Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Second Quarter 2013 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 the 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. Over to you.

Good morning, everyone, and thank you for joining us for Select Medical's Second Quarter Earnings Conference Call for 2013. For our prepared remarks, I'll provide some overall highlights for the company and our operating divisions, and then I'll ask our Chief Financial Officer, Marty Jackson, to provide some additional financial details and then we'll open the call up for questions. Our reported earnings per fully diluted share were $0.20 in the second quarter compared to $0.31 in the same quarter last year. Our earnings per share in the second quarter of this year included a nonrecurring loss on early retirement of debt. Excluding this loss and its related tax effect, adjusted earnings per share was $0.27 for the second quarter. Net revenue for the second quarter was $756.7 million compared to $750.2 million in the same quarter last year. During the quarter, we generated 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 rehab segment, which includes both our outpatient clinics and contract services. Net revenue in our specialty hospitals for the second quarter increased slightly to $559.4 million compared to $557.1 million in the same quarter last year. This growth resulted primarily from increases in patient volume, offset by a mandatory 2% reduction in our Medicare payments due to sequestration cuts that became effective on April 1. This reduction had a $9.1 million impact to our specialty hospital revenues in the second quarter and was the principal reason for the decline in our net revenue per patient day, which was 1,532 in the second quarter compared to 1,554 per patient day in the same quarter last year. Our patient days increased 1.7% to over 341,000 days in the second quarter compared to…

Thanks, Bob. For the second quarter, our operating expenses, which include our cost of service, general and administrative costs and bad debt expense increased 1.8% to $652.5 million, which compares to the same quarter last year. As a percent of our net revenue, operating expenses for the quarter was 86.2% compared to 85.5% in the same quarter last year. Cost of services increased 2.1% to $625.7 million for the second quarter compared to the same quarter last year. As a percent of net revenue, cost of services was 82.7% for the second quarter, which compares to 81.7% in the same quarter last year. The primary reason for the 100 basis point increase in our cost of services was the mandatory Medicare sequestration and MPPR Reductions, which were not -- which we were not able to offset with the corresponding reduction in operating cost. G&A expense was $17.9 million in the second quarter, which as a percent of our net revenue was 2.3%. This compares to $18.6 million or 2.5% of revenue for the same quarter last year. Bad debt as a percent of net revenue was 1.2% for the second quarter. This compares to 1.3% for the same quarter last year. As Bob mentioned, total adjusted EBITDA was $106 million for the second quarter and adjusted EBITDA margins were 14%. This compares to an adjusted EBITDA of $110.3 million and 14.7% adjusted EBITDA margins in the same quarter last year. The primary reason for the decline in the adjusted EBITDA and the margins were the mandatory Medicare sequestration and MPPR Reductions, as we have previously discussed. Depreciation and amortization expense was $15.9 million in the second quarter and compared to depreciation and amortization expense of $15.4 million in the same quarter last year. We did incur a loss on early…

[Operator Instructions] We have our first question from the line of Frank Morgan of RBC Capital Markets.

I believe you made some earlier comments in previous calls about the ultimate impact somewhere in the $5 million to $10 million range. I'm just curious, is that still your latest estimate on the kind of full phase-in that you would probably see in 2015? Or are there any other steps that you can take, mitigation steps to reduce or any other things you're doing to maybe reduce that?

Frank, this is Bob. Well, now that the 25 Percent Rule is really a reality, I think what you can expect is we're going to continue to kind of study it pretty carefully over the balance of this year and take some steps. Well, it's likely that we will quantify the impact when we come out with guidance for next year. So I'm a little hesitant to try to hang a number on what it would be for next year, a definitive number on it for what it would be for this year. I mean we still have a number -- a bunch of time between now and the end of the year. And as you remarked and as we commented, the impact for this year is not great and it doesn't fully phase until '15. So we will do some work on that and probably quantify it with a bit more specificity when we come out with guidance for next year.

Okay. And how many of your hospitals do you think will actually be impacted by it based on their fiscal years or their cost reporting years in 2014? Would it be 1/2 of your hospitals or 1/4 of your hospitals or do you have any just general idea? Or how little, Bob? [indiscernible]

Yes, Frank. If you take a look at -- as you know, it occurs based on year end -- the hospital cost report. And if you take a look at each quarter -- what I'll do is I'll provide you with each quarter as opposed to each month. But in Q4, we have 17 hospitals that are impacted. In Q1 of 2014 it would be 37. In Q2 of '14, it would be 20. In Q3 of '14, it would be 34. So that gives you the breakout of the hospitals. Now within each of those quarters, some hit in the first month of that quarter and some will hit in the second and third quarter. So it will vary.

