ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Select Medical Holdings Corporation
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
March 31, 2020
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
335,882
|
|
|
$
|
73,163
|
|
|
Accounts receivable
|
762,677
|
|
|
816,405
|
|
|
Prepaid income taxes
|
18,585
|
|
|
12,634
|
|
|
Other current assets
|
95,848
|
|
|
95,828
|
|
|
Total Current Assets
|
1,212,992
|
|
|
998,030
|
|
|
Operating lease right-of-use assets
|
1,003,986
|
|
|
1,014,969
|
|
|
Property and equipment, net
|
998,406
|
|
|
978,547
|
|
|
Goodwill
|
3,391,955
|
|
|
3,391,078
|
|
|
Identifiable intangible assets, net
|
409,068
|
|
|
405,374
|
|
|
Other assets
|
323,881
|
|
|
327,569
|
|
|
Total Assets
|
$
|
7,340,288
|
|
|
$
|
7,115,567
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
Current operating lease liabilities
|
$
|
207,950
|
|
|
$
|
212,884
|
|
|
Current portion of long-term debt and notes payable
|
25,167
|
|
|
17,161
|
|
|
Accounts payable
|
145,731
|
|
|
131,601
|
|
|
Accrued payroll
|
183,754
|
|
|
140,009
|
|
|
Accrued vacation
|
124,111
|
|
|
128,705
|
|
|
Accrued interest
|
33,853
|
|
|
11,339
|
|
|
Accrued other
|
191,076
|
|
|
194,165
|
|
|
Income taxes payable
|
2,638
|
|
|
8,090
|
|
|
Total Current Liabilities
|
914,280
|
|
|
843,954
|
|
|
Non-current operating lease liabilities
|
852,897
|
|
|
860,796
|
|
|
Long-term debt, net of current portion
|
3,419,943
|
|
|
3,553,056
|
|
|
Non-current deferred tax liability
|
148,258
|
|
|
158,782
|
|
|
Other non-current liabilities
|
101,334
|
|
|
103,783
|
|
|
Total Liabilities
|
5,436,712
|
|
|
5,520,371
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
Redeemable non-controlling interests
|
974,541
|
|
|
620,377
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,823,713 shares issued and outstanding at 2019 and 2020, respectively
|
134
|
|
|
134
|
|
|
Capital in excess of par
|
491,038
|
|
|
491,824
|
|
|
Retained earnings
|
279,800
|
|
|
316,680
|
|
|
Total Stockholders’ Equity
|
770,972
|
|
|
808,638
|
|
|
Non-controlling interests
|
158,063
|
|
|
166,181
|
|
|
Total Equity
|
929,035
|
|
|
974,819
|
|
|
Total Liabilities and Equity
|
$
|
7,340,288
|
|
|
$
|
7,115,567
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2019
|
|
2020
|
|
Net operating revenues
|
$
|
1,324,631
|
|
|
$
|
1,414,632
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
Cost of services, exclusive of depreciation and amortization
|
1,132,092
|
|
|
1,200,371
|
|
|
General and administrative
|
28,677
|
|
|
33,831
|
|
|
Depreciation and amortization
|
52,138
|
|
|
51,752
|
|
|
Total costs and expenses
|
1,212,907
|
|
|
1,285,954
|
|
|
Income from operations
|
111,724
|
|
|
128,678
|
|
|
Other income and expense:
|
|
|
|
|
|
|
Equity in earnings of unconsolidated subsidiaries
|
4,366
|
|
|
2,588
|
|
|
Gain on sale of businesses
|
6,532
|
|
|
7,201
|
|
|
Interest expense
|
(50,811
|
)
|
|
(46,107
|
)
|
|
Income before income taxes
|
71,811
|
|
|
92,360
|
|
|
Income tax expense
|
18,467
|
|
|
21,912
|
|
|
Net income
|
53,344
|
|
|
70,448
|
|
|
Less: Net income attributable to non-controlling interests
|
12,510
|
|
|
17,323
|
|
|
Net income attributable to Select Medical Holdings Corporation
|
$
|
40,834
|
|
|
$
|
53,125
|
|
|
Earnings per common share (Note 10):
|
|
|
|
|
|
|
Basic
|
$
|
0.30
|
|
|
$
|
0.40
|
|
|
Diluted
|
$
|
0.30
|
|
|
$
|
0.40
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Changes in Equity and Income
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
|
|
|
Common
Stock
Issued
|
|
Common
Stock
Par Value
|
|
Capital in
Excess
of Par
|
|
Retained
Earnings
|
|
Total Stockholders’ Equity
|
|
Non-controlling
Interests
|
|
Total
Equity
|
Balance at December 31, 2019
|
134,328
|
|
|
$
|
134
|
|
|
$
|
491,038
|
|
|
$
|
279,800
|
|
|
$
|
770,972
|
|
|
$
|
158,063
|
|
|
$
|
929,035
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
|
|
|
|
|
|
|
|
53,125
|
|
|
53,125
|
|
|
|
|
|
53,125
|
|
Net income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
10,067
|
|
|
10,067
|
|
Issuance of restricted stock
|
2
|
|
|
0
|
|
|
0
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Forfeitures of unvested restricted stock
|
(15
|
)
|
|
0
|
|
|
0
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Vesting of restricted stock
|
|
|
|
|
6,136
|
|
|
|
|
6,136
|
|
|
|
|
6,136
|
|
Repurchase of common shares
|
(492
|
)
|
|
0
|
|
|
(5,350
|
)
|
|
(3,341
|
)
|
|
(8,691
|
)
|
|
|
|
(8,691
|
)
|
Issuance of non-controlling interests
|
|
|
|
|
|
|
|
|
—
|
|
|
1,679
|
|
|
1,679
|
|
Distributions to and purchases of non-controlling interests
|
|
|
|
|
|
|
|
|
|
(2,726
|
)
|
|
(2,726
|
)
|
|
(4,048
|
)
|
|
(6,774
|
)
|
Redemption adjustment on non-controlling interests
|
|
|
|
|
|
|
|
|
|
(10,123
|
)
|
|
(10,123
|
)
|
|
|
|
|
(10,123
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
(55
|
)
|
|
420
|
|
|
365
|
|
Balance at March 31, 2020
|
133,823
|
|
|
$
|
134
|
|
|
$
|
491,824
|
|
|
$
|
316,680
|
|
|
$
|
808,638
|
|
|
$
|
166,181
|
|
|
$
|
974,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
|
|
|
Common
Stock
Issued
|
|
Common
Stock
Par Value
|
|
Capital in
Excess
of Par
|
|
Retained
Earnings
|
|
Total Stockholders’ Equity
|
|
Non-controlling
Interests
|
|
Total
Equity
|
Balance at December 31, 2018
|
135,266
|
|
|
$
|
135
|
|
|
$
|
482,556
|
|
|
$
|
320,351
|
|
|
$
|
803,042
|
|
|
$
|
113,198
|
|
|
$
|
916,240
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
|
|
|
|
|
40,834
|
|
|
40,834
|
|
|
|
|
40,834
|
|
Net income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
—
|
|
|
4,810
|
|
|
4,810
|
|
Issuance of restricted stock
|
21
|
|
|
0
|
|
|
0
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Forfeitures of unvested restricted stock
|
(24
|
)
|
|
0
|
|
|
0
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Vesting of restricted stock
|
|
|
|
|
5,488
|
|
|
|
|
5,488
|
|
|
|
|
5,488
|
|
Issuance of non-controlling interests
|
|
|
|
|
|
|
|
|
—
|
|
|
6,837
|
|
|
6,837
|
|
Distributions to and purchases of non-controlling interests
|
|
|
|
|
259
|
|
|
|
|
259
|
|
|
(2,739
|
)
|
|
(2,480
|
)
|
Redemption adjustment on non-controlling interests
|
|
|
|
|
|
|
(47,470
|
)
|
|
(47,470
|
)
|
|
|
|
(47,470
|
)
|
Other
|
|
|
|
|
|
|
(122
|
)
|
|
(122
|
)
|
|
413
|
|
|
291
|
|
Balance at March 31, 2019
|
135,263
|
|
|
$
|
135
|
|
|
$
|
488,303
|
|
|
$
|
313,593
|
|
|
$
|
802,031
|
|
|
$
|
122,519
|
|
|
$
|
924,550
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2019
|
|
2020
|
|
Operating activities
|
|
|
|
|
|
|
Net income
|
$
|
53,344
|
|
|
$
|
70,448
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Distributions from unconsolidated subsidiaries
|
7,872
|
|
|
8,479
|
|
|
Depreciation and amortization
|
52,138
|
|
|
51,752
|
|
|
Provision for expected credit losses
|
1,567
|
|
|
199
|
|
|
Equity in earnings of unconsolidated subsidiaries
|
(4,366
|
)
|
|
(2,588
|
)
|
|
Gain on sale of assets and businesses
|
(6,233
|
)
|
|
(7,339
|
)
|
|
Stock compensation expense
|
6,255
|
|
|
6,903
|
|
|
Amortization of debt discount, premium and issuance costs
|
3,231
|
|
|
553
|
|
|
Deferred income taxes
|
(81
|
)
|
|
9,364
|
|
|
Changes in operating assets and liabilities, net of effects of business combinations:
|
|
|
|
|
|
|
Accounts receivable
|
(74,752
|
)
|
|
(53,928
|
)
|
|
Other current assets
|
(7,523
|
)
|
|
27
|
|
|
Other assets
|
57,319
|
|
|
2,248
|
|
|
Accounts payable
|
4,324
|
|
|
(8,992
|
)
|
|
Accrued expenses
|
(69,163
|
)
|
|
(44,455
|
)
|
|
Income taxes
|
17,830
|
|
|
11,413
|
|
|
Net cash provided by operating activities
|
41,762
|
|
|
44,084
|
|
|
Investing activities
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
(6,120
|
)
|
|
(6,833
|
)
|
|
Purchases of property and equipment
|
(49,073
|
)
|
|
(39,208
|
)
|
|
Investment in businesses
|
(27,608
|
)
|
|
(9,848
|
)
|
|
Proceeds from sale of assets and businesses
|
2
|
|
|
11,230
|
|
|
Net cash used in investing activities
|
(82,799
|
)
|
|
(44,659
|
)
|
|
Financing activities
|
|
|
|
|
|
|
Borrowings on revolving facilities
|
360,000
|
|
|
460,000
|
|
|
Payments on revolving facilities
|
(220,000
|
)
|
|
(295,000
|
)
|
|
Payments on term loans
|
(132,685
|
)
|
|
(39,843
|
)
|
|
Borrowings of other debt
|
8,290
|
|
|
6,487
|
|
|
Principal payments on other debt
|
(6,155
|
)
|
|
(8,099
|
)
|
|
Repurchase of common stock
|
—
|
|
|
(8,691
|
)
|
|
Increase in overdrafts
|
6,050
|
|
|
—
|
|
|
Proceeds from issuance of non-controlling interests
|
3,425
|
|
|
1,679
|
|
|
Distributions to and purchases of non-controlling interests
|
(5,251
|
)
|
|
(12,474
|
)
|
|
Purchase of membership interests of Concentra Group Holdings Parent (Note 4)
|
—
|
|
|
(366,203
|
)
|
|
Net cash provided by (used in) financing activities
|
13,674
|
|
|
(262,144
|
)
|
|
Net decrease in cash and cash equivalents
|
(27,363
|
)
|
|
(262,719
|
)
|
|
Cash and cash equivalents at beginning of period
|
175,178
|
|
|
335,882
|
|
|
Cash and cash equivalents at end of period
|
$
|
147,815
|
|
|
$
|
73,163
|
|
|
Supplemental Information
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
37,199
|
|
|
$
|
67,885
|
|
|
Cash paid for taxes
|
718
|
|
|
1,135
|
|
|
Operating lease right-of-use assets obtained in exchange for lease liabilities, excluding adoption impact of ASC Topic 842 at January 1, 2019
|
24,176
|
|
|
67,894
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of March 31, 2020, and for the three month periods ended March 31, 2019 and 2020, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.
