-on-one consultation. time that you spend with the patient. So the costs are the same.

Okay, and then just as a last follow-up on that, what do you think is going to happen on the outpatient side? Do you think, you know, you'll see a migration towards more of these tele-visits, or do you think providers are going to come to you more often to work with you going forward? What do you think will change in the outpatient side of the world going forward?

Well, I think, as I mentioned, I think that We'll see the telehealth, the telerehab volume probably decline as more and more people are no longer staying at home. But we think a certain portion of the population, specifically the older population, will probably continue to do telerehab.

I don't think that the outpatient business of the color is that You look for a systemic change. I mean, I understand that there's certain businesses that, whether it be concerts or sporting events where you collect tens of thousands of people in close quarters, these outpatient rehab locations are pretty much made for social distancing. I mean, you don't have a lot of patients in the clinic at the same time. You have therapists. It's really a relatively easy environment to have The kind of safeguards that people are talking about. So it's hard for me to project any kind of systemic change in that industry.

All right. I was really trying to get at what the impact would be on your competitors in terms of will some of them go out of business because of the pressures that you're seeing now with mobile going and taking some of the business away or just running the business being more complicated and will some of those providers go away? and actually help you if those providers come work for you.

Well, you know, I think the trends that we saw before the pandemic may accelerate a bit. I mean, I think our belief always was that the future of that business was going to be fewer larger providers that had the efficiencies and the economies and were able to be dominant in the markets where they provide. I think that it will... continue to be difficult for one-off providers in the outpatient rehab business because of the compliance requirements, because of the cost, because of what payers want in markets. And I guess you could make an argument that that could be accelerated as a result of this event, but I'm not sure about that, but I don't think it... It may change the cadence of those changes, but I think that it'll just be a continuation of the things that we've seen and been talking about for some time.

Okay, thank you. Thank you. Our next question is from A.J. Rice with Credit Suisse.

Hi, everybody. Glad to hear everybody's well. Maybe just, obviously you were able to take some steps by the end of the first quarter and I see that you, it looks like you closed down fully 131 of your outpatient rehab clinics and maybe about 19 of the concentric centers. Is that, were there additional closures that have happened since the close of the quarter? Where do you sort of stand on those numbers at this point?

Yeah, A.J., good question. Of the 131 that were temporarily closed, 114 of those were in the Kentucky marketplace where the governor of Kentucky determined that outpatient rehab was nonessential. We had fought that and now those clinics are back open. What we've seen is an increase in the opening of clinics. Those 114 were required by the governor's requirements to close. We did not want to close them.

Okay. So there's not a material increase in either concentra or it sounds like it's less in the outpatient rehab that are closed today versus at the end of the quarter.

That's correct.

Okay. I know we've been talking around the cost reduction efforts and the fact that the decremental margin in the last couple weeks of March was very severe in the outpatient and concentra business. Is there any way to size what all those items you mentioned in terms of cost savings might aggregate to in terms of dollars or perspective on the relative margin hit? that you've seen in the early part of the second quarter versus what we saw in March?

There really is an AHA. As a matter of fact, you know, if you take a look at when this really impacted us, it was really March 16th. You know, it was right after World Health Organization declared the pandemic. that that third week was when we really started to see the volume decline. And, you know, in the fourth week, we started making changes. But there is very little, if anything, savings from the changes that we made that occurred in the first quarter in that March period.

Yeah, no, I understand that. I'm just trying to see is there any way to – talk about an order of magnitude of what you have since implemented and how that might mitigate some of the revenue pressure. It sounds like it's a moving target. Is that the way to think about it? Yes.

Okay.

Just the last question. Some of the other post-acute providers have expressed some caution about these Not so much the advance accelerated Medicare payments, but more than some of the grant money. A, whether they can justify it, or B, whether, you know, they feel comfortable with all the attestations. Where do you guys fall out with respect to that?

AJ, we are currently going through and pulling together all that information right now. At this point in time, we can't give you a definitive answer on that.

But you're right, it's complicated and it seems to be shifting, so we'll just continue to work on it. Fortunately, we have access to all of our costs and our data and information, so whatever requirements. If we're not able to keep some of the grant money, it won't be because we are not able to allocate. We'll be able to do all that. But we're working through that now.

