Good morning and thank you for joining us today for Select Medical Holdings Corporations earnings conference call to discuss the first quarter 2012 results and the company's business outlook. Speaking today are the company's CEO, Robert Ortenzio; and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter highlights and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select's plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference call over to Robert Ortenzio.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical Holdings' First Quarter Earnings Conference Call for 2012. As is our custom, for our prepared remarks, I'll provide some overall highlights for the company and our operating divisions. And then I'll ask Marty Jackson to provide some additional financial details before we open the call for questions. Earnings per fully diluted share increased 31.8% to $0.29 in the first quarter compared to $0.22 in the same quarter last year. Net revenue for the first quarter increased 7.3% to $744 million compared to the same quarter last year. During the quarter, we generate approximately 74% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab hospitals. And 26% from our outpatient rehabilitation segment, which includes both our outpatient clinics and our contract services. Net revenue on our specialty hospitals for the first quarter increased 6.4% to $553 million compared to the same quarter last year. The increase was driven primarily by increases in Medicare patient volumes and revenue from contracted labor services provided to the Baylor joint venture during the quarter. Our patient days in the first quarter increased 2.7% to 343,021 days, and overall occupancy rates were 73% in the first quarter compared to 72% in the same quarter last year. Specialty hospital net revenue per patient day was up slightly, $1,525 in the first quarter compared to $1,514 per patient day in the same quarter last year. The increase in net revenue per patient day was driven primarily by an increase in our non-Medicare net revenue per patient day. During the first quarter, approximately 85% of our inpatient revenue came from our LTACs, and 15% from our inpatient rehabilitation hospitals. Net revenue on our outpatient rehab segment for…

Thanks, Bob. For the first quarter of our operating -- for the first quarter, our operating expenses, which include our cost of service, general and administrative costs and bad debt expense, increased 8.1% to $636.2 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter were 85.5% compared to 84.9% in the same quarter last year. Cost of services increased 9.7% to $611.6 million for the first quarter. As a percent of net revenue, cost of services was 82.2% for the first quarter compared to 80.4% in the same quarter last year. The primary driver behind the increase in cost of services was an increase in our labor cost. We experienced a relative increase in labor cost associated with contracted labor services provided to the Baylor JV, which had a 40 basis point impact on our cost of services in the quarter. In addition, our relative labor cost in our specialty hospitals, specifically our LTACs, were higher as we did not adequately adjust our staffing level to correspond with the lower acuity patient population we treated during the quarter. This is compared to the same quarter last year. Our overall case mix index, which is how we measure acuity in our LTAC hospitals, was 1.185 during the first quarter compared to the case mix index of 1.207 in the first quarter last year. G&A expense was $14.2 million in the first quarter, which as a percent of net revenue was 1.9% compared to $16.6 million, or $2.4 million of revenue for the same quarter last year. The primary reason for the decline in G&A is relative to a gain on the sale of assets in this quarter. Excluding this gain, G&A would've been 2.3% of net revenue in the first…

[Operator Instructions] Your first question comes from the line of Kevin Fischbeck with Bank of America.

Okay. I was wondering if you could provide any color on the subpoenas that were also announced last night. Any color on exactly what is being looked at and what you think the impact might be?

Yes, Kevin. Yes, I really can't add much more other than what's in the disclosure. As you can see from the disclosure, it's pretty recent and we're cooperating and we get these from time to time. And I really can't say much other than what's in the disclosure and that is really, it contains all facts that we know at this point. Obviously, anytime you get these, your first suspicion is that they are part of a qui tam, we don't know that for sure. So all you can do is just respond to the information and then wait until you get more color on it and at this point, we really don't.

Okay. And you were right, you're going to get some questions on the LTAC proposed rule. Does your guidance include the impact of that in Q4?

It does. It does.

Okay. And the commentary from CMS about putting in patient assessment criteria. Do you have any sense of what that might look like and how similar that might be to the bill that the industry has provided? And I guess, do you have any sense of whether CMS looks at this as replacing the 75% rule -- oh, sorry, 25% rule, and therefore, they've categorized that as maybe cost administering $170 million. Did they feel like they have to come up with something that saves a similar amount of money or how do you think they're looking at that?

Kevin, let me make sure I understand. Is part of your question wrapping in the budget neutrality adjustment that's spread over 3 years?

No, I think, I mean, I'm under the impression that if CMS was to go forward with its view, absent a bill from the industry, that they would put the budget neutrality adjustment in, but also look to put patients as a criteria in on top of that. Correct me if you view it differently, but I'm some kind of assuming the budget neutrality happens and the year delay and the 25% rule is more, in my view, to give CMS time to replace the 25% rule, is something more appropriate around patients assessment criteria. I'm just trying to figure out where CMS is headed on that? Are they going to come up with something that's in line with what the industry was proposing in their bill or do you think it will be more restrictive, less restrictive? Do you think they have some sort of idea about savings when they comp with that?

Okay. Yes, I understand your question. And your question is right on the mark. I mean, it is exactly the question. There is some narrative in the rule after they go through the payment changes and the extension of the 25% rule that is subject to interpretation. I mean, I think what they say exactly is that they could soon be in a position to propose a revision to their payment policies that would make the 25% rule unnecessary. So that is open to some interpretation. And I think one interpretation is that, perhaps, they are looking at patient facility criteria, maybe similar to or different than the industry or the Roberts-Nelson bill or what the AHA has been talking about. And that would be one interpretation. I think another scenario maybe that they view this, the LTAC, as part of their discussed realignment of the post-acute care sector that we've seen some commentary around. It's been referred to as bundled payment, there's a site neutral proposal out there. So I think that it is the $100 question of exactly which direction they're heading, and I don't know at this time. I don't know -- I can't say that I know exactly which direction they're heading on that. But I think the narrative that was in the proposed rule is pretty constructive because, I think that they showed a willingness to put off the 25% rule, which is crude and onerous and the budget neutrality adjustment to be spread over 3 years and some indication that they are looking at some policy options on the LTACs. But that's as far as I would go in terms of interpreting it. I don't want to be overly optimistic or pessimistic. I think the rule that we got on its face is good but there's obviously still a lot of work to do.

Okay. Now, that's helpful. And then last question here, you mentioned a couple times in the commentary around the higher contracted services cost to the Baylor joint venture. How do we think about that expense? Is that an expense that's going to be a run-rate or is that something that is higher right now but you expect to get more leverage on over time?

Kevin, that's a very good question. We think it's really going to be on a run-rate basis. And actually, with the 2 global hospitals that we acquired, it's probably going to be a little bit higher than that.

And next question comes from the line of Gary Lieberman with Wells Fargo.

Maybe just a follow-up on the LTAC rule, the stated increase in the proposed rule, calculated at 1.9% increase for the industry. Have you guys had a chance to take a look at how the rule would impact Select specifically?

Sorry, say that again, Gary? The --

In the proposed LTAC, in the proposed rule, the stated increase that CMS calculated for the industry, I believe, was 1.9%. Can you guys comment, if you think you would receive a similar increase or it would be different for you?

Yes, I think, Gary, remember, with this proposed rule, there's a couple of different things going on here. There's the basket increase, there is the deduct associated with the efficiency improvement, there is the Obamacare deduct, and that's really applicable for October through December. And then starting in January, you have the deduct associated with DNA and then you've got the re-waiting for a short stay outlier, and then the labor adjustment that's made. I'm assuming you're saying after all of those, what is the overall impact to us?

Yes, that's what the question is. I mean, I'm not certain -- it wasn't clear exactly what the timing for when CMS calculated all the impacts would take place. I assume they were assuming that the budget neutrality wouldn't happen until January 1 and with that, under those assumptions, what they said was it would was increased 1.9%. So, yes, I'm just asking if you guys have had a chance to take a look at what the overall change would be with reimbursement under the rule?

Yes, we have had an opportunity to take a look at that and it's well below 1% for us. And a lot of that has to do with just the DRGs that we have and the re-waiting.

From an overall -- I think that's from an overall standpoint. I think also, maybe part of your question is this, sometimes the headline number that CMS gives on what they estimate the percentage increase or decrease, it differs greatly from what some companies say is the impact to them. I don't think that we dispute necessarily the impact that CMS is saying in their headline, but there's so many components of it that when it comes -- when you wash it all out, I think our view of the total impact is as Marty stated.

Okay. No, that's why I'm asking the question.

Yes, I mean, Gary, just to give you a historical background, last year, they talked about -- I believe they talked about a 1.8% increase for the industry. And I think what we had talked about was 72 basis point increase for us.

Right. Okay. That's helpful. And then maybe moving to the improvement in the equity income. You talked about the Baylor JV. Can you talk about that in more detail? Are those operational improvements that you've seen there that has caused the profit to increase or what was that from?

Well, if you recall, we did the Baylor JV at the -- on April 1 of last year. So on a year-over-year same quarter comparison, there is no comparison. So in the second quarter, we did see some startup of the JV expenses in it, but yes, I mean, the JV with Baylor is actually performing nicely. We think there still continues to be some room for operating improvement and we're very pleased with it.

Okay. And then maybe the final question would be just, you mentioned the decrease in the case mix index year-over-year, is that sort of within what you would expect from normal variability or is there something else you think that's at work there?

Yes, we believe that the reduction in the case mix index is really driven by reduced pulmonary patients. And if you take a look at what the acute care hospitals said, that they had a significant reduction in that patient population. So ours is just a follow-on to that.

And I think that if you get behind that, I think it's, in part, can be attributed to the extraordinary mild winter that we had. So you see fewer flus and consequently, fewer pulmonary patients. And it wouldn't take a lot of that for it to reduce the case mix index because those are by far, our highest acuity patients.

Your next question comes from the line of Todd Corsair with UBS.

Quick question on the 25% rules. The -- I guess I was just wondering, what share of your hospitals have -- of the LTACs have, cost reporting periods that fall in the third quarter?

Yes, there is 12 that have cost reporting periods during the time period you're talking about.

Okay. And the way you guys interpret the rule, did you see that there's -- just given the timing of implementation and everything, that there is some -- that possible with cost report periods starting there in that quarter, might be subject to the 25% rule one way or the other?

Yes, we believe that way the rule is written, the proposal is written that those -- that class of hospitals in the industry is disadvantaged by subject to the rule.

But for you guys, it's just that small minority.

It's 12 hospitals, so you can assume that within those 12, we may have some that would have an impact and maybe others that would not. But if the impact was material, we would've called that out separately. So you can assume that we took that into account when Marty reaffirmed guidance.

Great. That's helpful. And since we got this historically, I might as well ask it now. Any change in your thinking with regard to those floating rate notes on the balance sheet?

Todd, we like those floating rate notes.

I like them too.

Your next question comes from the line of Walter Branson with Regiment Capital.

Just a couple things. So you had revenue growth associated with contracted services to the Baylor JV, as well as labor costs associated with that. Is providing those services to the JV a profitable business or is it just cost based or what?

Yes, Walter. That is strictly a pass-through. So there is no profitability into that pass-through at all. So obviously, it's going to have a negative impact on your EBITDA margins.

Right, but it didn't have any negative impact on EBITDA, is that correct?

That's correct.

Correct.

Okay. And then in terms of the balance of the year, taking into account your stock repurchase program, would expect net debt to be going up or going down?

I would anticipate, with the terrific cash flow we have, net debt to go down.

Okay. And then just finally, just to kind of follow-up on what Todd said, I think you implied it, but I want to be clear, if you were to do a refinancing at this point, you would anticipate not taking out the floaters, is that correct.

Yes, and we like the floaters very much.

With no further questions in the queue, I'll turn it back over to management for closing remarks.

Thank you, operator. Thanks, everybody, for joining us for the call, and we'll look forward to updating you with the results of our second quarter later in the year. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.