Select Medical Holdings Corporation

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 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 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 organizations 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 Thank you very much. Thank you very much. Having said that, we saw a significant rebound in this business segment in June as revenue increased over 24% for the month on the same period year-over-year basis. Our June occupancy rate of 78% is close to pre-COVID levels and exceeded June's last year occupancy of 73%. In our outpatient rehabilitation and concentra segments, Thank you very much. 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% Thank you for joining us. 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. Thank you for joining us. 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 declined for 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 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 funds. $54.2 million was recorded with our other activities, and $800,000 was recorded in the concentra segments. 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. Thank you for joining us. 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 bar hospitals in New Jersey and South Florida and higher operating expenses related to COVID. Our outpatient rehab incurred adjusted EBITDA loss of $6.3 million in the second quarter compared to $42.6 million Thank you very much. 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 non-operating 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.

Thanks, Bob. Good morning, everyone. For the second quarter, our operating expenses, which include our cost of services in 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 last year. 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 of grant monies 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 and earnings of unconsolidated subsidiaries during the second quarter compared to $7.4 million in the same quarter last year. We also had non-operating gain of $300,000 in the second quarter this 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 an effective tax rate of 25.8% in the same quarter last year. Net income attributable to non-controlling 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 was 39 cents. Excluding the non-operating gain and its related tax effects, our adjusted earnings per share was 38 cents. 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 and six and a quarter senior notes and $77 million of other miscellaneous debt. Operating activities provided $642 million of cash flow in the second quarter, which included $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 and 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.

Ladies and gentlemen, if you have a question at this time, please press star, then the number 1 on your touchtone telephone. If you would like to remove yourself from the queue, press the pound key. Your first question comes from the line of Frank Morgan with RBC Capital Markets.

Good morning. David Chernow, Robert Breighner

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 a 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. We were about 7% in June. We're about 8% in July. And IRFs are about almost 6.5% up.

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

Certainly on the critical illness recovery hospitals, Frank, what we saw was, and you've seen this, 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.

Gotcha. 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 should consider either for the outpatient business or for concentra when we think about the rest of the year as you continue to recover?

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

Gotcha. And I guess my last one here is just you called out startup losses in the IRF segment last year in this quarter. What were the startup losses this year, if anything?

Yeah, there were no losses, startup losses for the IRFs this quarter.

Okay. All right. Thank you.

Great. Thanks, Frank.

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

Hey, good morning, everyone. And second to that, we really appreciate all the detail that you guys have been providing. And then I just wanted to – would be – It sounds like they're still going strong. And is the acuity also running higher at this point?

Justin, yes. You know, 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.

Okay. And then... Would the IRFs as well, I'm sorry, would the IRFs too, 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?

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.

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

Yeah, 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, 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 will 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.

Okay, that makes sense. Thanks, Bob. And then just one last one, really strong cash flow during the quarter and 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.

Yeah, 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 and the advance 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 a billion now. You're going to see a couple hundred million more come in.

and that could change dramatically if there's a change in policy regarding the repayment of the Medicare advanced funds which has been discussed. So I would just, if you're watching liquidity, you could watch for any regs that come through on that as well.

Yep. Okay, you got it. Thanks a lot. Nice work, guys.

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

Thanks, everybody. I 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.

Yeah, 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 of 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 April and May, I think we were in the 15, I think it was about 1,500 telerehab visits a day.

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

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

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

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

And is the issue 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? Or is it more of a demand and not enough elective surgeries and discharges?

Yeah, it's more of a demand.

Okay. Okay.

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 still has not come back full bore yet.

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

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.

Okay. Okay. What would you – just one or two more – I know you didn't reinstate guidance. What are the main uncertainties as you guys look at your second half holding you back from doing that?

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 is concerned.

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

Bill, what we can do is I'll get a hold of you offline and we'll get you that information.

Okay. Thanks so much. Appreciate it, guys. Sure.

Your next question comes from the line of A.J. Rice with Credit Suisse.

Hi, everybody. Thanks for the information. Let me ask you a couple questions. One, cleanup on the critical illness recovery program. 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 saying? Is there anything else going on there that's seemingly pushing, building up the patient day aspect, even if the admissions aren't?

