SELECT MEDICAL HOLDINGS CORPORATION
You should read this discussion together with our unaudited condensed
consolidated financial statements and accompanying notes.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning
of the federal securities laws. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements include statements preceded by, followed
by or that include the words "may," "could," "would," "should," "believe,"
"expect," "anticipate," "plan," "target," "estimate," "project," "intend," and
similar expressions. These statements include, among others, statements
regarding our expected business outlook, anticipated financial and operating
results, including the potential impact of the COVID-19 pandemic on those
financial and operating results, our business strategy and means to implement
our strategy, our objectives, the amount and timing of capital expenditures, the
likelihood of our success in expanding our business, financing plans, budgets,
working capital needs, and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on our management's beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding our services, the expansion of our services,
competitive conditions, and general economic conditions. These assumptions could
prove inaccurate. Forward-looking statements also involve known and unknown
risks and uncertainties, which could cause actual results to differ materially
from those contained in any forward-looking statement. Many of these factors are
beyond our ability to control or predict. Such factors include, but are not
limited to, the following:
•developments related to the COVID-19 pandemic including, but not limited to,
the duration and severity of the pandemic, additional measures taken by
government authorities and the private sector to limit the spread of COVID-19,
and further legislative and regulatory actions which impact healthcare
providers, including actions that may impact the Medicare program;
•changes in government reimbursement for our services and/or new payment
policies may result in a reduction in net operating revenues, an increase in
costs, and a reduction in profitability;
•the failure of our Medicare-certified long term care hospitals or inpatient
rehabilitation facilities to maintain their Medicare certifications may cause
our net operating revenues and profitability to decline;
•the failure of our Medicare-certified long term care hospitals and inpatient
rehabilitation facilities operated as "hospitals within hospitals" to qualify as
hospitals separate from their host hospitals may cause our net operating
revenues and profitability to decline;
•a government investigation or assertion that we have violated applicable
regulations may result in sanctions or reputational harm and increased costs;
•acquisitions or joint ventures may prove difficult or unsuccessful, use
significant resources, or expose us to unforeseen liabilities;
•our plans and expectations related to our acquisitions and our ability to
realize anticipated synergies;
•private third-party payors for our services may adopt payment policies that
could limit our future net operating revenues and profitability;
•the failure to maintain established relationships with the physicians in the
areas we serve could reduce our net operating revenues and profitability;
•shortages in qualified nurses, therapists, physicians, or other licensed
providers, or the inability to attract or retain healthcare professionals due to
the heightened risk of infection related to the COVID-19 pandemic, could
increase our operating costs significantly or limit our ability to staff our
facilities;
•competition may limit our ability to grow and result in a decrease in our net
operating revenues and profitability;
•the loss of key members of our management team could significantly disrupt our
operations;
•the effect of claims asserted against us could subject us to substantial
uninsured liabilities;
•a security breach of our or our third-party vendors' information technology
systems may subject us to potential legal and reputational harm and may result
in a violation of the Health Insurance Portability and Accountability Act of
1996 or the Health Information Technology for Economic and Clinical Health Act;
and
20
--------------------------------------------------------------------------------
Table of Contents
•other factors discussed from time to time in our filings with the SEC ,
including factors discussed under the heading "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly
Report on Form 10-Q for the three months ended March 31, 2020 , as such risk
factors may be updated from time to time in our periodic filings with the SEC ,
including the risk factors discussed in Item 1A. Risk Factors on this Form 10-Q.
Except as required by applicable law, including the securities laws of the
United States and the rules and regulations of the SEC , we are under no
obligation to publicly update or revise any forward-looking statements, whether
as a result of any new information, future events, or otherwise. You should not
place undue reliance on our forward-looking statements. Although we believe that
the expectations reflected in forward-looking statements are reasonable, we
cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate
with securities analysts, it is against our policy to disclose to securities
analysts any material non-public information or other confidential commercial
information. Accordingly, stockholders should not assume that we agree with any
statement or report issued by any securities analyst irrespective of the content
of the statement or report. Thus, to the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports
are not the responsibility of the Company.
Overview
We began operations in 1997 and, based on number of facilities, are one of the
largest operators of critical illness recovery hospitals, rehabilitation
hospitals, outpatient rehabilitation clinics, and occupational health centers in
the United States . As of June 30, 2020 , we had operations in 47 states and the
District of Columbia . We operated 101 critical illness recovery hospitals in 28
states, 29 rehabilitation hospitals in 12 states, and 1,757 outpatient
rehabilitation clinics in 37 states and the District of Columbia . Concentra, a
joint venture subsidiary, operated 522 occupational health centers in 41 states
as of June 30, 2020 . Concentra also provides contract services at employer
worksites and Department of Veterans Affairs community-based outpatient clinics
("CBOCs").
Our reportable segments include the critical illness recovery hospital segment,
the rehabilitation hospital segment, the outpatient rehabilitation segment, and
the Concentra segment. We had net operating revenues of $2,647.4 million for the
six months ended June 30, 2020 . Of this total, we earned approximately 39% of
our net operating revenues from our critical illness recovery hospital segment,
approximately 13% from our rehabilitation hospital segment, approximately 16%
from our outpatient rehabilitation segment, and approximately 27% from our
Concentra segment. Our critical illness recovery hospital segment consists of
hospitals designed to serve the needs of patients recovering from critical
illnesses, often with complex medical needs, and our rehabilitation hospital
segment consists of hospitals designed to serve patients that require intensive
physical rehabilitation care. Patients are typically admitted to our critical
illness recovery hospitals and rehabilitation hospitals from general acute care
hospitals. Our outpatient rehabilitation segment consists of clinics that
provide physical, occupational, and speech rehabilitation services. Our
Concentra segment consists of occupational health centers that provide workers'
compensation injury care, physical therapy, and consumer health services as well
as onsite clinics located at employer worksites that deliver occupational
medicine services. Additionally, our Concentra segment delivers veteran's
healthcare through its Department of Veterans Affairs CBOCs .
21
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA, as defined below, is
important to investors because Adjusted EBITDA is commonly used as an analytical
indicator of performance by investors within the healthcare industry. Adjusted
EBITDA is used by management to evaluate financial performance and determine
resource allocation for each of our operating segments. Adjusted EBITDA is not a
measure of financial performance under GAAP. Items excluded from Adjusted EBITDA
are significant components in understanding and assessing financial performance.
Adjusted EBITDA should not be considered in isolation or as an alternative to,
or substitute for, net income, income from operations, cash flows generated by
operations, investing or financing activities, or other financial statement data
presented in the consolidated financial statements as indicators of financial
performance or liquidity. Because Adjusted EBITDA is not a measurement
determined in accordance with GAAP and is thus susceptible to varying
definitions, Adjusted EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
We define Adjusted EBITDA as earnings excluding interest, income taxes,
depreciation and amortization, gain (loss) on early retirement of debt, stock
compensation expense, gain (loss) on sale of businesses, and equity in earnings
(losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA
throughout the remainder of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The table below reconciles net income and income from operations to Adjusted
EBITDA and should be referenced when we discuss Adjusted EBITDA:
Six Months Ended June
Three Months Ended June 30, 30,
2019 2020 2019 2020
(in thousands)
Net income $ 59,986 $ 67,486 $ 113,330 $ 137,934
Income tax expense 20,826 23,336 39,293 45,248
Interest expense 51,464 37,366 102,275 83,473
Gain on sale of businesses - (346) (6,532) (7,547)
Equity in earnings of unconsolidated
subsidiaries (7,394) (8,324) (11,760) (10,912)
Income from operations 124,882 119,518 236,606 248,196
Stock compensation expense:
Included in general and administrative 4,796 5,451 9,544 10,888
Included in cost of services 1,562 1,512 3,069 2,978
Depreciation and amortization 54,993 52,271 107,131 104,023
Adjusted EBITDA $ 186,233 $ 178,752 $ 356,350 $ 366,085