The results of operations for the three months ended March 31, 2020, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
Financial Instruments
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which replaced the incurred loss approach for recognizing credit losses on financial instruments with an expected loss approach. The expected loss approach is subject to management judgments using assessments of incurred credit losses, assessments of current conditions, and forecasts using reasonable and supportable assumptions. The standard was required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.
The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with patients. Historically, the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and, based on its experience, believes the risk of material defaults is low. The Company experienced credit losses of $1.1 million for the year ended December 31, 2017, credit loss recoveries of $0.1 million for the year ended December 31, 2018, and credit losses of $3.0 million for the year ended December 31, 2019. The Company’s historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are typically paid for by highly-solvent, creditworthy payors such as Medicare, other governmental programs, and highly-regulated commercial insurers, on behalf of the patient. The Company believes it has moderate credit risk related to defaults on self-pay amounts in accounts receivable; however, these amounts represented less than 1.0% of the Company’s accounts receivable at January 1, 2020.
In estimating the Company’s expected credit losses under Topic 326, the Company considers its incurred loss experience and adjusts for known and expected events and other circumstances, identified using periodic assessments implemented by the Company, which management believes are relevant in assessing the collectability of its accounts receivable. Because of the infrequent and insignificant nature of the Company’s historical credit losses, forecasts of expected credit losses are generally unnecessary. Expected credit losses are recognized by the Company through an allowance for credit losses and related credit loss expense.
As of January 1, 2020, the Company completed its expected credit loss assessment for its financial instruments subject to Topic 326. The Company’s estimate of expected credit losses as of January 1, 2020, resulted in no adjustments to the allowance for credit losses and no cumulative-effect adjustment to retained earnings on the adoption date of the standard.
|
|
3.
|
Credit Risk Concentrations
|
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and accounts receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to its critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, insurance coverage is verified prior to the patient’s visit. Within the Company’s Concentra centers, insurance coverage is verified or an authorization is received from the patient’s employer prior to the patient’s visit.
Because of the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion, patient accounts receivable which are due from the Medicare program represent the Company’s only significant concentration of credit risk. Approximately 15% and 18% of the Company’s accounts receivable is from Medicare at December 31, 2019, and March 31, 2020, respectively.
|
|
4.
|
Redeemable Non-Controlling Interests
|
The ownership interests held by outside parties in subsidiaries, limited liability companies, and limited partnerships controlled by the Company are classified as non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values.
On January 1, 2020, Select acquired approximately 17.2% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), Dignity Health Holding Corporation (“DHHC”), and certain other sellers in exchange for an aggregate purchase price of approximately $338.4 million. On February 1, 2020, 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 certain other sellers in exchange for an aggregate purchase price of approximately $27.8 million. 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 Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, dated as of February 1, 2018, as amended (the “Concentra LLC Agreement”).
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.
The changes in redeemable non-controlling interests are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2020
|
Balance as of January 1
|
$
|
780,488
|
|
|
$
|
974,541
|
|
Net income attributable to redeemable non-controlling interests
|
7,700
|
|
|
7,256
|
|
Distributions to and purchases of redeemable non-controlling interests
|
(2,771
|
)
|
|
(5,687
|
)
|
Purchase of membership interests of Concentra Group Holdings Parent
|
—
|
|
|
(366,203
|
)
|
Redemption adjustment on redeemable non-controlling interests
|
47,470
|
|
|
10,123
|
|
Other
|
354
|
|
|
347
|
|
Balance as of March 31
|
$
|
833,241
|
|
|
$
|
620,377
|
|
|
|
5.
|
Variable Interest Entities
|
Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In these states, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in Concentra’s occupational health centers.
The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.
The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $178.4 million and $173.7 million at December 31, 2019, and March 31, 2020, respectively. The total liabilities of Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $176.7 million and $172.1 million at December 31, 2019, and March 31, 2020, respectively.
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Total
|
|
(in thousands)
|
Balance as of December 31, 2019
|
$
|
1,078,804
|
|
|
$
|
430,900
|
|
|
$
|
649,763
|
|
|
$
|
1,232,488
|
|
|
$
|
3,391,955
|
|
Acquired
|
—
|
|
|
—
|
|
|
610
|
|
|
4,567
|
|
|
5,177
|
|
Sold
|
—
|
|
|
—
|
|
|
(6,034
|
)
|
|
—
|
|
|
(6,034
|
)
|
Measurement period adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
(20
|
)
|
Balance as of March 31, 2020
|
$
|
1,078,804
|
|
|
$
|
430,900
|
|
|
$
|
644,339
|
|
|
$
|
1,237,035
|
|
|
$
|
3,391,078
|
|
Identifiable Intangible Assets
The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
March 31, 2020
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
(in thousands)
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
166,698
|
|
|
$
|
—
|
|
|
$
|
166,698
|
|
|
$
|
166,698
|
|
|
$
|
—
|
|
|
$
|
166,698
|
|
Certificates of need
|
|
17,157
|
|
|
—
|
|
|
17,157
|
|
|
18,348
|
|
|
—
|
|
|
18,348
|
|
Accreditations
|
|
1,874
|
|
|
—
|
|
|
1,874
|
|
|
1,874
|
|
|
—
|
|
|
1,874
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
5,000
|
|
|
(5,000
|
)
|
|
—
|
|
|
5,000
|
|
|
(5,000
|
)
|
|
—
|
|
Customer relationships
|
|
287,373
|
|
|
(87,346
|
)
|
|
200,027
|
|
|
288,963
|
|
|
(93,814
|
)
|
|
195,149
|
|
Non-compete agreements
|
|
32,114
|
|
|
(8,802
|
)
|
|
23,312
|
|
|
32,845
|
|
|
(9,540
|
)
|
|
23,305
|
|
Total identifiable intangible assets
|
|
$
|
510,216
|
|
|
$
|
(101,148
|
)
|
|
$
|
409,068
|
|
|
$
|
513,728
|
|
|
$
|
(108,354
|
)
|
|
$
|
405,374
|
|
The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, 2020, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 6.9 years, respectively.