I understand that. Okay. And then maybe on the -- overall on the rehab side with that rule out, you referenced the -- some of the changes taking away some of the codes out of the presumptive. Is that much of a headwind for you or is that you think you can adjust to fairly quickly? How should we think about that on the IRF side?

Frank, we're going to focus that a little closer. But I don't think you should think of that as a game changer or a lot of headwinds for us to particularly what the year and our number of rehab hospitals and where we're placed in our market share and the task we look at. So we have a little bit more work to do on that, but I would not look that to be a significant headwind.

The next question comes from the line of Kevin Fischbeck of Bank of America.

Just maybe following up on the regulation. I guess, any thoughts about the patient assessment criteria and where CMS is kind of leading around that versus what the industry has been lobbying for? I think I read somewhere in the reg that one analysis that they did said that only 31% of industry admissions would fit the criteria that they seem to be honing in on. I just want to get your sense about how that seems to be shaping up.

Yes, Kevin, it's really pretty tough to figure out how it's shaping up because everybody has kind of weighed in with some policy ideas. You had a lot of information or some kind of policy ideas that came out of MedPAC. You had some narrative that was -- came out of CMS rule. You have the Roberts-Nelson Bill that's out there. And then you have some more work that's being done by Ways and Means instead of Finance. So there's a lot of different crosscurrents on the discussion. We try to follow them all pretty closely and obviously, there's some policy statements that, to your CMS or MedPAC, some are of interest and some are of concern for us. But we're also maybe sensing an opportunity here. I mean we've been trying to push for the patient facility criteria for some time and it may actually look like we're going to get an opportunity to get something done. In terms of what the impact would be to the industry and to Select in particular, we have a fairly high acuity patient base and I've said this before that I would certainly be willing to accept some loss of patient volume in exchange for some long-term clarity about where the role of the LTACs fit. There is some consistency going through. And I think when I look at some of the information being put out by CMS on the 5 types of patients that would be presumptively qualify for LTAC, and we're encouraged very much by that. On the flip side of that, there's some discussion about the requirement of an ICU stay in a general acute care hospital as a prerequisite for an LTAC stay. It gives it's a bit more of concern because that has a tendency to be…

That's actually very helpful commentary. And I guess just going to the guidance, just want to clarify because I guess the first time you provided guidance or I guess the last time you provided guidance, I assume it did not include the acquisitions or the 3 facilities that you mentioned before. And now it does. What is the net impact of the [indiscernible] ones you bought were probably additive, but maybe this JV in Ohio maybe has startup losses associated with this. I just wanted to see how those things impacted the guidance.

Well, I'll let Marty address that specifically. But let me say this, of the 3 facilities that were either -- 2 acquired and 1 was signed as a joint venture, 2 of the 3 are startups. We acquired the interest in the one in Scottsdale, right as it was beginning -- it was opening its doors. So there's certainly some startup losses associated with that one. And the same thing with the deal in Columbus, which we like very much. I think they are going to be strong deals and the deal with the -- the joint venture with OhioHealth, that's also a startup. We took our first patient August 1. So as you know, you have to go through your surveys and your certification process and so forth. So I don't know if Marty has any other comments, but in terms of the accretion of those operations, I just want to point out the 2 are startups. They're going to have some losses.

Yes, Kevin. Yes, there's minimal impact in 2013 associated with those transactions. But you'll see some benefit. You'll see some nice benefit in 2014.

Okay. That's helpful. So the guidance is really kind of apples-to-apples, because there's surpluses wash off the benefits from the San Antonio.

That's correct.

That's a good way to look at it.

Okay, all right. And then I guess maybe this answers the question that I had. I just was trying to bridge from EBITDA down to EPS, and it seemed like there was something going on below the line and it maybe that there's a lot more D&A now, that the Q2 D&A is not the right run rate because of these 3 facilities coming online. Is that the way to think about the rest of the year? Or is there something else going on below the line?

No. I'm not -- it's certainly not anything associated with the 3 facilities. And there's nothing else going on below the bottom line.

All right. So D&A and interest expense in Q2 are good run rates for the rest of the year?

Yes, I think so.

Next question is from the line of A.J. Rice of UBS.

Maybe just following up on a comment about the Ohio joint venture. Does that look similar to the other types of JVs you've done or is there any new wrinkles there? And then maybe stepping back more broadly, a comment on anything you're seeing in terms of the pipeline for joint ventures or acquisitions.

Well, I think the OhioHealth deal is consistent. I mean, they're all a little different. It's consistent with our strategy and it is with a major player. OhioHealth is a very reputable, well-thought of player in -- based in Columbus. They're really throughout central Ohio, so we're pleased to be partnering with them. It is in an existing building. It is a little different in that regard and that helped us really get operational as quickly as we did. The other thing that I think is a little different with the OhioHealth deal is that it's inpatient only at this point, not outpatient. So that would be a bit different. It's also the same, A.J., in that we think that there is going to be pretty good opportunity for growth beyond just the initial 44-bed rehabilitation hospital. So we're really pretty excited about that deal and being with a good partner as we are in Scottsdale, with Scottsdale Health, which we think is similarly a great partner. And Scottsdale Health recently announced that they had a letter of intent to form a statewide system with John C. Lincoln Health Network. So they're growing and we look to be growing as well in Scottsdale. I would also say that we feel good about those 2 deals because we also have LTACs in both of those markets. So in Scottsdale, we have an LTAC HIH inside one of Scottsdale Health hospitals. And in Columbus, we have 3 long-term acute care hospitals that have a pretty good, significant presence in the market. So from those standpoint -- and again, they're all different, but there's some good consistency and it's very consistent with our strategy. The pipeline was the second part of your question. I will tell you that in some prior conference calls, I've said that I've been disappointed about our pace of getting the rehab joint ventures done. We have 2 that have been done now and I feel very good about our pipeline. I think we have some great deals that are teed up. It's always hard to get them across the finish line and I have given up on trying to predict timing for quarters when they'd be signed and closed. But we've got a number of -- we think very exciting deals and a pretty good pipeline. So I'm actually more optimistic today than I've been in the past.

Okay. And then maybe just stepping back a little more broadly. Capital deployment, in general, the priority is there. I know Marty mentioned you didn't buy any stock this quarter. Any thoughts on the buyback relative to spending money on acquisitions and development?

You're right, A.J. I mean, A.J., you've been around us for a long, long time. We are opportunistic when something -- when a good value presents itself, we certainly take advantage of that. We're taking a look at the number of acquisitions currently. We've had the dividend and I think periodically, you'll see us purchasing stock back.

Okay. And then maybe just to ask on an operational quarter, clearly one of the big themes across the sector broadly defined, the provider sector this quarter and the first half has been soft volumes. Obviously, this quarter, you guys sort of buffed that trend when you drilled down on it, is there anything behind that? You actually had pretty good volumes relatively speaking in both the specialty hospital and the outpatient business. Anything to highlight there or talk about there that drove that?

A.J., it's -- you're absolutely right in terms of what's going on throughout the industry. I will say that I'm very pleased with our volumes across the company in the second quarter. I mean, as you know, we were disappointed with the volumes in the first quarter. We talked about what the reasons could be for the soft volumes in the first quarter. And for companies that have operations spread across the entire country, it is very difficult to give -- to give good, hard reasons for why volumes are down or whether they're up. On a month that they're or quarter that they're up, I feel very good about how our operators have maintained their focus on each individual hospitals and pushing the volumes. It's hard for me to see anything that I can really point to that's systemic across health care in general or more broadly, as you put it to say, that are either driving or not driving. I mean, sometimes we track with the general acute care volumes and sometimes we don't. And the second quarter was really strong. But that came on the heels of a first quarter that we were disappointed in. There is seasonal business, particularly seasonality in the LTAC business. And sometimes, it appears as though the season that either didn't start as quickly as you think it would or it tails off quicker. So I can't -- it's really difficult for me to give a lot of color. Although I think we were hitting on all cylinders in the second quarter and we've added some strength to our operational team. I think we did a much better job controlling expenses in the second quarter than we did in the first quarter. So all those, I think, combined for what we consider a pretty good, strong quarter.

Okay. Maybe one last one and I'll slip in. On the equity earnings line or the unconsolidated line, obviously, there's a lot of stuff in there or sounds like there is. Can you just sort of comment on how the Baylor joint venture is going versus -- you referenced, Marty, I think the startup losses. Is that -- are those startup losses associated with investments that you talked about before? I know on that line -- are you continuing to make new investments on that line?

Yes, A.J. The Baylor -- obviously, we've talked about Baylor being in that line before. Baylor has been pretty consistent. So you can assume that in that line, Baylor maintains that consistency. It's really a function of the investments that we have talked about previously and we have talked about those being primarily startup companies that we've invested with. And we're just reflecting the losses associated with those startups in that line.

If you look at -- we talked about before about Nava Health and Haven Behavioral, those are -- both investments, Amplion and our joint venture with Mayo Clinic and those are generating losses. We think they're long-term investments. I feel good about them. But we are absorbing some losses on our percentage of the business there. And I don't think there's any thought on our part that we would pull back from those. We haven't made any new investments in that area that would show up below the line. But we feel pretty good about the ones we're in.

The next question is from the line of Walter Branson of Regiment Capital.

Actually just a follow-up on the last answer. Do you have any use or broad outline of expectations as to when those kind of startup losses would abate?

No. I don't think I'd want to go out on it. I mean, those are not the companies that we control. We have some inputs. I -- that would be difficult and a little presumptuous for me to try to predict of when those startup losses will fall off. I would say that each of the investments, I feel very good about the management and the strategic direction of all of them. But in the nature of the startup and the kind of investments and directions that they go, it will just be too difficult for me to give a prediction.

Okay. And then just one other thing, you indicated some concern about potentially a requirement for an ICU stay in the patient and facility criteria rule. Can you give us any sense as to what proportion of your LTAC payments don't have the prior ICU stay at -- I was under the impression that was closed to all.

No, it's not closed to all. And no, I probably couldn't give you at this point kind of the profile of -- actually the origin of patients. I mean, it's going to become a more important area for us one day that we now have to track exactly where all of our patients origins come from for the 25 Percent Rule and the discussion about an ICU stay is early, it's preliminary. I think it's going to be part of the debate, but I just don't know where that's going and I wouldn't -- I don't feel comfortable giving any data on that from our company or the industry.

And the next question is from the line of Blake Goodner of Bridger.

I was actually following up on the last question, just to get a little more color around this. I mean, it seems to me MedPAC had a little different view on this and even CMS on the LTAC side, where they seem to be going beyond patient criteria and focusing more on perhaps changing the payment system. And they do focus in on the CCI versus non-CCI categorization, where a CCI patient, it -- I think it's actually defined as a patient staying 8 or 9 more days at an ICU, not just 1 day. So -- I mean that's kind of statistic I'd be interested in. How many of your patients are CCI patients? Because the direction MedPAC seems like they're going on in is they want to reduce LTAC payments for the non-CCI patients. So if you could give us a feel for what percent of your patients fall in CCI versus non-CCI, that would be helpful in terms of trying to figure out what the ultimate impact might be.

Yes. So when you refer to CCI patient, you're talking about the chronically critically ill?

Yes.

Well, I mean, that's the issue. I mean, there is no definition for the chronically critically ill. And what you see is a theme going throughout all of these ideas, whether it's MedPAC or CMS or Roberts-Nelson or the committees is they are trying to find some proxy for acuity. I mean, everybody, I think -- there's broad agreement that the chronically critically ill patient is the one that belongs in the LTAC. But really, the issue is how do you define it? And this is what people are struggling with. I mean, Roberts-Nelson attempts to define it through comorbidities. I mean, there are 1/2 a dozen different ways to define it. This idea of an ICU is just another kind of crude instrument to say whether a patient is a measure of acuity. You have to appreciate that even patients that stay in ICUs -- I mean, an ICU patient at UPMC in Pittsburgh is going to be a different than an ICU patient that has an ICU stay in a small, Midwestern city. So you see these variations all across the map, so it's different to quantify. So it's important, I think, for you to understand this is what the policymakers and the industry are struggling with. It's how do you define the chronically critically ill patient and I think that's the debate. And there are going to be some that you can pick categories, you can pick comorbidities, you can put -- you can pick it through MS-DRGs, you can pick it through all -- there's a whole variety of ways that you can do it. And an ICU stay is another one. I would say, I think, a crude measure because there's variation of that across the country. So -- and there's variation about the presence of ICU beds. So I think that's the struggle, that's the exercise, that's the debate. So that's why trying to quantify or putting out a lot of data on what it would be and how many days is, I think, is just -- is not worthwhile at this point. We're obviously, looking at all of those things and trying to insert ourselves in the debate as the industry is -- as the AHA is and others. So I appreciate that this is frustrating for investors. It's frustrating for the companies as well. But it's been since 2007 that at least the industry -- and I know Select has been pushing for patient facility criteria and now the debate is really heating up. And it's going to be tough, but we do welcome it because I do think it gets us to a point where we do get some stability.

And then just one follow-up, which is CMS also suggested they were going to be releasing their contractor report. Do you have any insights or thoughts as to what that report might be discussing or showing or the conclusions from that report?

I do not. Anything that has not been released by CMS, I can assure you, I don't have any insights on what it says before it's released.

Thank you. There are no further questions in the queue. And so I would like to turn the call back over to the management for closing remarks. Thank you.

I have no closing remarks. I want to thank you for being part of the conference call. We look forward to updating you again after the third quarter.

Thank you very much. Ladies and gentlemen, that now concludes the conference call for today. You may now disconnect and thank you very much.