22-------------------------------------------------------------------------------- Table of Contents Effects of the COVID-19 Pandemic on our Results of Operations The continuing implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. We have provided net operating revenues and certain operating statistics to assist readers in understanding how the COVID-19 pandemic impacted each of our segments during the three and six months endedJune 30, 2020 . Please refer to our risk factors discussed in Item 1A. "Risk Factors" of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 for further discussion. Critical Illness Recovery Hospital Segment. Our critical illness recovery hospitals are a key component of the inpatient hospital continuum of care. Both CMS andCongress acted to temporarily suspend certain regulations concerning length of stay requirements, which apply to our critical illness recovery hospitals, in order to facilitate the transfer of patients from general acute care hospitals (see "Regulatory Changes" for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. COVID-19 has become more prevalent in certain markets that we serve; as a result, our critical illness recovery hospitals have admitted patients with COVID-19 and we have faced the challenging task of treating those patients while also taking measures to protect our patients and staff members who do not have COVID-19. The pandemic has caused, and will continue to cause, disruptions in our critical illness recovery hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary increases or restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. The following table shows the trend in net operating revenues and patient day volume for each of the periods presented, as well as the number of critical illness recovery hospitals we operated at the end of each period. Three Six One Month Ended Months Months Ended Ended January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30 2020 Critical illness recovery hospital Net operating revenues$ 163,238 $ 165,375 $ 171,908 $ 171,445 $ 178,223 $ 169,958 $ 519,626 $ 1,020,147 Patient days 90,783 87,844 91,831 90,710 95,191 90,988 276,889 547,347 Occupancy rate 69 % 72 % 70 % 71 % 72 % 71 % 72 % 71 % Number of hospitals owned 100 100 100 100 100 100 100 100 2019 Critical illness recovery hospital Net operating revenues$ 149,799 $ 145,586 $ 162,149 $ 156,231 $ 156,422 $ 148,490 $ 461,143 $ 918,677 Patient days 86,238 80,806 91,085 88,357 89,350 85,153 262,860 520,989 Occupancy rate 69 % 71 % 73 % 70 % 69 % 68 % 69 % 70 % Number of hospitals owned 96 96 96 99 99 99 99 99 The following table summarizes the changes in our net operating revenues and patient day volume for 2020, as compared to the same period in 2019, for each of the periods presented. Three Six One Month Ended Months Months Ended Ended January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30 Critical illness recovery hospital Net operating revenues 9.0 % 13.6 % 6.0 % 9.7 % 13.9 % 14.5 % 12.7 % 11.0 % Patient days 5.3 % 8.7 % 0.8 % 2.7 % 6.5 % 6.9 % 5.3 % 5.1 % 23
-------------------------------------------------------------------------------- Table of Contents Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS andCongress acted to temporarily suspend certain regulations that govern admissions into our rehabilitation hospitals in order to facilitate the transfer of patients from general acute care hospitals and critical illness recovery hospitals (see "Regulatory Changes" for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. COVID-19 has become more prevalent in certain markets that we serve; as a result, our rehabilitation hospitals have admitted patients with COVID-19 and we have faced the challenging task of treating those patients while also taking measures to protect our patients and staff members who do not have COVID-19. The pandemic has caused, and will continue to cause, disruptions in our rehabilitation hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. At the beginning of the pandemic, elective surgeries at hospitals and other facilities were suspended, which reduced the need for inpatient rehabilitation services. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginning of the pandemic and hospitals began to perform elective surgeries again, which has increased the need for the services provided by our rehabilitation hospitals. The following table shows the trend in net operating revenues and patient day volume for each of the periods presented, as well as the number of rehabilitation hospitals we operated at the end of each period. Three Six One Month Ended Months Months Ended Ended January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30 2020 Rehabilitation hospital Net operating revenues$ 61,673 $ 60,690 $ 59,656 $ 45,878 $ 57,815 $ 64,974 $ 168,667 $ 350,686 Patient days 32,111 31,813 30,644 23,553 29,787 30,741 84,081 178,649 Occupancy rate 79 % 84 % 76 % 61 % 73 % 78 % 71 % 75 % Number of hospitals owned 19 19 19 19 19 19 19 19 2019 Rehabilitation hospital Net operating revenues$ 50,615 $ 48,080 $ 55,863 $ 51,991 $ 56,019 $ 52,364 $ 160,374 $ 314,932 Patient days 27,434 25,442 29,940 28,266 29,730 28,529 86,525 169,341 Occupancy rate 74 % 76 % 78 % 76 % 75 % 73 % 75 % 76 % Number of hospitals owned 17 17 18 18 19 19 19 19 The following table summarizes the changes in our net operating revenues and patient day volume for 2020, as compared to the same period in 2019, for each of the periods presented. Three Six One Month Ended Months Months Ended Ended January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30 Rehabilitation hospital Net operating revenues 21.8 % 26.2 % 6.8 % (11.8) % 3.2 % 24.1 % 5.2 % 11.4 % Patient days 17.0 % 25.0 % 2.4 % (16.7) % 0.2 % 7.8 % (2.8) % 5.5 % Outpatient Rehabilitation Segment. Beginning in mid-March, hospitals and other facilities began to suspend elective surgeries. Additionally, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel, and closures of schools. By the end of March, most states had implemented significant restrictions on businesses and individuals. The suspension of elective surgeries at hospitals and other facilities and the reduction of physician office visits, combined with recommendations of social distancing and the other items noted above, have had significant effects on our patient visit volumes. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginning of the pandemic and hospitals began to perform elective surgeries again, which has increased the need for the services provided by our outpatient rehabilitation clinics. Additionally, most physician offices have reopened for routine office visits. While some of our volume has recovered, our outpatient rehabilitation segment continues to experience reduced volume of patients seeking rehabilitation services for employment injuries and sports activities. 24 -------------------------------------------------------------------------------- Table of Contents The following table shows the trend in net operating revenues and patient visit volume for each of the periods presented, as well as the number of working days for each period. Three Six One Month Ended Months Months Ended Ended January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30 2020 Outpatient Rehabilitation Net operating revenues$ 90,924 $ 88,239 $ 76,086 $ 49,084 $ 51,186 $ 66,868 $ 167,138 $ 422,387 Visits 757,171 739,061 626,433 386,108 409,703 546,456 1,342,267 3,464,932 Working days(1) 22 20 22 22 20 22 64 128 2019 Outpatient Rehabilitation Net operating revenues$ 83,185 $ 78,573 $ 85,147 $ 90,230 $ 90,272 $ 81,389 $ 261,891 $ 508,796 Visits 687,007 658,610 708,866 762,914 759,829 680,762 2,203,505 4,257,988 Working days(1) 22 20 21 22 22 20 64 127
_______________________________________________________________________________
(1) Represents the number of days in which normal business operations were
conducted during the periods presented.
The following table summarizes the changes in our net operating revenues and
patient visit volume for 2020, as compared to the same period in 2019, for each
of the periods presented below.
Three Six
One Month Ended Months Months
Ended Ended
January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30
Outpatient Rehabilitation
Net operating revenues 9.3 % 12.3 % (10.6) % (45.6) % (43.3) % (17.8) % (36.2) % (17.0) %
Visits 10.2 % 12.2 % (11.6) % (49.4) % (46.1) % (19.7) % (39.1) % (18.6) %
Concentra Segment. Beginning in mid-March, state governments in the areas
experiencing the most significant growth of COVID-19 infections began
implementing mandatory closures of non-essential or non-life sustaining
businesses. By the end of March, most states implemented significant
restrictions on businesses, causing many employers to furlough their workforce
and temporarily cease or significantly reduce their operations. These actions
have had significant effects on our patient visit volumes. Beginning in May,
state governors and health departments began to ease the restrictions imposed at
the beginning of the pandemic and employers began to increase their workforce,
which has resulted in an increased need for our occupational health services.
The following table shows the trend in net operating revenues and patient visit
volume for each of the periods presented, as well as the number of working days
for each period.
Three Six
One Month Ended Months Months
Ended Ended
January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30
2020
Concentra
Net operating revenues $ 141,236 $ 133,690 $ 123,609 $ 91,178 $ 99,228 $ 121,932 $ 312,338 $ 710,873
Visits 1,032,069 965,741 879,585 610,555 674,629 865,896 2,151,080 5,028,475
Working days(1) 22 20 22 22 20 22 64 128
2019
Concentra
Net operating revenues $ 133,507 $ 126,309 $ 136,505 $ 140,050 $ 143,183 $ 130,218 $ 413,451 $ 809,772
Visits 985,598 919,065 1,006,944 1,040,543 1,073,763 988,783 3,103,089 6,014,696
Working days(1) 22 20 21 22 22 20 64 127
_______________________________________________________________________________
(1) Represents the number of days in which normal business operations were conducted during the periods presented.
25
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes the changes in our net operating revenues and
patient visit volume for 2020, as compared to the same period in 2019, for each
of the periods presented below.
Three Six
One Month Ended Months Months
Ended Ended
January 31 February 28 March 31 April 30 May 31 June 30 June 30 June 30
Concentra
Net operating revenues 5.8 % 5.8 % (9.4) % (34.9) % (30.7) % (6.4) % (24.5) % (12.2) %
Visits 4.7 % 5.1 % (12.6) % (41.3) % (37.2) % (12.4) % (30.7) % (16.4) %
Please refer to "Summary Financial Results" and "Results of Operations" for
further discussion of our segment performance measures for the three and six
months ended June 30, 2019 and 2020. Please refer to "Operating Statistics" for
further discussion regarding the uses and calculations of the metrics provided
above, as well as the operating statistics data for each segment for the three
and six months ended June 30, 2019 and 2020.
The continued uncertainty of the potential impact of the COVID-19 pandemic on
the healthcare sector could have a materially adverse impact our business,
results of operations, and overall financial performance in future periods. See
Item 1A. "Risk Factors" of this Form 10-Q for further discussion of the possible
impact of the COVID-19 pandemic on our business.
Other Significant Events
Purchase of Concentra Interest
On January 1, 2020 , Select, WCAS, and DHHC entered into an agreement pursuant to
which Select acquired approximately 17.2% of the outstanding membership
interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS,
DHHC, and other equity holders of Concentra Group Holdings Parent for
approximately $338.4 million .
On February 1, 2020 , Select, WCAS and DHHC entered into an agreement pursuant to
which Select acquired an additional 1.4% of the outstanding membership interests
of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and
other equity holders of Concentra Group Holdings Parent for approximately $27.8
million .
Following these purchases, Select owns approximately 66.6% of the outstanding
membership interests of Concentra Group Holdings Parent on a fully diluted basis
and approximately 68.8% of the outstanding Class A membership interests of
Concentra Group Holdings Parent. These purchases were in lieu of, and are
considered to be, the exercise of the first put right provided to certain equity
holders under the terms of the Concentra LLC Agreement.
26
--------------------------------------------------------------------------------
Table of Contents
Summary Financial Results
Three Months Ended June 30, 2020
For the three months ended June 30, 2020 , our net operating revenues were
$1,232.7 million , compared to $1,361.4 million for the three months ended
June 30, 2019 . Income from operations was $119.5 million for the three months
ended June 30, 2020 , compared to $124.9 million for the three months ended
June 30, 2019 . For the three months ended June 30, 2020 , income from operations
included other operating income of $55.0 million related to the recognition of
payments received under the Provider Relief Fund for loss of revenue and health
care related expenses attributable to COVID-19.
Net income increased 12.5% to $67.5 million for the three months ended June 30,
2020 , compared to $60.0 million for the three months ended June 30, 2019 . Net
income included a pre-tax gain on sale of businesses of $0.3 million for the
three months ended June 30, 2020 .
Adjusted EBITDA was $178.8 million for the three months ended June 30, 2020 ,
compared to $186.2 million for the three months ended June 30, 2019 . Our
Adjusted EBITDA margin was 14.5% for the three months ended June 30, 2020 ,
compared to 13.7% for the three months ended June 30, 2019 .
The following tables reconcile our segment performance measures to our
consolidated operating results:
Three Months Ended
Critical Illness Rehabilitation Outpatient Concentra Other Total
Recovery Hospital Hospital Rehabilitation
(in thousands)
Net operating revenues $ 519,626 $ 168,667 $ 167,138 $ 312,338 $ 64,949 $ 1,232,718
Operating expenses (429,883) (141,062) (173,420) (272,331) (99,221) (1,115,917)
Depreciation and amortization (13,892) (6,907) (7,194) (21,857) (2,421) (52,271)
Other operating income - - - 789 54,199 54,988
Income (loss) from operations $ 75,851 $ 20,698 $ (13,476) $ 18,939 $ 17,506 $ 119,518
Depreciation and amortization 13,892 6,907 7,194 21,857 2,421 52,271
Stock compensation expense - - - 701 6,262 6,963
Adjusted EBITDA $ 89,743 $ 27,605 $ (6,282) $ 41,497 $ 26,189 $ 178,752
Adjusted EBITDA margin 17.3 % 16.4 % (3.8) % 13.3 % N/M 14.5 %
Three Months Ended June 30, 2019
Critical Illness Rehabilitation Outpatient Concentra Other Total
Recovery Hospital Hospital Rehabilitation
(in thousands)
Net operating revenues $ 461,143 $ 160,374 $ 261,891 $ 413,451 $ 64,505 $ 1,361,364
Operating expenses (397,005) (130,406) (219,307) (338,131) (96,640) (1,181,489)
Depreciation and amortization (14,495) (6,696) (6,991) (24,479) (2,332) (54,993)
Income (loss) from operations $ 49,643 $ 23,272 $ 35,593 $ 50,841 $ (34,467) $ 124,882
Depreciation and amortization 14,495 6,696 6,991 24,479 2,332 54,993
Stock compensation expense - - - 767 5,591 6,358
Adjusted EBITDA $ 64,138 $ 29,968 $ 42,584 $ 76,087 $ (26,544) $ 186,233
Adjusted EBITDA margin 13.9 % 18.7 % 16.3 % 18.4 % N/M 13.7 %
27-------------------------------------------------------------------------------- Table of Contents The following table summarizes changes in segment performance measures for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 : Critical Illness Rehabilitation Outpatient Recovery Hospital Rehabilitation Concentra Other Total Hospital Change in net operating revenues 12.7 % 5.2 % (36.2) % (24.5) % 0.7 % (9.4) % Change in income from operations 52.8 % (11.1) % (137.9) % (62.7) % N/M (4.3) % Change in Adjusted EBITDA 39.9 % (7.9) % (114.8) % (45.5) % N/M (4.0) %
_______________________________________________________________________________
N/M - Not meaningful.
Six Months EndedJune 30, 2020 For the six months endedJune 30, 2020 , our net operating revenues were$2,647.4 million , compared to$2,686.0 million for the six months endedJune 30, 2019 . Income from operations increased 4.9% to$248.2 million for the six months endedJune 30, 2020 , compared to$236.6 million for the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , income from operations included other operating income of$55.0 million related to the recognition of payments received under theProvider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19. Net income increased 21.7% to$137.9 million for the six months endedJune 30, 2020 , compared to$113.3 million for the six months endedJune 30, 2019 . Net income included a pre-tax gain on sale of businesses of$7.5 million and$6.5 million for the six months endedJune 30, 2020 and 2019, respectively. Adjusted EBITDA increased 2.7% to$366.1 million for the six months endedJune 30, 2020 , compared to$356.4 million for the six months endedJune 30, 2019 . Our Adjusted EBITDA margin was 13.8% for the six months endedJune 30, 2020 , compared to 13.3% for the six months endedJune 30, 2019 . The following tables reconcile our segment performance measures to our consolidated operating results:
Six Months Ended
Critical Illness Rehabilitation Outpatient Concentra Other Total
Recovery Hospital Hospital Rehabilitation
(in thousands)
Net operating revenues $ 1,020,147 $ 350,686 $ 422,387 $ 710,873 $ 143,257 $ 2,647,350
Operating expenses (841,834) (284,512) (401,547) (610,167) (212,059) (2,350,119)
Depreciation and amortization (26,228) (13,794) (14,412) (44,744) (4,845) (104,023)
Other operating income - - - 789 54,199 54,988
Income (loss) from operations $ 152,085 $ 52,380 $ 6,428 $ 56,751 $ (19,448) $ 248,196
Depreciation and amortization 26,228 13,794 14,412 44,744 4,845 104,023
Stock compensation expense - - - 1,468 12,398 13,866
Adjusted EBITDA $ 178,313 $ 66,174 $ 20,840 $ 102,963 $ (2,205) $ 366,085
Adjusted EBITDA margin 17.5 % 18.9 % 4.9 % 14.5 % N/M 13.8 %
28--------------------------------------------------------------------------------
Table of Contents
Six Months Ended June 30, 2019
Critical Illness Rehabilitation Outpatient Concentra Other Total
Recovery Hospital Hospital Rehabilitation
(in thousands)
Net operating revenues $ 918,677 $ 314,932 $ 508,796 $ 809,772 $ 133,818 $ 2,685,995
Operating expenses (781,541) (259,167) (437,221) (668,961) (195,368) (2,342,258)
Depreciation and amortization (25,946) (13,098) (14,023) (49,383) (4,681) (107,131)
Income (loss) from operations$ 111,190 $ 42,667
13,098 14,023 49,383 4,681 107,131
Stock compensation expense - - - 1,534 11,079 12,613
Adjusted EBITDA $ 137,136 $ 55,765 $ 71,575 $ 142,345 $ (50,471) $ 356,350
Adjusted EBITDA margin 14.9 % 17.7 % 14.1 % 17.6 % N/M 13.3 %
The following table summarizes changes in segment performance measures for the
six months ended June 30, 2020 , compared to the six months ended June 30, 2019 :
Critical Illness Rehabilitation Outpatient
Recovery Hospital Rehabilitation Concentra Other Total
Hospital
Change in net operating
revenues 11.0 % 11.4 % (17.0) % (12.2) % 7.1 % (1.4) %
Change in income from
operations 36.8 % 22.8 % (88.8) % (37.9) % N/M 4.9 %
Change in Adjusted EBITDA 30.0 % 18.7 % (70.9) % (27.7) % N/M 2.7 %
_______________________________________________________________________________
N/M - Not meaningful.
29
--------------------------------------------------------------------------------
Table of Contents
Regulatory Changes
Our Annual Report on Form 10-K for the year ended December 31, 2019 , filed with
the SEC on February 20, 2020 , contains a detailed discussion of the regulations
that affect our business in Part I - Business - Government Regulations. The
following is a discussion of some of the more significant healthcare regulatory
changes that have affected our financial performance in the periods covered by
this report or are likely to affect our financial performance and financial
condition in the future. The information below should be read in conjunction
with the more detailed discussion of regulations contained in our Form 10-K.
Medicare Reimbursement
The Medicare program reimburses healthcare providers for services furnished to
Medicare beneficiaries, which are generally persons age 65 and older, those who
are chronically disabled, and those suffering from end stage renal disease. The
program is governed by the Social Security Act of 1965 and is administered
primarily by the Department of Health and Human Services and CMS. Net operating
revenues generated directly from the Medicare program represented approximately
26% of our net operating revenues for the six months ended June 30, 2020 , and
26% of our net operating revenues for the year ended December 31, 2019 .
Federal Health Care Program Changes in Response to the COVID-19 Pandemic
On January 31, 2020 , the Secretary of Health and Human Services ("HHS") declared
a public health emergency under section 319 of the Public Health Service Act, 42
U.S.C. § 247d, in response to the COVID-19 outbreak in the United States . On
March 13, 2020 , President Trump declared a national emergency due to the
COVID-19 pandemic and the HHS Secretary authorized the waiver or modification of
certain requirements under the Medicare, Medicaid and Children's Health
Insurance Program ("CHIP") pursuant to section 1135 of the Social Security Act.
Under this authority, CMS issued a number of blanket waivers that excuse health
care providers or suppliers from specific program requirements. The following
blanket waivers, while in effect, may impact our results of operations:
i.Inpatient rehabilitation facilities ("IRFs"), IRF units, and hospitals and
units applying to be classified as IRFs, can exclude patients admitted solely to
respond to the emergency from the calculation of the "60 percent rule"
thresholds to receive payment as an IRF.
ii.Long-term care hospitals ("LTCHs") are exempt from the greater-than-25-day
average length of stay requirement for all cost reporting periods that include
the COVID-19 public health emergency period. Hospitals seeking LTCH
classification can exclude patient stays from the greater-than-25-day average
length of stay requirement where the patient was admitted or discharged to meet
the demands of the COVID-19 public health emergency.
iii.Medicare will not require out-of-state physician and non-physician
practitioners to be licensed in the state where they are providing services when
they are licensed in another state, subject to certain conditions and state or
local licensure requirements.
iv.Many requirements under the hospital conditions of participation ("CoPs") are
waived during the emergency period to give hospitals more flexibility in
treating COVID-19 patients.
v.Hospitals can operate temporary expansion locations without meeting the
provider-based entity requirements or certain requirements in the physical
environment CoP for hospitals during the emergency. This waiver also allows
hospitals to change the status of their current provider-based department
locations to meet patient needs as part of the state or local pandemic plan.
vi.IRFs, LTCHs and certain other providers do not need to submit quality data to
Medicare for October 1, 2019 through June 30, 2020 to comply with the quality
reporting programs.
vii.The HHS Secretary waived sanctions under the physician self-referral law
(i.e., Stark law) for certain types of remuneration and referral arrangements
that are related to a COVID-19 purpose. The Office of the Inspector General
("OIG") will also exercise enforcement discretion to not impose administrative
sanctions under the federal anti-kickback statute for many payments covered by
the Stark law waivers.
CMS also approved section 1135 waivers for 54 state Medicaid programs (including
the District of Columbia , Puerto Rico , and other territories), 45 temporary
changes to Medicaid or CHIP state plan amendments, and 1 traditional change to a
Medicaid state plan amendment. CMS will consider specific waiver requests from
providers and suppliers. We have submitted one or more specific waiver requests
to make it easier for our operators or referral partners to treat COVID-19
patients, and we may submit others in the future.
30
--------------------------------------------------------------------------------
Table of Contents
Pursuant to the Coronavirus Preparedness and Response Supplemental
Appropriations Act, Public Law 116-123, CMS has waived Medicare telehealth
payment requirements during the emergency so that beneficiaries in all areas of
the country (not just rural areas) can receive telehealth services, including in
their homes, beginning on March 6, 2020 . CMS issued additional waivers to permit
more than 130 additional services to be furnished by telehealth, allow
physicians to monitor patient services remotely, and fulfill face-to-face
requirements in IRFs.
In addition to these agency actions, the CARES Act was enacted on March 27,
2020 . It provides additional waivers, reimbursement, grants and other funds to
assist health care providers during the COVID-19 public health emergency. Some
of the CARES Act provisions that may impact our operations include:
i.$100 billion in appropriations for the Public Health and Social Services
Emergency Fund to be used for preventing, preparing, and responding to the
coronavirus, and for reimbursing "eligible health care providers for health care
related expenses or lost revenues that are attributable to coronavirus." Half of
the fund is allocated for general distribution to Medicare providers. The first
$30 billion was distributed to health care providers that received Medicare
fee-for-service payments in 2019. The remaining $20 billion is being distributed
to Medicare providers in a manner that makes the entire $50 billion general
distribution proportional to providers' share of 2018 net patient revenue. The
other half of the fund is for targeted allocations to providers in high impact
COVID-19 areas ($10 billion ), rural providers ($10 billion ), Indian Health
Service ($400 million ), and unspecified allocations for treatment of uninsured
COVID-19 patients and providers who need additional funding such as skilled
nursing facilities, dentists, and providers that only treat Medicaid patients.
ii.Expansion of the Accelerated and Advance Payment Program to advance three
months of payments to Medicare providers. CMS has the ability to recoup the
advanced payments through future Medicare claims, beginning 121 days after the
advanced payment was issued. Repayment of amounts received under the Accelerated
and Advance Payment Program are due 210 days after the advanced payment was
issued.
iii.Temporary suspension of the 2% cut to Medicare payments due to sequestration
so that, for the period of May 1, 2020 to December 31, 2020 , the Medicare
program will be exempt from any sequestration order.
iv.Two waivers of Medicare statutory requirements regarding site neutral payment
to LTCHs. The first waives the LTCH discharge payment percentage requirement
(i.e., 50% rule) for the cost reporting period(s) that include the emergency
period. The second waives application of the site neutral payment rate so that
all LTCH cases admitted during the emergency period will be paid the LTCH-PPS
standard federal rate.
v.Waiver of the IRF 3-hour rule so that IRF services provided during the public
health emergency period do not need to meet the coverage requirement that
patients receive at least 3 hours of therapy a day or 15 hours of therapy per
week.
The CARES Act also provides for a 20% increase in the payment weight for
Medicare payments to hospitals paid under the inpatient hospital prospective
payment system ("IPPS") for treating COVID-19 patients. We are monitoring
developments related to this provision, in case CMS provides a similar payment
add-on for LTCHs and IRFs.
Medicare Reimbursement of LTCH Services
The following is a summary of significant regulatory changes to the Medicare
prospective payment system for our critical illness recovery hospitals, which
are certified by Medicare as LTCHs, which have affected our results of
operations, as well as the policies and payment rates that may affect our future
results of operations. Medicare payments to our critical illness recovery
hospitals are made in accordance with the long term care hospital prospective
payment system ("LTCH-PPS").
Fiscal Year 2019. On August 17, 2018 , CMS published the final rule updating
policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting
discharges and cost reporting periods beginning on or after October 1, 2018
through September 30, 2019 ). Certain errors in the final rule were corrected in
a document published October 3, 2018 . The standard federal rate was set at
$41,559 , an increase from the standard federal rate applicable during fiscal
year 2018 of $41,415 . The update to the standard federal rate for fiscal year
2019 included a market basket increase of 2.9%, less a productivity adjustment
of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal
rate also included an area wage budget neutrality factor of 0.999215 and a
temporary, one-time budget neutrality adjustment of 0.990878 in connection with
the elimination of the 25 Percent Rule. The fixed-loss amount for high cost
outlier cases paid under LTCH-PPS was set at $27,121 , a decrease from the
fixed-loss amount in the 2018 fiscal year of $27,381 . The fixed-loss amount for
high cost outlier cases paid under the site-neutral payment rate was set at
$25,743 , a decrease from the fixed-loss amount in the 2018 fiscal year of
$26,537 .
31
--------------------------------------------------------------------------------
Table of Contents
Fiscal Year 2020. On August 16, 2019 , CMS published the final rule updating
policies and payment rates for the LTCH-PPS for fiscal year 2020 (affecting
discharges and cost reporting periods beginning on or after October 1, 2019
through September 30, 2020 ). Certain errors in the final rule were corrected in
a document published October 8, 2019 . The standard federal rate was set at
$42,678 , an increase from the standard federal rate applicable during fiscal
year 2019 of $41,559 . The update to the standard federal rate for fiscal year
2020 included a market basket increase of 2.9%, less a productivity adjustment
of 0.4%. The standard federal rate also included an area wage budget neutrality
factor of 1.0020203 and a temporary, one-time budget neutrality adjustment of
0.999858 in connection with the elimination of the 25 Percent Rule. The
fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at
$26,778 , a decrease from the fixed-loss amount in the 2019 fiscal year of
$27,121 . The fixed-loss amount for high cost outlier cases paid under the
site-neutral payment rate was set at $26,552 , an increase from the fixed-loss
amount in the 2019 fiscal year of $25,743 . For LTCH discharges occurring in cost
reporting periods beginning in FY 2020, site neutral payment rate cases will
begin to be paid fully on the site neutral payment rate, rather than the
transitional blended rate. However, the CARES Act waives the site neutral
payment rate for patients admitted during such coronavirus emergency period and
in response to the public health emergency, as discussed above.
Fiscal Year 2021. On May 29, 2020 , CMS published the proposed policies and
payment rates for the LTCH-PPS for fiscal year 2021 (affecting discharges and
cost reporting periods beginning on or after October 1, 2020 through September
30, 2021 ). The standard federal rate for fiscal year 2021, if adopted, would be
set at $43,849 , an increase from the standard federal rate applicable during
fiscal year 2020 of $42,678 . The update to the standard federal rate for fiscal
year 2021, if adopted, includes a market basket increase of 2.9%, less a
productivity adjustment of 0.4%. The standard federal rate would also include an
area wage budget neutrality factor of 1.0018755 and a permanent, one-time budget
neutrality adjustment of 1.000517 in connection with the elimination of the 25
Percent Rule. The fixed-loss amount for high cost outlier cases paid under
LTCH-PPS, if adopted, would be set at $30,515 , an increase from the fixed-loss
amount in the 2020 fiscal year of $26,778 . The fixed-loss amount for high cost
outlier cases paid under the site-neutral payment rate, if adopted, would be set
at $30,006 , an increase from the fixed-loss amount in the 2020 fiscal year of
$26,552 .
Medicare Reimbursement of IRF Services
The following is a summary of significant regulatory changes to the Medicare
prospective payment system for our rehabilitation hospitals, which are certified
by Medicare as IRFs, which have affected our results of operations, as well as
the policies and payment rates that may affect our future results of operations.
Medicare payments to our rehabilitation hospitals are made in accordance with
the inpatient rehabilitation facility prospective payment system ("IRF-PPS").
Fiscal Year 2019. On August 6, 2018 , CMS published the final rule updating
policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting
discharges and cost reporting periods beginning on or after October 1, 2018
through September 30, 2019 ). The standard payment conversion factor for
discharges for fiscal year 2019 was set at $16,021 , an increase from the
standard payment conversion factor applicable during fiscal year 2018 of
$15,838 . The update to the standard payment conversion factor for fiscal year
2019 included a market basket increase of 2.9%, less a productivity adjustment
of 0.8%, and less a reduction of 0.75% mandated by the ACA. CMS increased the
outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established
in the final rule for fiscal year 2018.
Fiscal Year 2020. On August 8, 2019 , CMS published the final rule updating
policies and payment rates for the IRF-PPS for fiscal year 2020 (affecting
discharges and cost reporting periods beginning on or after October 1, 2019
through September 30, 2020 ). The standard payment conversion factor for
discharges for fiscal year 2020 was set at $16,489 , an increase from the
standard payment conversion factor applicable during fiscal year 2019 of
$16,021 . The update to the standard payment conversion factor for fiscal year
2020 included a market basket increase of 2.9%, less a productivity adjustment
of 0.4%. CMS decreased the outlier threshold amount for fiscal year 2020 to
$9,300 from $9,402 established in the final rule for fiscal year 2019.
Fiscal Year 2021. On April 21, 2020 , CMS published the proposed policies and
payment rates for the IRF-PPS for fiscal year 2021 (affecting discharges and
cost reporting periods beginning on or after October 1, 2020 through September
30, 2021 ). The standard payment conversion factor for discharges for fiscal year
2021 would be set at $16,847 , an increase from the standard payment conversion
factor applicable during fiscal year 2020 of $16,489 . The update to the standard
payment conversion factor for fiscal year 2021, if adopted, would include a
market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS
proposed to decrease the outlier threshold amount for fiscal year 2021 to $8,102
from $9,300 established in the final rule for fiscal year 2020.
32
--------------------------------------------------------------------------------
Table of Contents
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
Outpatient rehabilitation providers enroll in Medicare as a rehabilitation
agency, a clinic, or a public health agency. The Medicare program reimburses
outpatient rehabilitation providers based on the Medicare physician fee
schedule. For services provided in 2017 through 2019, a 0.5% update was applied
each year to the fee schedule payment rates, subject to an adjustment beginning
in 2019 under the Merit-Based Incentive Payment System ("MIPS"). In 2019, CMS
added physical and occupational therapists to the list of MIPS eligible
clinicians. For these therapists in private practice, payments under the fee
schedule are subject to adjustment in a later year based on their performance in
MIPS according to established performance standards. Calendar year 2021 is the
first year that payments are adjusted, based upon the therapist's performance
under MIPS in 2019. Providers in facility-based outpatient therapy settings
are excluded from MIPS eligibility and therefore not subject to this payment
adjustment. For services provided in 2020 through 2025, a 0.0% percent update
will be applied each year to the fee schedule payment rates, subject to
adjustments under MIPS and the alternative payment models ("APMs"). In 2026 and
subsequent years, eligible professionals participating in APMs who meet certain
criteria would receive annual updates of 0.75%, while all other professionals
would receive annual updates of 0.25%.
Each year from 2019 through 2024 eligible clinicians who receive a significant
share of their revenues through an advanced APM (such as accountable care
organizations or bundled payment arrangements) that involves risk of financial
losses and a quality measurement component will receive a 5% bonus. The bonus
payment for APM participation is intended to encourage participation and testing
of new APMs and to promote the alignment of incentives across payors.
In the final 2020 Medicare physician fee schedule, CMS revised coding,
documentation guidelines, and valuation for evaluation and management ("E/M")
office visit codes. Because the Medicare physician fee schedule is
budget-neutral, any revaluation of E/M services that will increase spending by
more than $20 million will require a budget neutrality adjustment. To increase
values for the E/M codes while maintaining budget neutrality under the fee
schedule, CMS proposed cuts to other codes to make up the difference, beginning
in 2021. Under the proposal, physical and occupational therapy services could
see code reductions that may result in an estimated 8% decrease in payment.
However, many providers have opposed the proposed cuts, and CMS has not yet
determined the actual cuts to each code.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational
Therapy Assistants
In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS
established two new modifiers (CQ and CO) to identify services furnished in
whole or in part by physical therapy assistants ("PTAs") or occupational therapy
assistants ("OTAs"). These modifiers were mandated by the Bipartisan Budget Act
of 2018, which requires that claims for outpatient therapy services furnished in
whole or part by therapy assistants on or after January 1, 2020 include the
appropriate modifier. CMS intends to use these modifiers to implement a payment
differential that would reimburse services provided by PTAs and OTAs at 85% of
the fee schedule rate beginning on January 1, 2022 . In the final 2020 Medicare
physician fee schedule rule, CMS clarified that when the physical therapist is
involved for the entire duration of the service and the PTA provides skilled
therapy alongside the physical therapist, the CQ modifier is not required. Also,
when the same service (code) is furnished separately by the physical therapist
and PTA, CMS will apply the de minimis standard to each 15-minute unit of codes,
not on the total physical therapist and PTA time of the service, allowing the
separate reporting, on two different claim lines, of the number of units to
which the new modifiers apply and the number of units to which the modifiers do
not apply.
33
--------------------------------------------------------------------------------
Table of Contents
Operating Statistics
The following table sets forth operating statistics for each of our segments for
the periods presented. The operating statistics reflect data for the period of
time we managed these operations. Our operating statistics include metrics we
believe provide relevant insight about the number of facilities we operate,
volume of services we provide to our patients, and average payment rates for
services we provide. These metrics are utilized by management to monitor trends
and performance in our businesses and therefore may be important to investors
because management may assess our performance based in part on such metrics.
Other healthcare providers may present similar statistics, and these statistics
are susceptible to varying definitions. Our statistics as presented may not be
comparable to other similarly titled statistics of other companies.
Six Months Ended June
Three Months Ended June 30, 30,
2019 2020 2019 2020
Critical illness recovery hospital data:
Number of hospitals owned-start of period 96 100 96 100
Number of hospitals acquired 3 - 3 -
Number of hospitals owned-end of period 99 100 99 100
Number of hospitals managed-end of period 1 1 1 1
Total number of hospitals (all)-end of period 100 101 100 101
Available licensed beds(1) 4,230 4,308 4,230 4,308
Admissions(1)(2) 9,172 9,167 18,628 18,700
Patient days(1)(3) 262,860 276,889 520,989 547,347
Average length of stay (days)(1)(4) 28 30 28 30
Net revenue per patient day(1)(5) $ 1,739
69 % 72 % 70 % 71 %
Percent patient days-Medicare(1)(7) 50 % 42 % 52 % 46 %
Rehabilitation hospital data:
Number of hospitals owned-start of period 18 19 17 19
Number of hospital start-ups 1 - 2 -
Number of hospitals owned-end of period 19 19 19 19
Number of hospitals managed-end of period 9 10 9 10
Total number of hospitals (all)-end of period 28 29 28 29
Available licensed beds(1) 1,299 1,309 1,299 1,309
Admissions(1)(2) 6,017 5,713 11,853 12,046
Patient days(1)(3) 86,525 84,081 169,341 178,649
Average length of stay (days)(1)(4) 14 15 14 15
Net revenue per patient day(1)(5) $ 1,635
75 % 71 % 76 % 75 %
Percent patient days-Medicare(1)(7) 50 % 43 % 51 % 48 %
Outpatient rehabilitation data:
Number of clinics owned-start of period 1,407 1,471 1,423 1,461
Number of clinics acquired 10 1 14 3
Number of clinic start-ups 11 13 22 25
Number of clinics closed/sold (9) (10) (40) (14)
Number of clinics owned-end of period 1,419 1,475 1,419 1,475
Number of clinics managed-end of period 276 282 276 282
Total number of clinics (all)-end of period 1,695 1,757 1,695 1,757
Number of visits(1)(8) 2,203,505 1,342,267 4,257,988 3,464,932
Net revenue per visit(1)(9) $ 102 $ 106 $ 103 $ 105
34--------------------------------------------------------------------------------
Table of Contents
Three Months Ended June 30, Six Months Ended June 30,
2019 2020 2019 2020
Concentra data:
Number of centers owned-start of period 525 523 524 521
Number of centers acquired 4 - 5 4
Number of centers closed/sold (3) (1) (3) (3)
Number of centers owned-end of period 526 522 526 522
Number of onsite clinics operated-end of
period 129 129 129 129
Number of CBOCs owned-end of period 33 33 33 33
Number of visits(1)(8) 3,103,089 2,151,080 6,014,696 5,028,475
Net revenue per visit(1)(9) $ 121 $ 124 $ 122 $ 124
_______________________________________________________________________________
(1)Data excludes locations managed by the Company. For purposes of our Concentra
segment, onsite clinics and community-based outpatient clinics are excluded.
(2)Represents the number of patients admitted to our hospitals during the
periods presented.
(3)Each patient day represents one patient occupying one bed for one day during
the periods presented.
(4)Represents the average number of days in which patients were admitted to our
hospitals. Average length of stay is calculated by dividing the number of
patient days, as presented above, by the number of patients discharged from our
hospitals during the periods presented.
(5)Represents the average amount of revenue recognized for each patient day. Net
revenue per patient day is calculated by dividing patient service revenues,
excluding revenues from certain other ancillary and outpatient services provided
at our hospitals, by the total number of patient days.
(6)Represents the portion of our hospitals being utilized for patient care
during the periods presented. Occupancy rate is calculated using the number of
patient days, as presented above, divided by the total number of bed days
available during the period. Bed days available is derived by adding the daily
number of available licensed beds for each of the periods presented.
(7)Represents the portion of our patient days which are paid by Medicare. The
Medicare patient day percentage is calculated by dividing the total number of
patient days which are paid by Medicare by the total number of patient days, as
presented above.
(8)Represents the number of visits in which patients were treated at our
outpatient rehabilitation clinics and Concentra centers during the periods
presented.
(9)Represents the average amount of revenue recognized for each patient visit.
Net revenue per visit is calculated by dividing patient service revenue,
excluding revenues from certain other ancillary services, by the total number of
visits.
35
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
The following table outlines selected operating data as a percentage of net
operating revenues for the periods indicated:
Six Months Ended June
Three Months Ended June 30, 30,
2019 2020 2019 2020
Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of services, exclusive of depreciation
and amortization(1) 84.5 87.8 85.0 86.2
General and administrative 2.3 2.7 2.2 2.5
Depreciation and amortization 4.0 4.3 4.0 4.0
Total costs and expenses 90.8 94.8 91.2 92.7
Other operating income - 4.5 - 2.1
Income from operations 9.2 9.7 8.8 9.4
Equity in earnings of unconsolidated
subsidiaries 0.5 0.7 0.5 0.4
Gain on sale of businesses - 0.0 0.2 0.3
Interest expense (3.8) (3.0) (3.8) (3.2)
Income before income taxes 5.9 7.4 5.7 6.9
Income tax expense 1.5 1.9 1.5 1.7
Net income 4.4 5.5 4.2 5.2
Net income attributable to non-controlling
interests 1.1 1.3 1.0 1.2
Net income attributable to Select Medical
Holdings Corporation 3.3 % 4.2 % 3.2 % 4.0 %
_______________________________________________________________________________
(1)Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating costs.
36--------------------------------------------------------------------------------
Table of Contents The following table summarizes selected financial data by segment for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
2019 2020 % Change 2019 2020 % Change
Net operating revenues:
Critical illness recovery hospital $ 461,143 $ 519,626 12.7 % $ 918,677 $ 1,020,147 11.0 %
Rehabilitation hospital 160,374 168,667 5.2 314,932 350,686 11.4
Outpatient rehabilitation 261,891 167,138 (36.2) 508,796 422,387 (17.0)
Concentra 413,451 312,338 (24.5) 809,772 710,873 (12.2)
Other(1) 64,505 64,949 0.7 133,818 143,257 7.1
Total Company $ 1,361,364 $ 1,232,718 (9.4) % $ 2,685,995 $ 2,647,350 (1.4) %
Income (loss) from operations:
Critical illness recovery hospital
52.8 % $ 111,190 $ 152,085 36.8 %
Rehabilitation hospital 23,272 20,698 (11.1) 42,667 52,380 22.8
Outpatient rehabilitation 35,593 (13,476) (137.9) 57,552 6,428 (88.8)
Concentra(2) 50,841 18,939 (62.7) 91,428 56,751 (37.9)
Other(1)(2) (34,467) 17,506 N/M (66,231) (19,448) N/M
Total Company $ 124,882 $ 119,518 (4.3) % $ 236,606 $ 248,196 4.9 %
Adjusted EBITDA:
Critical illness recovery hospital $ 64,138 $ 89,743 39.9 % $ 137,136 $ 178,313 30.0 %
Rehabilitation hospital 29,968 27,605 (7.9) 55,765 66,174 18.7
Outpatient rehabilitation 42,584 (6,282) (114.8) 71,575 20,840 (70.9)
Concentra(2) 76,087 41,497 (45.5) 142,345 102,963 (27.7)
Other(1)(2) (26,544) 26,189 N/M (50,471) (2,205) N/M
Total Company $ 186,233 $ 178,752 (4.0) % $ 356,350 $ 366,085 2.7 %
Adjusted EBITDA margins:
Critical illness recovery hospital 13.9 % 17.3 % 14.9 % 17.5 %
Rehabilitation hospital 18.7 16.4 17.7 18.9
Outpatient rehabilitation 16.3 (3.8) 14.1 4.9
Concentra(2) 18.4 13.3 17.6 14.5
Other(1)(2) N/M N/M N/M N/M
Total Company 13.7 % 14.5 % 13.3 % 13.8 %
Total assets:
Critical illness recovery hospital $ 2,119,574 $ 2,115,294 $ 2,119,574 $ 2,115,294
Rehabilitation hospital 1,107,852 1,135,206 1,107,852 1,135,206
Outpatient rehabilitation 1,265,487 1,267,308 1,265,487 1,267,308
Concentra 2,447,387 2,351,974 2,447,387 2,351,974
Other(1) 166,640 598,676 166,640 598,676
Total Company $ 7,106,940 $ 7,468,458 $ 7,106,940 $ 7,468,458
Purchases of property and
equipment:
Critical illness recovery hospital $ 14,488 $ 14,970 $ 24,648 $ 23,935
Rehabilitation hospital 5,356 1,923 18,539 5,248
Outpatient rehabilitation 6,705 6,593 15,745 14,977
Concentra 12,240 6,820 27,938 22,406
Other(1) 1,423 1,739 2,415 4,687
Total Company $ 40,212 $ 32,045 $ 89,285 $ 71,253 _______________________________________________________________________________ (1) Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain non-consolidating joint ventures and minority investments in other healthcare related businesses. (2) For the three and six months endedJune 30, 2020 , we recognized approximately$55.0 million of other operating income related to payments received under theProvider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19.$54.2 million and$0.8 million of other operating income is included within the operating results of our other activities and our Concentra segment, respectively. N/M - Not meaningful. 37 -------------------------------------------------------------------------------- Table of Contents Three Months EndedJune 30, 2020 , Compared to Three Months EndedJune 30, 2019 In the following, we discuss our results of operations related to net operating revenues, operating expenses, other operating income, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling interests. Please refer to "Effects of the COVID-19 Pandemic on our Results of Operations" above for further discussion. Net Operating Revenues Our net operating revenues were$1,232.7 million for the three months endedJune 30, 2020 , compared to$1,361.4 million for the three months endedJune 30, 2019 . Critical Illness Recovery Hospital Segment. Net operating revenues increased 12.7% to$519.6 million for the three months endedJune 30, 2020 , compared to$461.1 million for the three months endedJune 30, 2019 . The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the three months endedJune 30, 2020 . Our patient days increased 5.3% to 276,889 days for the three months endedJune 30, 2020 , compared to 262,860 days for the three months endedJune 30, 2019 . We experienced a 4.5% increase in patient days in our existing critical illness recovery hospitals. The remaining increase was attributable to the four critical illness recovery hospitals we acquired in 2019. Occupancy in our critical illness recovery hospitals increased to 72% during the three months endedJune 30, 2020 , compared to 69% for the three months endedJune 30, 2019 . Net revenue per patient day increased 7.4% to$1,867 for the three months endedJune 30, 2020 , compared to$1,739 for the three months endedJune 30, 2019 . We experienced increases in both our Medicare and non-Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from an increase in patient acuity. Rehabilitation Hospital Segment. Net operating revenues increased 5.2% to$168.7 million for the three months endedJune 30, 2020 , compared to$160.4 million for the three months endedJune 30, 2019 . The increase in net operating revenues resulted from increases in net revenue per patient day. Our net revenue per patient day increased 12.0% to$1,831 for the three months endedJune 30, 2020 , compared to$1,635 for the three months endedJune 30, 2019 . We experienced increases in both our Medicare and non-Medicare net revenue per patient day. During the three months endedJune 30, 2020 , we had 84,081 patient days, compared to 86,525 days for the three months endedJune 30, 2019 . The decline in patient days occurred duringApril 2020 and was principally driven by our rehabilitation hospitals inNew Jersey andSouth Florida that temporarily restricted their admissions as a result of the COVID-19 pandemic. Certain of our other rehabilitation hospitals also experienced overall lower patient volumes due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Our rehabilitation hospitals began to see improvement in patient volume duringMay 2020 and, duringJune 2020 , our patient days increased 7.8% as compared toJune 2019 . Outpatient Rehabilitation Segment. Net operating revenues were$167.1 million for the three months endedJune 30, 2020 , compared to$261.9 million for the three months endedJune 30, 2019 . The decrease in net operating revenues was attributable to a decline in visits, which were 1,342,267 for the three months endedJune 30, 2020 , compared to 2,203,505 visits for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 , the decline in volume resulted from actions by governmental authorities and the private sector to limit the spread of COVID-19. Our outpatient rehabilitation clinics experienced less demand for services due to a decline in patient referrals from physicians, a reduction in workers' compensation injury visits due to the temporary closure of businesses, the suspension of elective surgeries at hospitals and other facilities, which resulted in less demand for outpatient rehabilitation services, and mandated social distancing measures. Our outpatient rehabilitation clinics experienced a 47.7% decrease in visits during April andMay 2020 as compared to the same period in 2019. Patient volume in our outpatient rehabilitation clinics began to improve duringJune 2020 as compared to April andMay 2020 . DuringJune 2020 , we experienced a 19.7% decrease in visits as compared to the same period in 2019. As ofJune 30, 2020 , we have 66 outpatient rehabilitation clinics that remain temporarily closed. Our net revenue per visit was$106 for the three months endedJune 30, 2020 , compared to$102 for the three months endedJune 30, 2019 . The higher net revenue per visit rate reflects a higher percentage of workers' compensation patients treated during the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . 38 -------------------------------------------------------------------------------- Table of Contents Concentra Segment. Net operating revenues were$312.3 million for the three months endedJune 30, 2020 , compared to$413.5 million for the three months endedJune 30, 2019 . The decrease in net operating revenues was attributable to a decline in visits, which were 2,151,080 for the three months endedJune 30, 2020 , compared to 3,103,089 visits for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 , the decline in volume resulted from employers furloughing their workforce and temporarily ceasing or significantly reducing their operations as a result of the actions of governmental authorities and those in the private sector to limit the spread of COVID-19. Consequently, our centers experienced a reduction in workers' compensation and employer services visits. During April andMay 2020 , our centers experienced a 39.2% decrease in visits as compared to the same period in 2019. Patient volume in our centers began to improve duringJune 2020 , as compared to April andMay 2020 . DuringJune 2020 , we experienced a 12.4% decrease in visits as compared to the same period in 2019. As ofJune 30, 2020 , we have 18 centers that remain temporarily closed and 195 centers are operating at reduced hours. Our net revenue per visit was$124 for the three months endedJune 30, 2020 , compared to$121 for the three months endedJune 30, 2019 . The higher net revenue per visit rate reflects a higher percentage of workers' compensation patients treated during the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Operating Expenses Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were$1,115.9 million , or 90.5% of net operating revenues, for the three months endedJune 30, 2020 , compared to$1,181.5 million , or 86.8% of net operating revenues, for the three months endedJune 30, 2019 . Our cost of services, a major component of which is labor expense, was$1,082.5 million , or 87.8% of net operating revenues, for the three months endedJune 30, 2020 , compared to$1,150.2 million , or 84.5% of net operating revenues, for the three months endedJune 30, 2019 . The increase in our operating expenses relative to our net operating revenues was principally due to reduced patient volume in our outpatient rehabilitation and Concentra segments, as discussed above. General and administrative expenses were$33.5 million , or 2.7% of net operating revenues, for the three months endedJune 30, 2020 , compared to$31.3 million , or 2.3% of net operating revenues, for the three months endedJune 30, 2019 . Other Operating Income For the three months endedJune 30, 2020 , we had other operating income of$55.0 million . We recognized payments received under theProvider Relief Fund as other operating income as we have incurred losses of revenue and health care related expenses attributable to COVID-19. Refer to Note 12 - CARES Act of the notes to our condensed consolidated financial statements included herein for further information. For the three months endedJune 30, 2020 ,$54.2 million of other operating income is included within the operating results of our other activities;$0.8 million of other operating income is included in the operating results of our Concentra segment. Adjusted EBITDA Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 39.9% to$89.7 million for the three months endedJune 30, 2020 , compared to$64.1 million for the three months endedJune 30, 2019 . Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 17.3% for the three months endedJune 30, 2020 , compared to 13.9% for the three months endedJune 30, 2019 . The increases in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment were driven by increases in both patient volume and our net revenue per patient day, as discussed above under "Net Operating Revenues." The increases in Adjusted EBITDA and Adjusted EBITDA margin were offset, in part, by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our critical illness recovery hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment. Rehabilitation Hospital Segment. Adjusted EBITDA was$27.6 million for the three months endedJune 30, 2020 , compared to$30.0 million for the three months endedJune 30, 2019 . Our Adjusted EBITDA margin for the rehabilitation hospital segment was 16.4% for the three months endedJune 30, 2020 , compared to 18.7% for the three months endedJune 30, 2019 . The declines in Adjusted EBITDA and Adjusted EBITDA margin were primarily driven by our rehabilitation hospitals inNew Jersey andSouth Florida which implemented temporary restrictions on admissions as a result of the COVID-19 pandemic, as discussed above under "Net Operating Revenues." Our Adjusted EBITDA and Adjusted EBITDA margin were also impacted by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our rehabilitation hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs as well as additional costs resulting from the purchase of personal protective equipment. 39 -------------------------------------------------------------------------------- Table of Contents Outpatient Rehabilitation Segment. We incurred Adjusted EBITDA losses of$6.3 million for the three months endedJune 30, 2020 , compared to Adjusted EBITDA of$42.6 million for the three months endedJune 30, 2019 . Our Adjusted EBITDA margin for the outpatient rehabilitation segment was (3.8)% for the three months endedJune 30, 2020 , compared to 16.3% for the three months endedJune 30, 2019 . The decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 39.1% decrease in visits, resulting from the effects of the COVID-19 pandemic, during the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . We incurred Adjusted EBITDA losses during April andMay 2020 . We generated positive Adjusted EBITDA inJune 2020 as we began to see improvement in patient volume, which is discussed above under "Net Operating Revenues." In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to one another and took other measures to reduce labor costs. Concentra Segment. Adjusted EBITDA was$41.5 million for the three months endedJune 30, 2020 , compared to$76.1 million for the three months endedJune 30, 2019 . Our Adjusted EBITDA margin for the Concentra segment was 13.3% for the three months endedJune 30, 2020 , compared to 18.4% for the three months endedJune 30, 2019 . The decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 30.7% decrease in visits, resulting from the effects of the COVID-19 pandemic, during the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The decreases in our Adjusted EBITDA and Adjusted EBITDA margin occurred during April andMay 2020 , as compared to the same period in 2019. Our Adjusted EBITDA and Adjusted EBITDA margin improved inJune 2020 , as compared to both April andMay 2020 and the same period in 2019, as we began to see improvement in patient volume, which is discussed above under "Net Operating Revenues." In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor costs. Depreciation and Amortization Depreciation and amortization expense was$52.3 million for the three months endedJune 30, 2020 , compared to$55.0 million for the three months endedJune 30, 2019 . Income from Operations For the three months endedJune 30, 2020 , we had income from operations of$119.5 million , compared to$124.9 million for the three months endedJune 30, 2019 . The decrease in income from operations was primarily attributable to the operating performance of our outpatient rehabilitation and Concentra segments. The decrease in income from operations was offset, in part, by the recognition of$55.0 million of other operating income, as discussed above. Equity in Earnings of Unconsolidated Subsidiaries Our equity in earnings of unconsolidated subsidiaries relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the three months endedJune 30, 2020 , we had equity in earnings of unconsolidated subsidiaries of$8.3 million , compared to$7.4 million for the three months endedJune 30, 2019 . Gain on Sale of Businesses We recognized a gain of$0.3 million during the three months endedJune 30, 2020 . The gain was attributable to additional proceeds received from the sale of an outpatient rehabilitation business. The sale occurred during the first quarter endedMarch 31, 2020 . Interest Expense Interest expense was$37.4 million for the three months endedJune 30, 2020 , compared to$51.5 million for the three months endedJune 30, 2019 . The decrease in interest expense was principally due to a decline in variable interest rates, as well as the refinancing of our Select credit facilities, Concentra-JPM credit facilities (as defined below), and senior notes during the third and fourth quarters of 2019. Income Taxes We recorded income tax expense of$23.3 million for the three months endedJune 30, 2020 , which represented an effective tax rate of 25.7%. We recorded income tax expense of$20.8 million for the three months endedJune 30, 2019 , which represented an effective tax rate of 25.8%. 40 -------------------------------------------------------------------------------- Table of Contents Net Income Attributable to Non-Controlling Interests Net income attributable to non-controlling interests was$15.8 million for the three months endedJune 30, 2020 , compared to$15.2 million for the three months endedJune 30, 2019 . 41 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2020 , Compared to Six Months EndedJune 30, 2019 In the following, we discuss our results of operations related to net operating revenues, operating expenses, other operating income, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling interests. Please refer to "Effects of the COVID-19 Pandemic on our Results of Operations" above for further discussion. Net Operating Revenues Our net operating revenues were$2,647.4 million for the six months endedJune 30, 2020 , compared to$2,686.0 million for the six months endedJune 30, 2019 . Critical Illness Recovery Hospital Segment. Net operating revenues increased 11.0% to$1,020.1 million for the six months endedJune 30, 2020 , compared to$918.7 million for the six months endedJune 30, 2019 . The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 5.1% to 547,347 days for the six months endedJune 30, 2020 , compared to 520,989 days for the six months endedJune 30, 2019 . We experienced a 2.0% increase in patient days in our existing critical illness recovery hospitals. The remaining increase was attributable to the four critical illness recovery hospitals we acquired in 2019. Net revenue per patient day increased 5.9% to$1,853 for the six months endedJune 30, 2020 , compared to$1,749 for the six months endedJune 30, 2019 . We experienced increases in both our Medicare and non-Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from an increase in patient acuity Rehabilitation Hospital Segment. Net operating revenues increased 11.4% to$350.7 million for the six months endedJune 30, 2020 , compared to$314.9 million for the six months endedJune 30, 2019 . The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the six months endedJune 30, 2020 . Our patient days increased 5.5% to 178,649 days for the six months endedJune 30, 2020 , compared to 169,341 days for the six months endedJune 30, 2019 . The increase in patient days was principally driven by our rehabilitation hospitals which commenced operations during 2019. Several of our other rehabilitation hospitals experienced increases in patient days during the six months endedJune 30, 2020 ; however, these increases were offset by declines in volume experienced within our rehabilitation hospitals inNew Jersey andSouth Florida that temporarily restricted admissions as a result of the COVID-19 pandemic. Certain of our rehabilitation hospitals also experienced overall lower patient volume due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Patient volume in our rehabilitation hospitals began declining inMarch 2020 and these declines continued throughApril 2020 . Our rehabilitation hospitals began to see improvement in patient volume duringMay 2020 and, duringJune 2020 , our rehabilitation hospitals patient days increased 7.8% as compared toJune 2019 . Our net revenue per patient day increased 8.8% to$1,778 for the six months endedJune 30, 2020 , compared to$1,634 for the six months endedJune 30, 2019 . We experienced increases in both our Medicare and non-Medicare net revenue per patient day. Outpatient Rehabilitation Segment. Net operating revenues were$422.4 million for the six months endedJune 30, 2020 , compared to$508.8 million for the six months endedJune 30, 2019 . The decrease in net operating revenues was attributable to a decline in visits, which were 3,464,932 for the six months endedJune 30, 2020 , compared to 4,257,988 visits for the six months endedJune 30, 2019 . We experienced an 11.2% increase in visits during January andFebruary 2020 as compared to the same period in 2019. Our outpatient rehabilitation clinics experienced a 32.4% decrease in visits during the four months endedJune 30, 2020 , as compared to same period in 2019. The decline in volume resulted from actions by governmental authorities and the private sector to limit the spread of COVID-19, as discussed above. For the six months endedJune 30, 2020 , the decline in volume principally occurred during April andMay 2020 . During this time, our outpatient rehabilitation clinics experienced a 47.7% decrease in visits as compared to the same period in 2019. Patient volume in our outpatient rehabilitation clinics began to improve duringJune 2020 , as compared to April andMay 2020 . DuringJune 2020 , we experienced a 19.7% decrease in visits as compared to the same period in 2019. As ofJune 30, 2020 , we have 66 outpatient rehabilitation clinics that remain temporarily closed. Our net revenue per visit was$105 for the six months endedJune 30, 2020 , compared to$103 for the six months endedJune 30, 2019 . The higher net revenue per visit rate reflects a higher percentage of workers' compensation patients treated during the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . 42
-------------------------------------------------------------------------------- Table of Contents Concentra Segment. Net operating revenues were$710.9 million for the six months endedJune 30, 2020 , compared to$809.8 million for the six months endedJune 30, 2019 . The decrease in net operating revenues was attributable to a decline in visits, which were 5,028,475 for the six months endedJune 30, 2020 , compared to 6,014,696 visits for the six months endedJune 30, 2019 . We experienced a 4.9% increase in visits during January andFebruary 2020 , as compared to the same period in 2019. Our centers experienced a 26.3% decrease in visits during the four months endedJune 30, 2020 , as compared to same period in 2019. The decline in volume during these four months resulted from employers furloughing their workforce and temporarily ceasing or significantly reducing their operations as a result of the actions of governmental authorities and those in the private sector to limit the spread of COVID-19, as discussed above. For the six months endedJune 30, 2020 , the decline in volume principally occurred during April andMay 2020 . During this time, our centers experienced a 39.2% decrease in visits as compared to the same period in 2019. Patient volume in our centers began to improve duringJune 2020 , as compared to April andMay 2020 . DuringJune 2020 , we experienced a 12.4% decrease in visits as compared to the same period in 2019. As ofJune 30, 2020 , we have 18 centers that remain temporarily closed and 195 centers are operating at reduced hours. Net revenue per visit was$124 for the six months endedJune 30, 2020 , compared to$122 for the six months endedJune 30, 2019 . The higher net revenue per visit rate reflects a higher percentage of workers' compensation patients treated during the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Operating Expenses Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were$2,350.1 million , or 88.7% of net operating revenues, for the six months endedJune 30, 2020 , compared to$2,342.3 million , or 87.2% of net operating revenues, for the six months endedJune 30, 2019 . Our cost of services, a major component of which is labor expense, was$2,282.8 million , or 86.2% of net operating revenues, for the six months endedJune 30, 2020 , compared to$2,282.2 million , or 85.0% of net operating revenues, for the six months endedJune 30, 2019 . The increase in our operating expenses relative to our net operating revenues was principally due to the reduced patient volume in our outpatient rehabilitation and Concentra segments, as discussed above. General and administrative expenses were$67.3 million , or 2.5% of net operating revenues, for the six months endedJune 30, 2020 , compared to$60.0 million , or 2.2% of net operating revenues, for the six months endedJune 30, 2019 . Other Operating Income For the six months endedJune 30, 2020 , we had other operating income of$55.0 million . We recognized payments received under theProvider Relief Fund as other operating income as we have incurred losses of revenue and health care related expenses attributable to COVID-19. Refer to Note 12 - CARES Act of the notes to our condensed consolidated financial statements included herein for further information. For the six months endedJune 30, 2020 ,$54.2 million of other operating income is included within the operating results of our other activities;$0.8 million of other operating income is included in the operating results of our Concentra segment. Adjusted EBITDA Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 30.0% to$178.3 million for the six months endedJune 30, 2020 , compared to$137.1 million for the six months endedJune 30, 2019 . Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 17.5% for the six months endedJune 30, 2020 , compared to 14.9% for the six months endedJune 30, 2019 . The increases in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment were driven by increases in both patient volume and net revenue per patient day, as discussed above under "Net Operating Revenues." The increases in Adjusted EBITDA and Adjusted EBITDA margin were offset, in part, by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our critical illness recovery hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment. 43 -------------------------------------------------------------------------------- Table of Contents Rehabilitation Hospital Segment. Adjusted EBITDA increased 18.7% to$66.2 million for the six months endedJune 30, 2020 , compared to$55.8 million for the six months endedJune 30, 2019 . Our Adjusted EBITDA margin for the rehabilitation hospital segment was 18.9% for the six months endedJune 30, 2020 , compared to 17.7% for the six months endedJune 30, 2019 . The increases in Adjusted EBITDA and Adjusted EBITDA margin were primarily attributable to our hospitals which commenced operations in 2019. We also experienced increases in Adjusted EBITDA and Adjusted EBITDA margin at many of our existing hospitals as a result of increased patient volume and increases in net revenue per patient day. These increases were offset, in part, by declines in Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation hospitals inNew Jersey andSouth Florida that implemented temporary restrictions on admissions as a result of the COVID-19 pandemic. Our Adjusted EBITDA and Adjusted EBITDA margin were also impacted by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our rehabilitation hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs as well as additional costs resulting from the purchase of personal protective equipment. Prior to our rehabilitation hospitals becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 72.5% to$27.4 million for January andFebruary 2020 , compared to$15.9 million for the same period in 2019. Our Adjusted EBITDA margin increased to 22.4% for January andFebruary 2020 , compared to 16.1% for the same period in 2019. We experienced declines in Adjusted EBITDA and Adjusted EBITDA margin during April andMay 2020 , as compared to the same period in 2019, as a result of lower patient volume. Our Adjusted EBITDA and Adjusted EBITDA margin improved inJune 2020 as compared to both April andMay 2020 and the same period in 2019. For the six months endedJune 30, 2019 , the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately$8.8 million . Outpatient Rehabilitation Segment. Adjusted EBITDA was$20.8 million for the six months endedJune 30, 2020 , compared to$71.6 million for the six months endedJune 30, 2019 . Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 4.9% for the six months endedJune 30, 2020 , compared to 14.1% for the six months endedJune 30, 2019 . The decrease in Adjusted EBITDA and Adjusted EBITDA margin were caused by a decline in visits, beginning inmid-March 2020 , as a result of the effects of the COVID-19 pandemic, as described above. During the months of March throughJune 2020 , our outpatient rehabilitation clinics experienced a 32.4% decrease in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to one another and took other measures to reduce labor costs. Prior to our outpatient rehabilitation clinics becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 33.6% to$23.1 million for January andFebruary 2020 , compared to$17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for January andFebruary 2020 , compared to 10.7% for the same period in 2019. We incurred Adjusted EBITDA losses during April andMay 2020 as a result of the decline in patient visits we experienced. Our outpatient rehabilitation segment generated positive Adjusted EBITDA inJune 2020 as we saw improvement in patient volume. Concentra Segment. Adjusted EBITDA was$103.0 million for the six months endedJune 30, 2020 , compared to$142.3 million for the six months endedJune 30, 2019 . Our Adjusted EBITDA margin for the Concentra segment was 14.5% for the six months endedJune 30, 2020 , compared to 17.6% for the six months endedJune 30, 2019 . The decreases in Adjusted EBITDA and Adjusted EBITDA margin were caused by a decline in visits, beginning inmid-March 2020 , as a result of the effects of the COVID-19 pandemic, as described above. During the months of March throughJune 2020 , our centers experienced a 26.3% decrease in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor costs. Prior to our centers becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 11.7% to$45.5 million for January andFebruary 2020 , compared to$40.8 million for the same period in 2019. Our Adjusted EBITDA margin increased to 16.6% for January andFebruary 2020 , compared to 15.7% for the same period in 2019. Our Adjusted EBITDA and Adjusted EBITDA margin were most significantly impacted in April andMay 2020 as a result of the decline in patient visits we experienced. Our Adjusted EBITDA and Adjusted EBITDA margin improved inJune 2020 , as compared to both April andMay 2020 and the same period in 2019, as we saw improvement in patient volume. Depreciation and Amortization Depreciation and amortization expense was$104.0 million for the six months endedJune 30, 2020 , compared to$107.1 million for the six months endedJune 30, 2019 . 44 -------------------------------------------------------------------------------- Table of Contents Income from Operations For the six months endedJune 30, 2020 , we had income from operations of$248.2 million , compared to$236.6 million for the six months endedJune 30, 2019 . The increase in income from operations was primarily attributable to the improved operating performance of our critical illness recovery hospital segment, as well as the recognition of$55.0 million of other operating income, as discussed above. Equity in Earnings of Unconsolidated Subsidiaries Our equity in earnings of unconsolidated subsidiaries relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the six months endedJune 30, 2020 , we had equity in earnings of unconsolidated subsidiaries of$10.9 million , compared to$11.8 million for the six months endedJune 30, 2019 . Gain on Sale of Businesses We recognized gains of$7.5 million and$6.5 million during the six months endedJune 30, 2020 and 2019, respectively. These gains were attributable to the sales of outpatient rehabilitation businesses. Interest Expense Interest expense was$83.5 million for the six months endedJune 30, 2020 , compared to$102.3 million for the six months endedJune 30, 2019 . The decrease in interest expense was principally due to a decline in variable interest rates, as well as the refinancing of our Select credit facilities, Concentra-JPM credit facilities, and senior notes during the third and fourth quarters of 2019. Income Taxes We recorded income tax expense of$45.2 million for the six months endedJune 30, 2020 , which represented an effective tax rate of 24.7%. We recorded income tax expense of$39.3 million for the six months endedJune 30, 2019 , which represented an effective tax rate of 25.7%. For the six months endedJune 30, 2020 , the lower effective tax rate resulted primarily from the discrete tax benefits realized from the exercise of certain equity options in connection with the purchase of additional membership interests inConcentra Group Holdings Parent, as described under "Other Significant Events." The impact of these tax benefits were offset, in part, by the sale of an outpatient rehabilitation business. The selling price for this business exceeded our tax basis, resulting in a taxable gain. This sale was treated as a discrete tax event for the six months endedJune 30, 2020 . Net Income Attributable to Non-Controlling Interests Net income attributable to non-controlling interests was$33.2 million for the six months endedJune 30, 2020 , compared to$27.7 million for the six months endedJune 30, 2019 . The increase was principally due to the operating performance of our joint venture critical illness recovery hospitals and rehabilitation hospitals. 45
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