Okay. All right. Thanks a lot.

Thank you. Our next question is from Kevin Fishbeck with Bank of America.

Maybe just to follow up on that stimulus money number, you said I think 10.1 million in entities where you're a minority partner. Is that the amount attributable to you or is that the amount that your partners got and you would get a minority share of that?

Yeah, Kevin, that's the total amount.

Total amount that they received. Okay. And then just want to get a little more color on the first two months of the year. Obviously, you had... Leap year in there, which probably helped the numbers a little bit, but the growth there was incredibly strong and much stronger than what we would have been looking for for the quarter. Trying to understand maybe a little bit how that performance matched up against what you guys were really expecting as you try and think about what select might look like on a new normal. Were those the trajectories you would have expected for the year more broadly, or was there anything unusual going on in those first two months of the year?

No, I mean, they were certainly a little bit better than we had anticipated. And again, I think across all four business segments, the operators have done a great job bringing in, taking market share, bringing in volume. It's really driven by the volume.

Yeah, I think it was just a continuation of the momentum you saw from third quarter, fourth quarter of last year. I mean, I just think a lot of the changes and a lot of the things that we did were really beginning to show. And, you know, we would have been exceedingly pleased with the results of the first quarter had we not had the disruption in March. But, you know, I think we believe we can get back to that.

Okay. And then, you know, the comment about 21% of outpatient visits coming from elective procedures, I guess what we've seen, broadly speaking, is that we've seen declines in utilization across almost every provider group bigger than what we would have I'm not sure we understand the question, Kevin. Can you say that again? I think you said earlier that 21% of outpatient rehab visits come from elective procedures and so you were optimistic that elective surgeries come back then outpatient visits will come back but I guess we've seen surgeries down 70% outpatient surgeries down 70% in April so you've seen a much bigger drop in surgeries than we ever would have thought we could have seen before and so I wasn't really sure if what were seeing as kind of deferred procedures in April is really the typical definition of what we would think of as elective procedures. So when you say 21% of visits come from elective surgeries, I just wasn't sure if you were kind of using the 70% down this month or whether you're kind of saying, well, on average, historically, we thought this is what it was, but we're obviously seeing a much bigger impact right now.

Yeah, in essence, what we did was we took a look at those visits that we had coming from Elective surgery being done, so post-op. We took a look at those over the last 12 months and basically divided that by the total number of visits that we had. That's how we arrived at the 21%.

Okay, so that's not necessarily real-time. The impact is obviously bigger right now. Yeah, exactly.

It's not real-time, but historic. And I think we think that all of those surgeries that ultimately find their way to our outpatients Those will not be gone. I mean, there's just going to be pent-up demand. We certainly believe that there will be an acceleration at some point because those surgeries, while we refer to them as elective, they are going to have to be done at some point.

And then I guess my last question, on the rehab, efficient rehab side, you know, I guess we did see, you know, the patient days being up even though the admissions were down a lot. Can you maybe talk about what was going on there? Was there some issue about being discharged from the hospital? Is that a dynamic that we would expect to continue the length of stay would, you know, keep increasing or would we ultimately expect We have volume patient days to be similar to the admission trends. Thanks.

Yeah, I think as far as length of stay, I would expect, you know, in the future, you're going to see it go back to historical levels. That this was a, you know, the pandemic is just a very unique situation with regards to admissions and discharges.

Okay, great, thanks.

Thanks.

Thank you. Our next question is from David Common with J.P. Morgan.

Great, thank you. Good morning, and thanks for fielding all our outlook questions, you know, recognizing that there's so many uncertainties. I was hoping to follow up a little on A.J.' 's questions, particularly with regard to Concentra. and maybe you could give us just a bit more sort of qualitative commentary on the cost structure and the ability to avoid operating losses for any length of time. I was thinking that maybe comments about performance during the global financial crisis might be helpful. If you could remind us of that and then sort of similarities and differences in the business since then. You mentioned rent deferrals which actually I wasn't expecting and it just jogged my memory to ask about the significance of rent burden in both the outpatient businesses and whether permanent closures would be part of the mix as you go forward. And then finally, just thoughts on whether this makes the valuation on the put call a little tricky looking out a little bit. Thank you.