Yeah, you're absolutely right, AJ. Typically what will end up happening is acuity goes up, your average length of stay goes up, which is going to increase your patient days.

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?

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

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

Okay, so today you would have an LTAC that might have COVID patients and non-COVID patients in it, then you have them together. Yes, that's correct. Okay. The CARES Act, $55 million, we had actually thought you might get more than that. Is there some that you think you'll record that you just didn't record this quarter that you'll pick up in the back? I know we've 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? Yes, AJ.

Yeah, EJ, 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 will probably be another $15 to $20 million throughout the balance of the year.

So you've got $100 in, you've got $55, and you get $15 to $20 more, so it takes you up to $75. Will the other $25 you just give back, is that what will happen, or what do you think?

Yeah, that's what our thoughts are right now. There is some question as to how the government's 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 until next year sometime, though.

Okay. It's been a while since we've talked through a concentra relative to the and I know some general sense that it has a little more economic sensitivity as you've already alluded to on the call. But can you just remind us, I think the focus of the industries 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 the industries that tend to use their services a lot What you're seeing in terms of the rebound there. And then, you know, we talk about it as the economy down as a negative. I guess I've always heard on workers' comp that sometimes as industries at risk of layoffs, people actually go out and 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?

Well, on that last point, AJ, 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 the 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 consent 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. and probably a lot of our work with the airlines. While we have some of it, that's going to be hard to sit. 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 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 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, you know, internally for us, you obviously can't, is we see it on a regional basis and even on a citywide 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 and has sensitivity toward because when you have higher unemployment, we see more pre-employment physicals. We see less drug testing, which is also a component of the business outside of actually just treating the injured worker.

Okay. Well, that just begs the question to me. 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 now, A bit going forward is going to be different. It seems like there might be that same opportunity with Concentra to consolidate locations and say, look, 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? On the Concentra side, AJ, we'd 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. Health Works 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 on the outpatient, that is a bit of a different nuanced business 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.

Okay, maybe one last thing I'll throw out there is There's all this discussion about aversion to nursing homes, discharges going elsewhere to nursing homes. 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? To the extent that some of those are going home, are you hearing anything about that helping you on the outpatient rehab side?

Well, we have heard a lot about it. I mean, our census in the rehab hospital is strong, and for those of you who have 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 Thank you very much. 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.

Okay. All right. Thanks a lot.

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

Thank you. I 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?

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

It's July year over year, July, July. That's correct. Okay. And in June it was up 24%? Is that just compound? Is that just anniversarying startups?

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

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

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

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 volume, so kind of quote-unquote core volumes are 8% or 9% below average. You know, is there a way to think about that for the LTACs? I mean... Thank you very much.

somewhere in that 1,500 to 2,000 COVID patients was what we were looking at. So relatively modest.

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, you know, the long-term implications of COVID?

Competitors in which segment? In all segments? We're going to go through all of them.

Yeah, I'd say go through all of them if you could.

Yeah, 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, it's hard for me to see that there'd 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 that they can reopen. If they don't reopen, that obviously could translate into 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 anything like that could in any way be meaningful.

Okay. And then I guess the acuity number in the LTCH side trying to understand that a little bit better because It 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?

Yeah, 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 and improve 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.

And this is 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 not going to go away. We always think about our business in terms of flu season where our business picks up. Even after there's a vaccine for COVID-19, we still think that it's 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 probably for years to come. I do think it, and I've said this before, that the pandemic has, I think, in many ways solidified the position, the value of of the LTACs or our critical illness recovery hospitals in the continuum of care even deeper than it was prior to.

All right, that's great. Thank you.

Hey, Kevin. Yeah. 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.

Yeah, no, I'm around.

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

Hey, 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? Thanks.

Yes, Frank, absolutely. I mean, right now we take a look at the efficiency factor 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.

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

Yeah, actually my follow-up was answered, but since I've got you, I was 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.

Well, I think from, I'll comment on the broader M&A. I mean, I think we feel in the four 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 Thank you very much. and we'll pick up the 33% plus or minus of concentra that we don't own now. Our plan is to do that mainly out of cash flow and accumulated cash on the balance sheet and 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.

That makes sense. That was actually my follow-up. Thanks both. Appreciate it.

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

Yeah, we have no further comments. Thanks everybody for joining us.

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