The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $7.1 million and $6.9 million for the three months ended March 31, 2019 and 2020, respectively.
|
|
7.
|
Long-Term Debt and Notes Payable
|
As of March 31, 2020, the Company’s long-term debt and notes payable were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Outstanding
|
|
Unamortized
Premium
(Discount)
|
|
Unamortized
Issuance
Costs
|
|
Carrying
Value
|
|
|
Fair
Value
|
Select 6.250% senior notes
|
$
|
1,225,000
|
|
|
$
|
38,437
|
|
|
$
|
(19,200
|
)
|
|
$
|
1,244,237
|
|
|
|
$
|
1,222,673
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select revolving facility
|
165,000
|
|
|
—
|
|
|
—
|
|
|
165,000
|
|
|
|
164,381
|
|
Select term loan
|
2,103,437
|
|
|
(9,905
|
)
|
|
(10,796
|
)
|
|
2,082,736
|
|
|
|
1,987,748
|
|
Other debt, including finance leases
|
78,617
|
|
|
—
|
|
|
(373
|
)
|
|
78,244
|
|
|
|
78,244
|
|
Total debt
|
$
|
3,572,054
|
|
|
$
|
28,532
|
|
|
$
|
(30,369
|
)
|
|
$
|
3,570,217
|
|
|
|
$
|
3,453,046
|
|
Principal maturities of the Company’s long-term debt and notes payable were approximately as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
Select 6.250% senior notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,225,000
|
|
|
$
|
1,225,000
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select revolving facility
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
165,000
|
|
|
—
|
|
|
165,000
|
|
Select term loan
|
—
|
|
|
—
|
|
|
—
|
|
|
4,757
|
|
|
11,150
|
|
|
2,087,530
|
|
|
2,103,437
|
|
Other debt, including finance leases
|
14,318
|
|
|
8,130
|
|
|
17,215
|
|
|
3,364
|
|
|
23,550
|
|
|
12,040
|
|
|
78,617
|
|
Total debt
|
$
|
14,318
|
|
|
$
|
8,130
|
|
|
$
|
17,215
|
|
|
$
|
8,121
|
|
|
$
|
199,700
|
|
|
$
|
3,324,570
|
|
|
$
|
3,572,054
|
|
As of December 31, 2019, the Company’s long-term debt and notes payable were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Outstanding
|
|
Unamortized
Premium
(Discount)
|
|
Unamortized
Issuance
Costs
|
|
Carrying
Value
|
|
|
Fair
Value
|
Select 6.250% senior notes
|
$
|
1,225,000
|
|
|
$
|
39,988
|
|
|
$
|
(19,944
|
)
|
|
$
|
1,245,044
|
|
|
|
$
|
1,322,020
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select revolving facility
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Select term loan
|
2,143,280
|
|
|
(10,411
|
)
|
|
(11,348
|
)
|
|
2,121,521
|
|
|
|
2,145,959
|
|
Other debt, including finance leases
|
78,941
|
|
|
—
|
|
|
(396
|
)
|
|
78,545
|
|
|
|
78,545
|
|
Total debt
|
$
|
3,447,221
|
|
|
$
|
29,577
|
|
|
$
|
(31,688
|
)
|
|
$
|
3,445,110
|
|
|
|
$
|
3,546,524
|
|
Excess Cash Flow Payment
In February 2020, Select made a principal prepayment of approximately $39.8 million associated with its term loans in accordance with the provision in its senior secured credit agreement, dated March 6, 2017 (together with any borrowings thereunder, the “Select credit facilities”) that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.
Fair Value
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for its 6.250% senior notes due August 15, 2026 (the “senior notes”) and the Select credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active. The fair value of the Select credit facilities was based on quoted market prices for this debt in the syndicated loan market. The fair value of the senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.
The Company’s reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services with non-consolidating subsidiaries.
The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined 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. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.
The following tables summarize selected financial data for the Company’s reportable segments. Prior year results presented herein have been changed to conform to the current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2020
|
|
(in thousands)
|
Net operating revenues:(1)
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
457,534
|
|
|
$
|
500,521
|
|
Rehabilitation hospital
|
|
154,558
|
|
|
182,019
|
|
Outpatient rehabilitation
|
|
246,905
|
|
|
255,249
|
|
Concentra
|
|
396,321
|
|
|
398,535
|
|
Other
|
|
69,313
|
|
|
78,308
|
|
Total Company
|
|
$
|
1,324,631
|
|
|
$
|
1,414,632
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
72,998
|
|
|
$
|
88,570
|
|
Rehabilitation hospital
|
|
25,797
|
|
|
38,569
|
|
Outpatient rehabilitation
|
|
28,991
|
|
|
27,122
|
|
Concentra
|
|
66,258
|
|
|
61,466
|
|
Other
|
|
(23,927
|
)
|
|
(28,394
|
)
|
Total Company
|
|
$
|
170,117
|
|
|
$
|
187,333
|
|
Total assets:
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
2,062,659
|
|
|
$
|
2,148,779
|
|
Rehabilitation hospital
|
|
1,089,391
|
|
|
1,127,267
|
|
Outpatient rehabilitation
|
|
1,250,015
|
|
|
1,285,449
|
|
Concentra
|
|
2,464,317
|
|
|
2,354,169
|
|
Other
|
|
155,110
|
|
|
199,903
|
|
Total Company
|
|
$
|
7,021,492
|
|
|
$
|
7,115,567
|
|
Purchases of property and equipment:
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
10,160
|
|
|
$
|
8,965
|
|
Rehabilitation hospital
|
|
13,183
|
|
|
3,325
|
|
Outpatient rehabilitation
|
|
9,040
|
|
|
8,384
|
|
Concentra
|
|
15,698
|
|
|
15,586
|
|
Other
|
|
992
|
|
|
2,948
|
|
Total Company
|
|
$
|
49,073
|
|
|
$
|
39,208
|
|
_______________________________________________________________________________
|
|
(1)
|
Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019.
|
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Adjusted EBITDA
|
$
|
72,998
|
|
|
$
|
25,797
|
|
|
$
|
28,991
|
|
|
$
|
66,258
|
|
|
$
|
(23,927
|
)
|
|
|
|
Depreciation and amortization
|
(11,451
|
)
|
|
(6,402
|
)
|
|
(7,032
|
)
|
|
(24,904
|
)
|
|
(2,349
|
)
|
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(767
|
)
|
|
(5,488
|
)
|
|
|
|
Income (loss) from operations
|
$
|
61,547
|
|
|
$
|
19,395
|
|
|
$
|
21,959
|
|
|
$
|
40,587
|
|
|
$
|
(31,764
|
)
|
|
$
|
111,724
|
|
Equity in earnings of unconsolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,366
|
|
Gain on sale of businesses
|
|
|
|
|
|
|
|
|
|
|
6,532
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,811
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Adjusted EBITDA
|
$
|
88,570
|
|
|
$
|
38,569
|
|
|
$
|
27,122
|
|
|
$
|
61,466
|
|
|
$
|
(28,394
|
)
|
|
|
|
Depreciation and amortization
|
(12,336
|
)
|
|
(6,887
|
)
|
|
(7,218
|
)
|
|
(22,887
|
)
|
|
(2,424
|
)
|
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(767
|
)
|
|
(6,136
|
)
|
|
|
|
Income (loss) from operations
|
$
|
76,234
|
|
|
$
|
31,682
|
|
|
$
|
19,904
|
|
|
$
|
37,812
|
|
|
$
|
(36,954
|
)
|
|
$
|
128,678
|
|
Equity in earnings of unconsolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,588
|
|
Gain on sale of businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,201
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,107
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,360
|
|
|
|
9.
|
Revenue from Contracts with Customers
|
Net operating revenues consist primarily of revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues for the three months ended March 31, 2019 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Patient service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
$
|
238,169
|
|
|
$
|
74,579
|
|
|
$
|
40,278
|
|
|
$
|
555
|
|
|
$
|
—
|
|
|
$
|
353,581
|
|
Non-Medicare
|
216,959
|
|
|
70,642
|
|
|
187,914
|
|
|
393,236
|
|
|
—
|
|
|
868,751
|
|
Total patient services revenues
|
455,128
|
|
|
145,221
|
|
|
228,192
|
|
|
393,791
|
|
|
—
|
|
|
1,222,332
|
|
Other revenues(1)
|
2,406
|
|
|
9,337
|
|
|
18,713
|
|
|
2,530
|
|
|
69,313
|
|
|
102,299
|
|
Total net operating revenues
|
$
|
457,534
|
|
|
$
|
154,558
|
|
|
$
|
246,905
|
|
|
$
|
396,321
|
|
|
$
|
69,313
|
|
|
$
|
1,324,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Patient service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
$
|
241,509
|
|
|
$
|
90,752
|
|
|
$
|
40,832
|
|
|
$
|
472
|
|
|
$
|
—
|
|
|
$
|
373,565
|
|
Non-Medicare
|
255,947
|
|
|
81,436
|
|
|
196,890
|
|
|
395,033
|
|
|
—
|
|
|
929,306
|
|
Total patient services revenues
|
497,456
|
|
|
172,188
|
|
|
237,722
|
|
|
395,505
|
|
|
—
|
|
|
1,302,871
|
|
Other revenues
|
3,065
|
|
|
9,831
|
|
|
17,527
|
|
|
3,030
|
|
|
78,308
|
|
|
111,761
|
|
Total net operating revenues
|
$
|
500,521
|
|
|
$
|
182,019
|
|
|
$
|
255,249
|
|
|
$
|
398,535
|
|
|
$
|
78,308
|
|
|
$
|
1,414,632
|
|
_______________________________________________________________________________
|
|
(1)
|
Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019.
|
The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is as follows:
|
|
(i)
|
Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were no dividends declared or contractual dividends paid for the three months ended March 31, 2019 and 2020.
|
|
|
(ii)
|
The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period.
|
|
|
(iii)
|
The net income allocated to each security is then divided by the weighted average number of outstanding shares for the period to determine the EPS for each security considered in the two-class method.
|
The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating securities outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
Diluted EPS
|
|
|
|
Three Months Ended March 31,
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
53,344
|
|
|
$
|
70,448
|
|
|
$
|
53,344
|
|
|
$
|
70,448
|
|
|
Less: net income attributable to non-controlling interests
|
|
12,510
|
|
|
17,323
|
|
|
12,510
|
|
|
17,323
|
|
|
Net income attributable to the Company
|
|
40,834
|
|
|
53,125
|
|
|
40,834
|
|
|
53,125
|
|
|
Less: net income attributable to participating securities
|
|
1,343
|
|
|
1,818
|
|
|
1,343
|
|
|
1,818
|
|
|
Net income attributable to common shares
|
|
$
|
39,491
|
|
|
$
|
51,307
|
|
|
$
|
39,491
|
|
|
$
|
51,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Basic EPS
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Diluted EPS
|
|
|
(in thousands, except for per share amounts)
|
Common shares
|
|
$
|
39,491
|
|
|
130,821
|
|
|
$
|
0.30
|
|
|
|
$
|
39,491
|
|
|
130,861
|
|
|
$
|
0.30
|
|
Participating securities
|
|
1,343
|
|
|
4,449
|
|
|
$
|
0.30
|
|
|
|
1,343
|
|
|
4,449
|
|
|
$
|
0.30
|
|
Total Company
|
|
$
|
40,834
|
|
|
|
|
|
|
|
$
|
40,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Basic EPS
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Diluted EPS
|
|
|
(in thousands, except for per share amounts)
|
Common shares
|
|
$
|
51,307
|
|
|
129,638
|
|
|
$
|
0.40
|
|
|
|
$
|
51,307
|
|
|
129,638
|
|
|
$
|
0.40
|
|
Participating securities
|
|
1,818
|
|
|
4,594
|
|
|
$
|
0.40
|
|
|
|
1,818
|
|
|
4,594
|
|
|
$
|
0.40
|
|
Total Company
|
|
$
|
53,125
|
|
|
|
|
|
|
|
$
|
53,125
|
|
|
|
|
|
_______________________________________________________________________________
(1) Represents the weighted average share count outstanding during the period.
|
|
11.
|
Commitments and Contingencies
|
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $6.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company has produced documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act includes changes to certain tax law related to net operating losses and the deductibility of interest expense and depreciation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred income taxes and decreasing its current income taxes payable by approximately $15.5 million during the three months ended March 31, 2020.
Title VIII in Division B of the CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $100.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities, and Medicare- and Medicaid-enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the coronavirus disease 2019 (“COVID-19”) pandemic, such as forgone revenues from canceled procedures, and to provide support for related healthcare expenses, such as constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce. Further, these relief funds ensure uninsured patients are receiving testing and treatment for COVID-19. On April 10, 2020, the U.S. Department of Health & Human Services began making payments to healthcare providers from the $100.0 billion appropriation. These are payments, rather than loans, to healthcare providers, and will not need to be repaid. The Company received approximately $93.7 million of payments as part of the Cares Act Provider Relief Fund. The Company concluded that the receipt of these payments would be accounted for in periods subsequent to March 31, 2020, as the Company was not able to determine eligibility for the assistance or the amounts that would be distributed until April 2020.
Additionally, the CARES Act allows for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program during the COVID-19 pandemic. Under this program, healthcare providers may receive advanced payments for future Medicare services provided. The Company applied for and received approval from CMS in April 2020 to receive advanced payments and, through April 30, 2020, the Company has received $316.1 million under this program. Because these payments are made on behalf of patients before services are provided, the Company will record these payments as a contract liability until all performance obligations have been met. These advanced payments will be recouped by CMS through future Medicare claims billed by the Company, beginning 121 days after receipt of the advanced payment. After 120 days, any new Medicare claim billed by the Company will reduce the liability owed to CMS. The Company is required to repay any advanced payments not recouped by CMS within 210 days from the date the Company originally received the payment. Failure to repay the advanced payments when due will result in interest charges on the outstanding balance owed.
In April 2020, the Company began deferring payment on its share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is able to defer half of its share of payroll taxes owed until December 31, 2021, with the remaining half due on December 31, 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
|
|
|
•
|
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, 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 March 31, 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 1,753 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, a joint venture subsidiary, operated 523 occupational health centers in 41 states as of March 31, 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 $1,414.6 million for the three months ended March 31, 2020. Of this total, we earned approximately 35% of our net operating revenues from our critical illness recovery hospital segment, approximately 13% from our rehabilitation hospital segment, approximately 18% from our outpatient rehabilitation segment, and approximately 28% 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.
During the quarter ended June 30, 2019, we began reporting the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part of our other activities. Previously, these services were reflected in the financial results of our reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to our non-consolidating subsidiaries, resulting in our recognition of net operating revenues equal to the actual labor costs incurred. Prior year results presented herein have been changed to conform to the current presentation.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2020
|
|
|
|
(in thousands)
|
Net income
|
|
$
|
53,344
|
|
|
$
|
70,448
|
|
|
Income tax expense
|
|
18,467
|
|
|
21,912
|
|
|
Interest expense
|
|
50,811
|
|
|
46,107
|
|
|
Gain on sale of businesses
|
|
(6,532
|
)
|
|
(7,201
|
)
|
|
Equity in earnings of unconsolidated subsidiaries
|
|
(4,366
|
)
|
|
(2,588
|
)
|
|
Income from operations
|
|
111,724
|
|
|
128,678
|
|
|
Stock compensation expense:
|
|
|
|
|
|
|
|
Included in general and administrative
|
|
4,748
|
|
|
5,437
|
|
|
Included in cost of services
|
|
1,507
|
|
|
1,466
|
|
|
Depreciation and amortization
|
|
52,138
|
|
|
51,752
|
|
|
Adjusted EBITDA
|
|
$
|
170,117
|
|
|
$
|
187,333
|
|
|
Effects of the COVID-19 Pandemic on our Results of Operations
The broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. We are a healthcare service provider that provides patient care services in both inpatient and outpatient settings. We have provided certain additional performance metrics to assist readers in understanding how the COVID-19 pandemic impacted each of our segments during the one month ended March 31, 2020, including our (i) net operating revenues and Adjusted EBITDA for the two months ended February 29, 2020 and February 28, 2019, (ii) net operating revenues and Adjusted EBITDA for the one month ended March 31, 2020 and 2019, (iii) net operating revenues and Adjusted EBITDA for the three months ended March 31, 2020 and 2019, and (iv) certain operating statistics for each of the aforementioned periods. 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 ended December 31, 2019 for further discussion.
Critical Illness Recovery Hospital Segment. Our critical illness recovery hospitals are a key part of the inpatient hospital continuum of care. Both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements, which impact 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. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with 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.
Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS and Congress acted to temporarily suspend certain regulations that govern admissions into our rehabilitation hospitals 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. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with 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. Additionally, elective surgeries at hospitals and other facilities have been suspended which is reducing the need for inpatient rehabilitation services.
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. These actions continued to expand throughout March and by the end of March, most states 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. As a result, we have temporarily consolidated the operations of some of our clinics by transferring staff and patients.
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. These actions continued to expand throughout March. By the end of March, most states implemented significant restrictions on businesses. These actions have had significant effects on our patient visit volumes as employers have furloughed workforces and temporarily ceased operations or have significantly reduced their operations. As a result, we have temporarily consolidated the operations of some of our centers by transferring staff and patients.
We provided below certain performance measures and operating statistics used by management to help illustrate the impact of the COVID-19 pandemic on our operating results. For the quarter ended March 31, 2020, we defined the pre-COVID-19 outbreak period as the two months ended February 29, 2020, and the post-COVID-19 outbreak period as the one month ended March 31, 2020. We provided prior year comparative data for the pre-COVID-19 and post-COVID-19 outbreak periods presented. The following performance measures and operating statistics should be considered in conjunction with the operating results for the full quarter ended March 31, 2020. The performance measures and operating statistics presented for the two months ended February 29, 2020 and the one month ended March 31, 2020 are, when combined, equal to the performance measures and operating statistics presented for the full quarter ended March 31, 2020. The same is true for the prior year comparative data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Months Ended February
|
|
|
One Month Ended March
|
|
|
Three Months Ended March
|
|
|
2019
|
|
2020
|
|
%
Change
|
|
|
2019
|
|
2020
|
|
%
Change
|
|
|
2019
|
|
2020
|
Selected financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
295,385
|
|
|
$
|
328,613
|
|
|
11.2
|
%
|
|
|
$
|
162,149
|
|
|
$
|
171,908
|
|
|
6.0
|
%
|
|
|
$
|
457,534
|
|
|
$
|
500,521
|
|
Rehabilitation hospital
|
|
98,695
|
|
|
122,363
|
|
|
24.0
|
|
|
|
55,863
|
|
|
59,656
|
|
|
6.8
|
|
|
|
154,558
|
|
|
182,019
|
|
Outpatient rehabilitation
|
|
161,758
|
|
|
179,163
|
|
|
10.8
|
|
|
|
85,147
|
|
|
76,086
|
|
|
(10.6
|
)
|
|
|
246,905
|
|
|
255,249
|
|
Concentra
|
|
259,816
|
|
|
274,926
|
|
|
5.8
|
|
|
|
136,505
|
|
|
123,609
|
|
|
(9.4
|
)
|
|
|
396,321
|
|
|
398,535
|
|
Other(1)
|
|
38,532
|
|
|
54,283
|
|
|
40.9
|
|
|
|
30,781
|
|
|
24,025
|
|
|
(21.9
|
)
|
|
|
69,313
|
|
|
78,308
|
|
Total Company
|
|
$
|
854,186
|
|
|
$
|
959,348
|
|
|
12.3
|
%
|
|
|
$
|
470,445
|
|
|
$
|
455,284
|
|
|
(3.2
|
)%
|
|
|
$
|
1,324,631
|
|
|
$
|
1,414,632
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
36,355
|
|
|
$
|
48,395
|
|
|
33.1
|
%
|
|
|
$
|
25,192
|
|
|
$
|
27,839
|
|
|
10.5
|
%
|
|
|
$
|
61,547
|
|
|
$
|
76,234
|
|
Rehabilitation hospital
|
|
11,605
|
|
|
22,855
|
|
|
96.9
|
|
|
|
7,790
|
|
|
8,827
|
|
|
13.3
|
|
|
|
19,395
|
|
|
31,682
|
|
Outpatient rehabilitation
|
|
12,623
|
|
|
18,289
|
|
|
44.9
|
|
|
|
9,336
|
|
|
1,615
|
|
|
(82.7
|
)
|
|
|
21,959
|
|
|
19,904
|
|
Concentra
|
|
23,373
|
|
|
29,624
|
|
|
26.7
|
|
|
|
17,214
|
|
|
8,188
|
|
|
(52.4
|
)
|
|
|
40,587
|
|
|
37,812
|
|
Other(1)
|
|
(22,432
|
)
|
|
(24,868
|
)
|
|
(10.9
|
)
|
|
|
(9,332
|
)
|
|
(12,086
|
)
|
|
(29.5
|
)
|
|
|
(31,764
|
)
|
|
(36,954
|
)
|
Total Company
|
|
$
|
61,524
|
|
|
$
|
94,295
|
|
|
53.3
|
%
|
|
|
$
|
50,200
|
|
|
$
|
34,383
|
|
|
(31.5
|
)%
|
|
|
$
|
111,724
|
|
|
$
|
128,678
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
44,035
|
|
|
$
|
56,648
|
|
|
28.6
|
%
|
|
|
$
|
28,963
|
|
|
$
|
31,922
|
|
|
10.2
|
%
|
|
|
$
|
72,998
|
|
|
$
|
88,570
|
|
Rehabilitation hospital
|
|
15,908
|
|
|
27,448
|
|
|
72.5
|
|
|
|
9,889
|
|
|
11,121
|
|
|
12.5
|
|
|
|
25,797
|
|
|
38,569
|
|
Outpatient rehabilitation
|
|
17,265
|
|
|
23,062
|
|
|
33.6
|
|
|
|
11,726
|
|
|
4,060
|
|
|
(65.4
|
)
|
|
|
28,991
|
|
|
27,122
|
|
Concentra
|
|
40,785
|
|
|
45,537
|
|
|
11.7
|
|
|
|
25,473
|
|
|
15,929
|
|
|
(37.5
|
)
|
|
|
66,258
|
|
|
61,466
|
|
Other(1)
|
|
(17,278
|
)
|
|
(19,281
|
)
|
|
(11.6
|
)
|
|
|
(6,649
|
)
|
|
(9,113
|
)
|
|
(37.1
|
)
|
|
|
(23,927
|
)
|
|
(28,394
|
)
|
Total Company
|
|
$
|
100,715
|
|
|
$
|
133,414
|
|
|
32.5
|
%
|
|
|
$
|
69,402
|
|
|
$
|
53,919
|
|
|
(22.3
|
)%
|
|
|
$
|
170,117
|
|
|
$
|
187,333
|
|
Adjusted EBITDA margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
14.9
|
%
|
|
17.2
|
%
|
|
|
|
|
17.9
|
%
|
|
18.6
|
%
|
|
|
|
|
16.0
|
%
|
|
17.7
|
%
|
Rehabilitation hospital
|
|
16.1
|
|
|
22.4
|
|
|
|
|
|
17.7
|
|
|
18.6
|
|
|
|
|
|
16.7
|
|
|
21.2
|
|
Outpatient rehabilitation
|
|
10.7
|
|
|
12.9
|
|
|
|
|
|
13.8
|
|
|
5.3
|
|
|
|
|
|
11.7
|
|
|
10.6
|
|
Concentra
|
|
15.7
|
|
|
16.6
|
|
|
|
|
|
18.7
|
|
|
12.9
|
|
|
|
|
|
16.7
|
|
|
15.4
|
|
Other(1)
|
|
N/M
|
|
|
N/M
|
|
|
|
|
|
N/M
|
|
|
N/M
|
|
|
|
|
|
N/M
|
|
|
N/M
|
|
Total Company
|
|
11.8
|
%
|
|
13.9
|
%
|
|
|
|
|
14.8
|
%
|
|
11.8
|
%
|
|
|
|
|
12.8
|
%
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Months Ended February
|
|
|
One Month Ended March
|
|
|
Three Months Ended March
|
|
|
2019
|
|
2020
|
|
%
Change
|
|
|
2019
|
|
2020
|
|
%
Change
|
|
|
2019
|
|
2020
|
Operating statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
6,303
|
|
|
6,427
|
|
|
2.0
|
%
|
|
|
3,153
|
|
|
3,106
|
|
|
(1.5
|
)%
|
|
|
9,456
|
|
|
9,533
|
|
Patient days
|
|
167,044
|
|
|
178,627
|
|
|
6.9
|
%
|
|
|
91,085
|
|
|
91,831
|
|
|
0.8
|
%
|
|
|
258,129
|
|
|
270,458
|
|
Occupancy rate
|
|
70
|
%
|
|
70
|
%
|
|
|
|
|
73
|
%
|
|
70
|
%
|
|
|
|
|
71
|
%
|
|
70
|
%
|
Rehabilitation hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
3,758
|
|
|
4,412
|
|
|
17.4
|
%
|
|
|
2,078
|
|
|
1,921
|
|
|
(7.6
|
)%
|
|
|
5,836
|
|
|
6,333
|
|
Patient days
|
|
52,876
|
|
|
63,924
|
|
|
20.9
|
%
|
|
|
29,940
|
|
|
30,644
|
|
|
2.4
|
%
|
|
|
82,816
|
|
|
94,568
|
|
Occupancy rate
|
|
75
|
%
|
|
81
|
%
|
|
|
|
|
78
|
%
|
|
76
|
%
|
|
|
|
|
76
|
%
|
|
79
|
%
|
Outpatient rehabilitation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of visits
|
|
1,345,617
|
|
|
1,496,232
|
|
|
11.2
|
%
|
|
|
708,866
|
|
|
626,433
|
|
|
(11.6
|
)%
|
|
|
2,054,483
|
|
|
2,122,665
|
|
Concentra:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of visits
|
|
1,904,663
|
|
|
1,997,810
|
|
|
4.9
|
%
|
|
|
1,006,944
|
|
|
879,585
|
|
|
(12.6
|
)%
|
|
|
2,911,607
|
|
|
2,877,395
|
|
_______________________________________________________________________________
|
|
(1)
|
Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries.
|
Please refer to “Summary Financial Results” and “Results of Operations” for further discussion of our segment performance measures for the three months ended March 31, 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 months ended March 31, 2019 and 2020.
The COVID-19 pandemic and its adverse effects have become more prevalent throughout April 2020, and we are experiencing more pronounced disruptions in our outpatient rehabilitation and Concentra operations. The continued uncertainty of the potential impact of the COVID-19 pandemic on the healthcare sector could materially adversely impact our business, results of operations, and overall financial performance in future periods. See “Risk Factors” 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.
Summary Financial Results
For the three months ended March 31, 2020, our net operating revenues increased 6.8% to $1,414.6 million, compared to $1,324.6 million for the three months ended March 31, 2019. Income from operations increased 15.2% to $128.7 million for the three months ended March 31, 2020, compared to $111.7 million for the three months ended March 31, 2019.
Net income increased 32.1% to $70.4 million for the three months ended March 31, 2020, compared to $53.3 million for the three months ended March 31, 2019. Net income included a pre-tax gain on sale of businesses of $7.2 million and $6.5 million for the three months ended March 31, 2020 and 2019, respectively.
Adjusted EBITDA increased 10.1% to $187.3 million for the three months ended March 31, 2020, compared to $170.1 million for the three months ended March 31, 2019. Our Adjusted EBITDA margin was 13.2% for the three months ended March 31, 2020, compared to 12.8% for the three months ended March 31, 2019.
The following tables reconcile our segment performance measures to our consolidated operating results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Net operating revenues
|
$
|
500,521
|
|
|
$
|
182,019
|
|
|
$
|
255,249
|
|
|
$
|
398,535
|
|
|
$
|
78,308
|
|
|
$
|
1,414,632
|
|
Operating expenses
|
411,951
|
|
|
143,450
|
|
|
228,127
|
|
|
337,836
|
|
|
112,838
|
|
|
1,234,202
|
|
Depreciation and amortization
|
12,336
|
|
|
6,887
|
|
|
7,218
|
|
|
22,887
|
|
|
2,424
|
|
|
51,752
|
|
Income (loss) from operations
|
$
|
76,234
|
|
|
$
|
31,682
|
|
|
$
|
19,904
|
|
|
$
|
37,812
|
|
|
$
|
(36,954
|
)
|
|
$
|
128,678
|
|
Depreciation and amortization
|
12,336
|
|
|
6,887
|
|
|
7,218
|
|
|
22,887
|
|
|
2,424
|
|
|
51,752
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
767
|
|
|
6,136
|
|
|
6,903
|
|
Adjusted EBITDA
|
$
|
88,570
|
|
|
$
|
38,569
|
|
|
$
|
27,122
|
|
|
$
|
61,466
|
|
|
$
|
(28,394
|
)
|
|
$
|
187,333
|
|
Adjusted EBITDA margin
|
17.7
|
%
|
|
21.2
|
%
|
|
10.6
|
%
|
|
15.4
|
%
|
|
N/M
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Net operating revenues(1)
|
$
|
457,534
|
|
|
$
|
154,558
|
|
|
$
|
246,905
|
|
|
$
|
396,321
|
|
|
$
|
69,313
|
|
|
$
|
1,324,631
|
|
Operating expenses(1)
|
384,536
|
|
|
128,761
|
|
|
217,914
|
|
|
330,830
|
|
|
98,728
|
|
|
1,160,769
|
|
Depreciation and amortization
|
11,451
|
|
|
6,402
|
|
|
7,032
|
|
|
24,904
|
|
|
2,349
|
|
|
52,138
|
|
Income (loss) from operations
|
$
|
61,547
|
|
|
$
|
19,395
|
|
|
$
|
21,959
|
|
|
$
|
40,587
|
|
|
$
|
(31,764
|
)
|
|
$
|
111,724
|
|
Depreciation and amortization
|
11,451
|
|
|
6,402
|
|
|
7,032
|
|
|
24,904
|
|
|
2,349
|
|
|
52,138
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
767
|
|
|
5,488
|
|
|
6,255
|
|
Adjusted EBITDA
|
$
|
72,998
|
|
|
$
|
25,797
|
|
|
$
|
28,991
|
|
|
$
|
66,258
|
|
|
$
|
(23,927
|
)
|
|
$
|
170,117
|
|
Adjusted EBITDA margin
|
16.0
|
%
|
|
16.7
|
%
|
|
11.7
|
%
|
|
16.7
|
%
|
|
N/M
|
|
|
12.8
|
%
|
The following table summarizes changes in segment performance measures for the three months ended March 31, 2020, compared to the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
Change in net operating revenues
|
9.4
|
%
|
|
17.8
|
%
|
|
3.4
|
%
|
|
0.6
|
%
|
|
13.0
|
%
|
|
6.8
|
%
|
Change in income from operations
|
23.9
|
%
|
|
63.4
|
%
|
|
(9.4
|
)%
|
|
(6.8
|
)%
|
|
(16.3
|
)%
|
|
15.2
|
%
|
Change in Adjusted EBITDA
|
21.3
|
%
|
|
49.5
|
%
|
|
(6.4
|
)%
|
|
(7.2
|
)%
|
|
(18.7
|
)%
|
|
10.1
|
%
|
_______________________________________________________________________________
|
|
(1)
|
For the three months ended March 31, 2019, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.
|
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 three months ended March 31, 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”), and 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 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 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 the hospital CoPs that continue to apply 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 Office of the Inspector General (“OIG”) waived sanctions under the physician self-referral law (i.e., Stark law) for patient referrals and claims related to the emergency. The 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 53 state Medicaid program emergency waivers, 39 state plan amendments, 16 COVID-19 pandemic related Medicaid Disaster Amendments and one CHIP Disaster 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.
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 80 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 as loans to be repaid after 120 days.
|
|
|
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.
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.
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 16, 2020, CMS released an advanced copy of 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.
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.
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 customers, 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.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2020
|
Critical illness recovery hospital data:
|
|
|
|
|
|
|
Number of hospitals owned—start of period
|
|
96
|
|
|
100
|
|
Number of hospitals acquired
|
|
—
|
|
|
—
|
|
Number of hospital start-ups
|
|
—
|
|
|
—
|
|
Number of hospitals closed/sold
|
|
—
|
|
|
—
|
|
Number of hospitals owned—end of period
|
|
96
|
|
|
100
|
|
Number of hospitals managed—end of period
|
|
1
|
|
|
1
|
|
Total number of hospitals (all)—end of period
|
|
97
|
|
|
101
|
|
Available licensed beds(1)
|
|
4,071
|
|
|
4,286
|
|
Admissions(1)(2)
|
|
9,456
|
|
|
9,533
|
|
Patient days(1)(3)
|
|
258,129
|
|
|
270,458
|
|
Average length of stay (days)(1)(4)
|
|
28
|
|
|
29
|
|
Net revenue per patient day(1)(5)
|
|
$
|
1,759
|
|
|
$
|
1,839
|
|
Occupancy rate(1)(6)
|
|
71
|
%
|
|
70
|
%
|
Percent patient days—Medicare(1)(7)
|
|
53
|
%
|
|
49
|
%
|
Rehabilitation hospital data:
|
|
|
|
|
Number of hospitals owned—start of period
|
|
17
|
|
|
19
|
|
Number of hospitals acquired
|
|
—
|
|
|
—
|
|
Number of hospital start-ups
|
|
1
|
|
|
—
|
|
Number of hospitals closed/sold
|
|
—
|
|
|
—
|
|
Number of hospitals owned—end of period
|
|
18
|
|
|
19
|
|
Number of hospitals managed—end of period
|
|
9
|
|
|
10
|
|
Total number of hospitals (all)—end of period
|
|
27
|
|
|
29
|
|
Available licensed beds(1)
|
|
1,239
|
|
|
1,309
|
|
Admissions(1)(2)
|
|
5,836
|
|
|
6,333
|
|
Patient days(1)(3)
|
|
82,816
|
|
|
94,568
|
|
Average length of stay (days)(1)(4)
|
|
14
|
|
|
15
|
|
Net revenue per patient day(1)(5)
|
|
$
|
1,633
|
|
|
$
|
1,732
|
|
Occupancy rate(1)(6)
|
|
76
|
%
|
|
79
|
%
|
Percent patient days—Medicare(1)(7)
|
|
52
|
%
|
|
51
|
%
|
Outpatient rehabilitation data:
|
|
|
|
|
Number of clinics owned—start of period
|
|
1,423
|
|
|
1,461
|
|
Number of clinics acquired
|
|
4
|
|
|
2
|
|
Number of clinic start-ups
|
|
11
|
|
|
12
|
|
Number of clinics closed/sold
|
|
(31
|
)
|
|
(4
|
)
|
Number of clinics owned—end of period
|
|
1,407
|
|
|
1,471
|
|
Number of clinics managed—end of period
|
|
277
|
|
|
282
|
|
Total number of clinics (all)—end of period
|
|
1,684
|
|
|
1,753
|
|
Number of visits(1)(8)
|
|
2,054,483
|
|
|
2,122,665
|
|
Net revenue per visit(1)(9)
|
|
$
|
103
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2020
|
Concentra data:
|
|
|
|
|
Number of centers owned—start of period
|
|
524
|
|
|
521
|
|
Number of centers acquired
|
|
1
|
|
|
4
|
|
Number of center start-ups
|
|
—
|
|
|
—
|
|
Number of centers closed/sold
|
|
—
|
|
|
(2
|
)
|
Number of centers owned—end of period
|
|
525
|
|
|
523
|
|
Number of onsite clinics operated—end of period
|
|
129
|
|
|
128
|
|
Number of CBOCs owned—end of period
|
|
31
|
|
|
33
|
|
Number of visits(1)(8)
|
|
2,911,607
|
|
|
2,877,395
|
|
Net revenue per visit(1)(9)
|
|
$
|
124
|
|
|
$
|
123
|
|
_______________________________________________________________________________
|
|
(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.
|
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2020
|
Net operating revenues
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of services, exclusive of depreciation and amortization(1)
|
|
85.5
|
|
|
84.9
|
|
General and administrative
|
|
2.2
|
|
|
2.4
|
|
Depreciation and amortization
|
|
3.9
|
|
|
3.6
|
|
Income from operations
|
|
8.4
|
|
|
9.1
|
|
Equity in earnings of unconsolidated subsidiaries
|
|
0.3
|
|
|
0.2
|
|
Gain on sale of businesses
|
|
0.5
|
|
|
0.5
|
|
Interest expense
|
|
(3.8
|
)
|
|
(3.3
|
)
|
Income before income taxes
|
|
5.4
|
|
|
6.5
|
|
Income tax expense
|
|
1.4
|
|
|
1.5
|
|
Net income
|
|
4.0
|
|
|
5.0
|
|
Net income attributable to non-controlling interests
|
|
0.9
|
|
|
1.2
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
3.1
|
%
|
|
3.8
|
%
|
_______________________________________________________________________________
|
|
(1)
|
Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating costs.
|
The following table summarizes selected financial data by segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019(2)
|
|
2020
|
|
% Change
|
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
457,534
|
|
|
$
|
500,521
|
|
|
9.4
|
%
|
Rehabilitation hospital
|
|
154,558
|
|
|
182,019
|
|
|
17.8
|
|
Outpatient rehabilitation
|
|
246,905
|
|
|
255,249
|
|
|
3.4
|
|
Concentra
|
|
396,321
|
|
|
398,535
|
|
|
0.6
|
|
Other(1)
|
|
69,313
|
|
|
78,308
|
|
|
13.0
|
|
Total Company
|
|
$
|
1,324,631
|
|
|
$
|
1,414,632
|
|
|
6.8
|
%
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
61,547
|
|
|
$
|
76,234
|
|
|
23.9
|
%
|
Rehabilitation hospital
|
|
19,395
|
|
|
31,682
|
|
|
63.4
|
|
Outpatient rehabilitation
|
|
21,959
|
|
|
19,904
|
|
|
(9.4
|
)
|
Concentra
|
|
40,587
|
|
|
37,812
|
|
|
(6.8
|
)
|
Other(1)
|
|
(31,764
|
)
|
|
(36,954
|
)
|
|
(16.3
|
)
|
Total Company
|
|
$
|
111,724
|
|
|
$
|
128,678
|
|
|
15.2
|
%
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
72,998
|
|
|
$
|
88,570
|
|
|
21.3
|
%
|
Rehabilitation hospital
|
|
25,797
|
|
|
38,569
|
|
|
49.5
|
|
Outpatient rehabilitation
|
|
28,991
|
|
|
27,122
|
|
|
(6.4
|
)
|
Concentra
|
|
66,258
|
|
|
61,466
|
|
|
(7.2
|
)
|
Other(1)
|
|
(23,927
|
)
|
|
(28,394
|
)
|
|
(18.7
|
)
|
Total Company
|
|
$
|
170,117
|
|
|
$
|
187,333
|
|
|
10.1
|
%
|
Adjusted EBITDA margins:
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
16.0
|
%
|
|
17.7
|
%
|
|
|
|
Rehabilitation hospital
|
|
16.7
|
|
|
21.2
|
|
|
|
Outpatient rehabilitation
|
|
11.7
|
|
|
10.6
|
|
|
|
|
Concentra
|
|
16.7
|
|
|
15.4
|
|
|
|
|
Other(1)
|
|
N/M
|
|
|
N/M
|
|
|
|
|
Total Company
|
|
12.8
|
%
|
|
13.2
|
%
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
2,062,659
|
|
|
$
|
2,148,779
|
|
|
|
|
Rehabilitation hospital
|
|
1,089,391
|
|
|
1,127,267
|
|
|
|
Outpatient rehabilitation
|
|
1,250,015
|
|
|
1,285,449
|
|
|
|
|
Concentra
|
|
2,464,317
|
|
|
2,354,169
|
|
|
|
|
Other(1)
|
|
155,110
|
|
|
199,903
|
|
|
|
|
Total Company
|
|
$
|
7,021,492
|
|
|
$
|
7,115,567
|
|
|
|
|
Purchases of property and equipment:
|
|
|
|
|
|
|
|
|
|
Critical illness recovery hospital
|
|
$
|
10,160
|
|
|
$
|
8,965
|
|
|
|
Rehabilitation hospital
|
|
13,183
|
|
|
3,325
|
|
|
|
|
Outpatient rehabilitation
|
|
9,040
|
|
|
8,384
|
|
|
|
|
Concentra
|
|
15,698
|
|
|
15,586
|
|
|
|
|
Other(1)
|
|
992
|
|
|
2,948
|
|
|
|
|
Total Company
|
|
$
|
49,073
|
|
|
$
|
39,208
|
|
|
|
|
_______________________________________________________________________________
|
|
(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 months ended March 31, 2019, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.
|
Three Months Ended March 31, 2020, Compared to Three Months Ended March 31, 2019
In the following, we discuss our results of operations related to net operating revenues, operating expenses, 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” for further discussion regarding the impact of the COVID-19 pandemic on our operating results for the three months ended March 31, 2020.
Net Operating Revenues
Our net operating revenues increased 6.8% to $1,414.6 million for the three months ended March 31, 2020, compared to $1,324.6 million for the three months ended March 31, 2019.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 9.4% to $500.5 million for the three months ended March 31, 2020, compared to $457.5 million for the three months ended March 31, 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 4.8% to 270,458 days for the three months ended March 31, 2020, compared to 258,129 days for the three months ended March 31, 2019. The increase in patient days was primarily attributable to the acquisition of three hospitals in April 2019 and one hospital in October 2019. Net revenue per patient day increased 4.5% to $1,839 for the three months ended March 31, 2020, compared to $1,759 for the three months ended March 31, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.
Rehabilitation Hospital Segment. Net operating revenues increased 17.8% to $182.0 million for the three months ended March 31, 2020, compared to $154.6 million for the three months ended March 31, 2019. The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the three months ended March 31, 2020. Our patient days increased 14.2% to 94,568 days for the three months ended March 31, 2020, compared to 82,816 days for the three months ended March 31, 2019. The increase in patient days was principally driven by our rehabilitation hospitals which commenced operations during 2019. We also experienced a 5.7% increase in patient days in our remaining hospitals. Of the 11,752 day increase experienced during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, 11,048 of those days occurred in January and February 2020. During the three months ended March 31, 2020, certain of our rehabilitation hospitals, particularly those operating in areas more significantly impacted by the spread of COVID-19, such as New Jersey, experienced lower patient volume. Further, our rehabilitation hospitals experienced overall lower patient volume during March 2020 due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Our net revenue per patient day increased 6.1% to $1,732 for the three months ended March 31, 2020, compared to $1,633 for the three months ended March 31, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.
Outpatient Rehabilitation Segment. Net operating revenues increased 3.4% to $255.2 million for the three months ended March 31, 2020, compared to $246.9 million for the three months ended March 31, 2019. The increase in net operating revenues was primarily attributable to an increase in visits, which increased 3.3% to 2,122,665 for the three months ended March 31, 2020, compared to 2,054,483 visits for the three months ended March 31, 2019. We experienced an increase of 150,615 visits during January and February 2020, as compared to the same period in 2019. During March 2020, our outpatient rehabilitation clinics experienced a decrease of 82,433 visits, as compared to March 2019. The decline in volume during March 2020, which became more significant by mid-month, resulted from the actions taken by governmental authorities and those in the private sector to limit the spread of COVID-19, combined with recommendations to practice social distancing. 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 non-essential and non-life sustaining businesses, the suspension of elective surgeries at hospitals and other facilities, which has resulted in less demand for outpatient rehabilitation services, as well as mandated social distancing measures. By the end of March 2020, we have temporarily closed 131 clinics. In many instances, we were able to transfer patients and our staff to other nearby outpatient rehabilitation clinics which remained open. Our net revenue per visit was $104 for the three months ended March 31, 2020, compared to $103 for the three months ended March 31, 2019.
Concentra Segment. Net operating revenues increased 0.6% to $398.5 million for the three months ended March 31, 2020, compared to $396.3 million for the three months ended March 31, 2019. Visits in our centers were 2,877,395 for the three months ended March 31, 2020, compared to 2,911,607 visits for the three months ended March 31, 2019. We experienced an increase of 93,147 visits during January and February 2020, as compared to the same period in 2019. During March 2020, our Concentra centers experienced a decrease of 127,359 visits, as compared to March 2019. In March 2020, employers began to furlough their workforces and temporarily cease or significantly reduce 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. By the end of March 2020, we have temporarily closed 19 centers and reduced the operating hours of 159 centers. In many instances where we temporarily closed centers, we were able to transfer patients and our staff to other nearby centers which remained open. Net revenue per visit was $123 for the three months ended March 31, 2020, compared to $124 for the three months ended March 31, 2019. The decrease in net revenue per visit was principally due to a decrease in workers’ compensation visits, which yield higher per visit rates, and a decrease in our employer services per visit rate during the three months ended March 31, 2020.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,234.2 million, or 87.3% of net operating revenues, for the three months ended March 31, 2020, compared to $1,160.8 million, or 87.7% of net operating revenues, for the three months ended March 31, 2019. Our cost of services, a major component of which is labor expense, was $1,200.4 million, or 84.9% of net operating revenues, for the three months ended March 31, 2020, compared to $1,132.1 million, or 85.5% of net operating revenues, for the three months ended March 31, 2019. The decrease in our operating expenses relative to our net operating revenues was principally due to the operating performance of our rehabilitation hospital and critical illness recovery hospital segments. General and administrative expenses were $33.8 million, or 2.4% of net operating revenues, for the three months ended March 31, 2020, compared to $28.7 million, or 2.2% of net operating revenues, for the three months ended March 31, 2019.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 21.3% to $88.6 million for the three months ended March 31, 2020, compared to $73.0 million for the three months ended March 31, 2019. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 17.7% for the three months ended March 31, 2020, compared to 16.0% for the three months ended March 31, 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment were primarily driven by increases in our net revenue per patient day and the acquisition of four hospitals during 2019, as discussed above under “Net Operating Revenues.”
Rehabilitation Hospital Segment. Adjusted EBITDA increased 49.5% to $38.6 million for the three months ended March 31, 2020, compared to $25.8 million for the three months ended March 31, 2019. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the three months ended March 31, 2020, compared to 16.7% for the three months ended March 31, 2019. The increases in our Adjusted EBITDA and Adjusted EBITDA margin primarily occurred as a result of our operating performance in January and February 2020, as compared to the same period in 2019. Adjusted EBITDA increased 72.5% to $27.4 million for January and February 2020, compared to $15.9 million for the same period in 2019. Adjusted EBITDA margin increased to 22.4% for January and February 2020, compared to 16.1% for the same period in 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin are primarily attributable to increases in patient volume and net revenue per patient day at many of our existing hospitals. Additionally, we experienced an increase in Adjusted EBITDA from our hospitals which commenced operations during 2019. Though we experienced increases in Adjusted EBITDA and Adjusted EBITDA margin in March 2020, as compared to the prior year, these increases were offset, in part, by the effects of the COVID-19 pandemic on our operations, as discussed above. For the three months ended March 31, 2019, the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $2.8 million.
Outpatient Rehabilitation Segment. Adjusted EBITDA was $27.1 million for the three months ended March 31, 2020, compared to $29.0 million for the three months ended March 31, 2019. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 10.6% for the three months ended March 31, 2020, compared to 11.7% for the three months ended March 31, 2019. For the three months ended March 31, 2020, the decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by an 11.6% decrease in visits during March 2020, as compared to the same period in 2019. The decline in visits resulted from the effects of the COVID-19 pandemic, as described above. 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 steps to reduce labor costs. Prior to our outpatient rehabilitation clinics becoming affected by the COVID-19 pandemic, our Adjusted EBITDA had increased 33.6% to $23.1 million for January and February 2020, compared to $17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for January and February 2020, compared to 10.7% for the same period in 2019.
Concentra Segment. Adjusted EBITDA was $61.5 million for the three months ended March 31, 2020, compared to $66.3 million for the three months ended March 31, 2019. Our Adjusted EBITDA margin for the Concentra segment was 15.4% for the three months ended March 31, 2020, compared to 16.7% for the three months ended March 31, 2019. For the three months ended March 31, 2020, the decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 12.6% decrease in visits during March 2020, as compared to the same period in 2019. The decline in visits resulted from the effects of the COVID-19 pandemic, as described above. 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 steps to reduce labor costs. Prior to our centers becoming affected by the COVID-19 pandemic, Adjusted EBITDA had increased 11.7% to $45.5 million for January and February 2020, compared to $40.8 million for the same period in 2019. Our Adjusted EBITDA margin increased to 16.6% for January and February 2020, compared to 15.7% for the same period in 2019.
Depreciation and Amortization
Depreciation and amortization expense was $51.8 million for the three months ended March 31, 2020, compared to $52.1 million for the three months ended March 31, 2019.
Income from Operations
For the three months ended March 31, 2020, we had income from operations of $128.7 million, compared to $111.7 million for the three months ended March 31, 2019. The increase in income from operations occurred within our rehabilitation hospital and critical illness recovery hospital segments.
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 ended March 31, 2020, we had equity in earnings of unconsolidated subsidiaries of $2.6 million, compared to $4.4 million for the three months ended March 31, 2019. The decrease in equity in earnings was principally caused by a decline in performance of the healthcare-related businesses in which we own a minority interest.
Gain on Sale of Businesses
We recognized gains of $7.2 million and $6.5 million during the three months ended March 31, 2020 and 2019, respectively. These gains were attributable to the sales of outpatient rehabilitation businesses.
Interest Expense
Interest expense was $46.1 million for the three months ended March 31, 2020, compared to $50.8 million for the three months ended March 31, 2019. The decrease in interest expense was principally due 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 $21.9 million for the three months ended March 31, 2020, which represented an effective tax rate of 23.7%. We recorded income tax expense of $18.5 million for the three months ended March 31, 2019, which represented an effective tax rate of 25.7%. For the three months ended March 31, 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 in Concentra 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 three months ended March 31, 2020.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $17.3 million for the three months ended March 31, 2020, compared to $12.5 million for the three months ended March 31, 2019. The increase was principally due to the improved performance of several of our joint venture rehabilitation hospitals.
Liquidity and Capital Resources
Cash Flows for the Three Months Ended March 31, 2020 and Three Months Ended March 31, 2019
In the following, we discuss cash flows from operating activities, investing activities, and financing activities.
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Three Months Ended March 31,
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2019
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2020
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(in thousands)
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Cash flows provided by operating activities
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$
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41,762
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$
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44,084
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Cash flows used in investing activities
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(82,799
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)
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(44,659
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)
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Cash flows provided by (used in) financing activities
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13,674
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(262,144
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)
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Net decrease in cash and cash equivalents
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(27,363
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)
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(262,719
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)
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Cash and cash equivalents at beginning of period
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175,178
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335,882
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Cash and cash equivalents at end of period
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$
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147,815
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$
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73,163
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Operating activities provided $44.1 million of cash flows for the three months ended March 31, 2020, compared to $41.8 million of cash flows for the three months ended March 31, 2019. Our days sales outstanding was 53 days at March 31, 2020, compared to 51 days at December 31, 2019. Our days sales outstanding was 53 days at March 31, 2019, compared to 51 days at December 31, 2018. Our days sales outstanding will fluctuate based upon variability in our collection cycles. Our days sales outstanding fell within our expected range.
Investing activities used $44.7 million of cash flows for the three months ended March 31, 2020. The principal uses of cash were $39.2 million for purchases of property and equipment and $16.7 million for investments in and acquisitions of businesses. This was offset in part by proceeds received from the sale of assets and businesses of $11.2 million. Investing activities used $82.8 million of cash flows for the three months ended March 31, 2019. The principal uses of cash were $49.1 million for purchases of property and equipment and $33.7 million for investments in and acquisitions of businesses.
Financing activities used $262.1 million of cash flows for the three months ended March 31, 2020. The principal use of cash was $366.2 million for the purchase of additional membership interests of Concentra Group Holdings Parent during the three months ended March 31, 2020, as discussed above under “Other Significant Events.” We also used $39.8 million of cash for the mandatory prepayment of term loans under the Select credit facilities. This was offset in part by net borrowings of $165.0 million under the Select revolving facility (as defined below) during the three months ended March 31, 2020.
Financing activities provided $13.7 million of cash flows for the three months ended March 31, 2019. The principal source of cash was net borrowings of $140.0 million on the Select revolving facility. This was offset in part by $98.8 million and $33.9 million for mandatory prepayments of term loans under the Select credit facilities and Concentra-JPM credit facilities, respectively.
Capital Resources
Working capital. We had net working capital of $154.1 million at March 31, 2020, compared to $298.7 million at December 31, 2019. The decrease in net working capital was principally due to a decrease in cash and cash equivalents as a result of the purchase of additional membership interests of Concentra Group Holdings Parent during the three months ended March 31, 2020, as discussed above under “Other Significant Events.”
Select credit facilities.
In February 2020, Select made a principal prepayment of approximately $39.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.
At March 31, 2020, Select had outstanding borrowings under the Select credit facilities consisting of $2,103.4 million in term loans (excluding unamortized discounts and debt issuance costs of $20.7 million) (the “Select term loan”) and borrowings of $165.0 million (excluding letters of credit) under its revolving facility (the “Select revolving facility”). At March 31, 2020, Select had $245.7 million of availability under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit.
Concentra credit facilities.
At March 31, 2020, Concentra Inc. did not have any term loan or revolving facility borrowings under its first lien credit agreement dated June 1, 2015 (together with any borrowings thereunder, the “Concentra-JPM credit facilities”). At March 31, 2020, Concentra Inc. had $85.7 million of availability under its revolving facility (the “Concentra-JPM revolving facility”) after giving effect to $14.3 million of outstanding letters of credit. Select and Holdings are not obligors with respect to Concentra Inc.’s debt under the Concentra-JPM credit facilities. At March 31, 2020, Concentra Inc. had outstanding borrowings under its intercompany loan agreement with Select of $1,199.8 million.
Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2020, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. During the three months ended March 31, 2020, Holdings repurchased 491,559 shares at a cost of approximately $8.7 million, an average cost per share of $17.68, which includes transaction costs. Since the inception of the program through March 31, 2020, Holdings has repurchased 38,580,908 shares at a cost of approximately $356.6 million, or $9.24 per share, which includes transaction costs.
Liquidity. The COVID-19 pandemic adversely affected our operations during the three months ended March 31, 2020. The duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments that cannot be accurately predicted at this time; however, we believe our internally generated cash flows, borrowing capacity under the Select and Concentra-JPM credit facilities, and other measures to enhance our liquidity position that we have taken, as described below, will allow us to finance our operations over the next twelve months. As of March 31, 2020, we had cash and cash equivalents of $73.2 million, availability of $245.7 million under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit, and availability of $85.7 million under the Concentra-JPM revolving facility after giving effect to $14.3 million of outstanding letters of credit.
In response to the COVID-19 pandemic, the CARES Act, which is described further under “Regulatory Changes,” was enacted on March 27, 2020. As part of the CARES Act, $100.0 billion was authorized in relief funds to hospitals and other healthcare providers to prevent, prepare, and respond to the COVID-19 pandemic. These funds are used to reimburse providers for lost revenue attributable to the COVID-19 pandemic and to provide support for related healthcare expenses. Further, these relief funds ensure uninsured patients are receiving testing and treatment for COVID-19. We received approximately $93.7 million of payments as part of this relief in April 2020. These are payments, rather than loans, and will not need to be repaid. Additionally, the CARES Act allows for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program during the COVID-19 pandemic. Under this program, healthcare providers may receive advanced payments for future Medicare services provided. In order to improve our liquidity position, we applied for and received approval from CMS in April 2020 to receive advanced payments and, through April 30, 2020, we have received $316.1 million in payments. These advanced payments will be recouped by CMS from future Medicare claims billed by us, beginning 121 days after receipt of the advanced payment. After 120 days, any new Medicare claim we bill will reduce the amount owed to CMS. We are required to repay any advanced payments not recouped by CMS within 210 days from the date we originally received the payment.
In addition to applying for and receiving payments under the Medicare Accelerated and Advance Payments Program to enhance our liquidity in the short term, we have taken preemptive measures to reduce operating costs and expenses. Beginning in March and continuing into April 2020, we began reducing labor costs through employee furloughs, salary and wage reductions for certain employees, reducing the hours worked by part time employees, and limiting discretionary spending on capital expenditures. In April 2020, we began deferring payment on our share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020, and negotiating with our landlords to receive temporary rent deferrals on certain of our facilities which have temporarily closed.
Additionally, the CARES Act included a technical correction to allow for bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and provided for an increase in the amounts allowed for interest expense deductions for tax years beginning January 1, 2019. As a result of these provisions, we expect to reduce our estimated tax payments during 2020 by approximately $20.0 million.
At March 31, 2020, we were in compliance with each of our financial covenants. As of March 31, 2020, Select’s leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters), which is required to be maintained at less than 7.00 to 1.00 under the terms of the Select revolving facility, was 4.76 to 1.00. As of March 31, 2020, we do not anticipate events or circumstances which would preclude us from complying with our financial covenants in the future or prevent us from making interest and principal payments when due. Select is not required to make further principal payments on the Select term loan until September 30, 2023 and its senior notes are due August 15, 2026. Concentra is not required to make further principal payments on its intercompany term loan with Select until its maturity on June 1, 2022. The Select and Concentra-JPM revolving credit facilities mature on March 6, 2024 and March 1, 2022, respectively. Our ability to comply with our financial covenants and obligations outlined within our debt agreements can be affected by various risks and uncertainties. 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 ended December 31, 2019 for further discussion.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers. We also intend to open new outpatient rehabilitation clinics and occupational health centers in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic acquisitions.
Recent Accounting Pronouncements
Refer to Note 2 – Accounting Policies of the notes to our condensed consolidated financial statements included herein for information regarding recent accounting pronouncements.