David, let me address your last question first. Remember that the put that our minority partners have in Q1 of 2021 is an 11.3 multiple times the LTM EBITDA. Given the expected drop in EBITDA in these last two months, we would anticipate, and we've actually had discussions with our partners, and we do not anticipate that they would exercise that put come Q1 of 21. And they will basically postpone that and exercise that put come Q1 of 22. As it pertains to the cost structure, I had mentioned before that the outpatient businesses, a significant amount of their costs are really the salaries, wages, and benefits. So the way that we take a look at that is it's a variable expense, and to the extent that the volume isn't there, the clinicians are basically flexed. and in essence, that's what's occurred over the past month. Those clinicians have been flexed. So costs are down considerably. Okay.

And then rent deferrals, reductions, closures?

Yeah, rent deferral, I wouldn't think about that being a large amount. As a matter of fact, I believe What we've seen is probably less than a million dollars of cost savings on an annualized basis.

Okay. And then global financial crisis, any just reminders of performance and, again, differences in not just cost structure but similarities or differences in the nature of the business? Thank you.

Yeah. David, we don't think that there's a comparative analysis, there's really, there's no comparison between what happened in 2008, 2009 to what we have today. You know, you're looking at 30 million people being unemployed over the last month. And, you know, to the extent the states begin to open up, we think a lot of those people will, you know, basically be re-employed. So, you know, unlike what you saw In 2008, where it was over a period of time, we don't anticipate that that's going to occur here.

All right. Well, again, thanks for fielding the question.

Sure. Thanks, David.

Thank you. Our next question is from Bill Sutherland with the Benchmark Company.

Hey, thanks, and hello, everybody. Just one or two at this point. I've been thinking about the very strong utilization number you had in Inpatient Rehab, 79% for the quarter, despite all the complications in March. And I'm wondering if there's a cadence to the quarter to utilization. And where do you think, particularly given the mix of patients going forward, utilization can run for that business?

Yeah, Bill, as far as the way we take a look at utilization is really on an occupancy rate basis. And as you remember, we had opened up two new hospitals in the first quarter of 2019. And so what you've seen is a good portion of that volume that you're seeing is really a function of those hospitals opening up. and then some of the hospitals that we've had from the prior year maturing. So, you know, for us, we think that ultimately you can probably get on a mature basis in that occupancy rate of 85, 86% on the rehab side.

Okay. And even with the complications of housing the COVID patients?

Yes.

Yes. Okay. The other thing I wanted to ask you guys about is CMS came out with yet another set of waivers a day or two ago that apply to both your rehab and long-term hospitals, basically permitting reimbursement for any Medicare admit, kind of regardless of patient criteria or where they're referred from. Would you... I know you've committed to handling COVID patients. Would this allow you to just even, you know, take on more ADC or to have your, you know, just have more census in those locations as a result of that?

My understanding of the rules were that was really to assist the short-term acute care hospitals decompress their census and be able to find the discharge destination for those patients. As far as we're concerned, I think what we'll do is we'll continue to handle the highly acute patient population that we've always handled.

The waivers that were historically on the LTAC that came early on, which was the ability to bill fully for the site neutral patients and what they call the 50-50 rule. We didn't take advantage of those at all. I think that, and I would say that completely universally across our network of 100 critical illness hospitals. We are sticking to the high acuity ventilator dependent patients that will be the and I think the mission and the best patients for us coming out of this and for Select Medical for us right now as well. So we haven't really taken advantage of any of those waivers.

That makes total sense. The last one for me is on your timeline for your new rehab hospital development. Is there an update there or any change?

I think the construction has gone on unabated in our Arizona hospitals with Banner and we expect the two that are under construction to open on time in Q4.

Okay. Great. Thanks for all the color, guys. Thank you.

Thank you. And ladies and gentlemen, there is no further time for questions. I will hand it back to management for closing remarks.

Yeah, thank you everybody for joining us and we will certainly look forward to updating you next quarter.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating.