Select Medical Holdings Corporation (SEM) Q1 2016 Earnings Report, Transcript and Summary

Good morning and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the First Quarter 2016 Results and the Company's business outlook. Speaking today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we'd like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including without limitation, statements regarding operating results, growth opportunities, and other statements that refer to Select Medical'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'll turn the conference call over to Mr. Robert Ortenzio. You have the floor sir.

Thanks operator. Good morning everyone. Thanks for joining us for Select Medical’s first quarter earnings conference call for 2016. For our prepared remarks I'll provide some overall highlights for the company and our operating divisions, and then ask our Chief Financial Officer, Marty Jackson, to provide some additional financial details, before we open the call up for questions. As most of you are aware on March 4, Select completed the acquisition of Physiotherapy, a national provider of outpatient physical rehabilitation services with 574 locations throughout the US. Beginning March 4, Physiotherapy’s results are consolidated and reported with Select and are included in our outpatient rehab segment. Additionally, on March 31, we sold our contract therapy business, which was also part of the outpatient rehabilitation segment. Our outpatient rehab segment results for the quarter include our contract therapy business for the entire quarter. Net revenue for the first quarter increased 36.8% to $1.09 billion compared to $795.3 million in the same quarter last year. During the quarter, we generated approximately 55% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab hospitals; 22% from our outpatient rehabilitation segment, which includes our outpatient rehabilitation clinics and contract therapy services; and 23% from our Concentra segment. Net revenues in our specialty hospitals remain constant in the first quarter at $559 million compared to $598.8 million in the same quarter last year. Our net revenue per patient day increased to $1632 per day in the first quarter compared to $1575 per patient day same quarter last year and was primarily driven by an increase in our Medicare revenue per patient day. Patient days decreased to 338,000 days, compared to 352,000 days in the same quarter last year, primarily due to the hospitals that we have closed. I think it’s important to point out that not including our closed hospitals the volume drop would have been approximately 4,800 days or 1.3% volume drop from the prior years. In addition, without the closed hospitals admissions would have been down by 200 or 1.4% reduction. Our occupancy was 72% in the first quarter compared to 73% in the same quarter last year. Net revenue on our outpatient rehab segment for the first quarter increased 21.2% to $238.1 million compared to $196.4 million in the same quarter last year. The increase is attributable to our clinic based business and a result of visits from our newly acquired Physiotherapy clinics, as well as an increase in visits in our existing clinics. Net revenue in our outpatient clinic based increased 25.1% to $195.7 million compared to the same quarter last year. For our owned clinics, patient visits increased 27.5% to over 1.576 million visits compared to the same quarter last year. Our operators continue doing a great job growing visits, not including Physiotherapy; our operators grew visits on a same quarter year-over-year basis 8.5%, growing 1.236 million visits to 1.342 million visits. Our net revenue per visit was $103 in both the first quarter of this year and last year. Contract therapy contributed $42.4 million of net revenue in the first quarter. Net revenue in our Concentra segment for the first quarter was $250.9 million, including $217.6 million from the medical centers. For the centers, patient visits were over 1.84 million and net revenue per visit was $118 in the first quarter. Concentra also generated $33.3 million in net revenue from the on-site clinics, the community based outpatient clinics and other services in the first quarter. Overall adjusted EBITDA for the first quarter was $128.6 million compared to $98.9 million in the same quarter last year, with overall adjusted EBITDA margins at 11.8% for the first quarter compared to 12.4% margin in the same quarter last year. Specialty hospital adjusted EBITDA for the first quarter was $86.8 million, compared to $96.5 million in the same quarter last year. Adjusted EBITDA margin for specialty hospital segment was 14.5% compared to 16.1% in the same quarter last year. Decline in adjusted EBITDA in our specialty hospitals was due to a decline in adjusted EBITDA on our long-term acute care hospitals. This was primarily attributable to our closed hospitals, as well as an increase in labor costs associated with increased patient acuity and higher wage rate for clinicians we experienced due to patient criteria and nursing shortage. We also incur adjusted EBITDA startup losses of $3.8 million in our inpatient rehab hospitals. Outpatient rehabilitation adjusted EBITDA for the first quarter increased 30.5% to $28.9 million compared to $22.1 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 12.1% for the first quarter compared to 11.3% in the same quarter last year. For the outpatient clinic portion of our business, adjusted EBITDA increased $27.3 million in the first quarter compared to $19.8 million in the same quarter last year. The increase resulted from our newly acquired clinics, as well as growth in our existing clinics. Contract therapy contributed $1.6 million in adjusted EBITDA for the first quarter. Concentra adjusted EBITDA for the first quarter was $34.2 million and adjusted EBITDA margin was 13.6%. Our reported earnings per fully diluted share were $0.42 in the first quarter of this year compared to $0.27 in the same quarter last year. We had several one-time events in the quarter including a gain on the sale of a contract therapy business, a loss on impairment of an equity investment, Physiotherapy acquisition costs, and a loss on early retirement of debt. Excluding these one-time events and the related tax effects, earnings per fully diluted share would have been $0.23 in the first quarter of this year. I’d like to provide you with a few other updates since our last earnings call in February. As I mentioned in my lead-in, we closed on the acquisition of Physiotherapy Associates on March 4th, Physio has 554 outpatient clinics and 27 orthotics and prosthetics clinics in the US, and was the second largest outpatient rehab provider behind Select. We’re excited to have completed the acquisition and we’re in process of integrating Physio operations with Select, solidifying our position as the largest provider of outpatient rehab services in the United States. We also sold our contract therapy business on March 31 for approximately $65 million. Contract therapy results for the first quarter are included in our consolidated operating results. On an LTM basis, contract therapy contributed approximately $6.7 million of adjusted EBITDA and had a margin of 4.6%. As I mentioned in our last call, we previously announced agreement with Kindred Healthcare to swap certain LTAC hospitals. Under the terms of the agreement, Select will transfer five LTACs with a combined 233 beds to Kindred in exchange for four LTAC with a combined 287 beds, plus $800,000 in cash. The swap transaction is expected to close sometime in the second or third quarter. Earlier this week, we opened our new 60 bed TriHealth Rehabilitation hospital in Cincinnati, Ohio in partnership with TriHealth. We're also close to opening our new 138 bed California rehab institute in Los Angeles; California in partnership with UCLA in Cedars-Sinai, which we expect to expect open sometime in the second or third quarter. I also want to provide an update on our LTAC hospitals transitioning to patient criteria. Through March, 53 of our 108 owned-LTACs were subject to the new LTAC patient criteria rules. Our reported compliance level for all patients at all of our LTACs at the end of March was 89.3%; this is up from the 86% we disclosed as of the end of January. The 53 hospital subject to criteria had an average daily census reduction of 3.9% or just under 60 total average daily census, which is just over one patient per hospital in the period post implementation of criteria compared to the three-month period prior to entering criteria. We have an additional 19 hospitals transitioning in the second quarter and the remaining 36 hospitals in the third quarter. We’re pleased with the results our LTAC operators have delivered, and we're ahead of our expectations. On April 18, CMS issued the proposed LTAC rules for 2017, which effects cost reporting period and discharges occurring on or after October 1, 2016. The proposed rule includes the standard payment update, as well as some proposed changes to rebasing the LTAC market basket, as wells as changes to 25% rule. We are evaluating the propose rule and will be providing comments to CMS during the comment period. In addition on April 25, CMS issued the proposed rehab rules for fiscal 2017. The proposed rules include the standard payment update language, as well as some proposed changes related to the I RF Quality Reporting Program. Again, we're evaluating the proposed rule and we will be providing comments to CMS. At this point, I’ll turn it over to Marty Jackson to cover some additional financial highlights for the quarter before we open the call up for questions.

Thanks Bob, good morning everyone. For the first quarter our operating expenses, which include our cost of services, general and administrative expense, and bad debt expense were $966.9 million, this compares to $698.7 million in the same quarter last year. The increase in operating expenses is primarily due to the addition of Concentra and Physiotherapy. As a percentage of our net revenue, operating expenses for the first quarter increased to 88.8%, this compares to 87.8% in the same quarter last year. The increase as a percent of net revenue is 120 basis point increase in cost of services, which was partially offset by 10 basis point reduction in G&A and a 10 basis points reduction in bad debt. Cost of services increased to $922.3 million for the first quarter compared to $664.4 million in the same quarter last year. As a percent of net revenue, cost of services increased 120 basis points to 84.7% in the first quarter, this compares to 83.5% in the same quarter last year. Cost of services in our Concentra segment was $213.2 million in the first quarter or 85% of revenue. The higher relative cost of services in our Concentra segment, as well as an increase in the relative cost of services in our specialty hospital was the primary reason for the increase in our cost of services as a percent of net revenue during the first quarter. As Bob mentioned, we had an increase in labor cost in our LTAC associated with the increased patient acuity and the higher wage rate for clinicians due to patient criteria. In addition to the aforementioned labor costs, we have elected to maintain certain staffing levels, as many of our specialty hospitals in criteria even though we've experienced a decline in volume. This is due to the current nursing storage we have been experiencing. Given our belief that we will be successful in replacing reduced volumes, this strategy will allow us to not incur the additional costs recruiting and training new nurses, as well as avoiding the hiring of agency nurses. G&A expense was $28.3 million in the first quarter, which as a percent of net revenue was 2.6%, this compares to $21.7 million or 2.7% of net revenue for the same quarter last year. G&A expense in the first quarter included $3.2 million of Physiotherapy acquisition expenses, excluding the physiotherapy acquisition costs G&A would have been 2.3% in the first quarter. Bad debt as a percentage of net revenue was 1.5% in the first quarter, this compares to 1.6% in the same quarter last year. Total adjusted EBITDA was $128.6 million and adjusted EBITDA margin was 11.8% for the first quarter, this compares to an adjusted EBITDA of $98.9 million and an adjusted EBITDA margin of 12.4% in the same quarter last year. Depreciation and amortization expense was $34.5 million in the first quarter, this compares to $17.3 million in the same quarter last year. The increase resulted primarily from an incremental $15.4 million of depreciation and amortization expense in our Concentra segment. We generated $4.7 million in equity and earnings of unconsolidated subsidiaries during the first quarter, this compares to $2.6 million in the same quarter last year. These increases are mainly the result of the contributions from our specialty hospital joint venture partnerships. During the quarter as Bob mentioned, we had several one-time gains and losses. We sold our contract therapy business for approximately $65 million and recognized a gain on the sale of $30.4 million. Additionally, we recognized an impairment loss of $5.3 million on an equity investment in which we are minority owner. This loss was triggered by the planned sale of the company by its controlling owners. Both of these items were reflecting in our income statement as non-operating items. In connection with our financing activity in the quarter, we repaid our Series D term loans that were scheduled to mature in December of 2016, and recognized a loss on early retirement of debt of $800,000 during the quarter. Interest expense was $38.8 million in the first quarter, this compares to $21.4 million in the same quarter last year. The increase in interest expense in the first quarter is a result of additional borrowings related to the financing of the Concentra acquisition in 2015. The company recorded income tax expense of $17 million in the first quarter. The effective tax rate for the quarter was 22.2%, compared to an effective tax rate of 38.3% in the first quarter last year. The lower effective tax rate during the first quarter of this year is primarily related to the sale of our contract therapy business, our tax basis in the business exceeded our selling price, and as a result we had no tax expense resulted from the sale. Net income attributable to Select Medical Holdings was $54.8 million in the first quarter and fully diluted earnings per share were $0.42, this compares to fully diluted earnings per share of $0.27 in the same quarter last year. Excluding the gain on the sale of the contract therapy business, loss on impairments of the equity investment, Physiotherapy acquisition cost and a loss on early retirement of debt and the related tax effects, earnings per share on a fully diluted basis would have been $0.23 in the first quarter of this year. At the end of the quarter, we had $2.78 billion of debt outstanding and $85.4 million of cash on the balance sheet, which includes $61.5 million of cash at Select and $23.9 million of cash at Concentra. Our debt balances at the end of the quarter included $1,152.4 million in Select term loans, $315 million in Select revolving loans, $710 million in the Select 6.38% senior notes, $646.6 million in Concentra term loans. In addition, we had $62.8 million in total unamortized discounted premium and debt issuance costs to reduce the balance sheet debt liability, with the balance of $20.5 million consisting of other miscellaneous debt. Operating activities provided $111.2 million of cash flow in the first quarter. Our days outstanding or DSO was 52 days at March 31, 2016, this compares to 53 days at December 31, 2015 and 56 days at March 31, 2015. Investing activities used $397.7 million of cash during the first quarter. The use of cash was related to $412.9 million in acquisition related payments, primarily related to the acquisition of Physiotherapy and $46.8 million in purchases of property and equipment. This was offset in part by the $62.6 million in net proceeds from the sale of business during the quarter. Financing activities provided $357.5 million of cash in the first quarter, the provision of cash was primarily the result of Select's financing the Physiotherapy acquisition and refinancing of certain term loans. Net activity on Select and Concentra credit facilities was $388.2 million in net proceeds, offset in part by the repayment of bank overdrafts of $28.6 million and $4.4 million in repurchases of distributions to non-controlling interests. Additionally, in our earnings press release we provided revised financial guidance for the calendar year 2016, this includes net revenue in the range of $4.15 billion to $4.35 billion, adjusted EBITDA in the range of $500 million to $540 million, and fully diluted earnings per share to be in the range of $0.87 to $1.06. The update to our guidance for 2016 includes changes in the full-year expectations resulting from the acquisition of Physiotherapy, the sale of our contract therapy business and the financing activity completed in the first quarter. This concludes our prepared remarks. And at this time, we’d like to turn it back over to the operator to open up the call for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Frank Morgan from RBC Capital Markets. Your line is open.

Good morning. It looks like a really good success so far on criteria implementations, but when I do the math here, it looks like about 46% of the beds actually converted versus 54% of the remaining, based on the facilities that I’m guessing these are slightly the ones that are remaining or slightly bigger in terms of number of bed size. And my question is, how do you think that affects the ability to avoid census loss, if you have any color on the impact of census loss relative to hospitals of bigger bed counts?

I think the response to that is, when you take a portfolio at the portfolio, the portfolio really isn’t that much different. You're right, there is a fewer additional beds, but at the end of the day there really isn’t that much of a difference.

Got you. And with regard to the holding, your staffing levels on the buildings where you did see census drop, I hope I’m thinking about this right, but relative to, as you bring those back up, as you feel those, I'm assuming the incremental margins on that volume are pretty south, do you have any numbers you may want to share with us there?

You’re absolutely right Frank, I mean when you take a look at the decision to not really flex, and the other issue is that when you think about the variable expense on salaries, wages and benefits, it really isn’t linear, it’s a step function. So the way that we staff is we will staff RNs for four to five patients per nurse based on the acuity of the patient. And as Bob had mentioned, we're basically down ADC of a per hospital per day basis about 1.1 patients. So in essence what we expect to see is when their buying comes back, you'll see no incremental cost on the labor side. So, all of that incremental revenue from the increased buy-in should basically with the exceptional of pharma and supply costs drop right to the EBITDA line.

Okay, great. And then one final question, I’ll hop back in the queue, just as you talk to – the people in the field talk to discharge planners at hospital, some of the case managers, did you get a sense that the velocity at which that are kind of getting used to this criteria, is that increasing and do we think that the chances of getting that quicker and larger capture rate, what do you think of the odds of that happening on a quicker basis going forward, and I’ll hop. Thank you.

Well, I think Frank, this is Bob, you know, we think that as time goes on those facilities that have gone into criteria will naturally continue to get better. So we certainly don't think that the success that we’ve had with backfilling criteria patients is as good as we can do. I mean, as I mentioned in my remarks, we’re very pleased with the results so far and they are above our expectations. We think for the hospitals that have already gone in, they can certainly do better just with the passage of time. As to how we work with referral sources that obviously will change market to market, but we try to make this as seamless to our referral partners as we can. And basically what you see is our hospitals are evolving into being very high acuity specialty hospitals. So you know that there are certain patients, primarily the wound care patients that are going to probably have to stay in the acute care hospital a bit longer and then find an alternate, poste acute discharge destination, but for the high acuity patients that’s how we’re setting ourselves up to be those centers backfilling in the markets. And I’d have to say that we think that that strategy has been successful and we think that the results so far on the 53 that have gone on, and that have gone into criteria pretty much demonstrate that. I will say, as we’ve said in each quarter that the results can always be a little choppy, and you know we use, we try to get the data that we can to give investors a sense of where we are, and so we’d say it’s a little over one patient per hospitals reduction, but obviously you know we have some hospitals that are doing better under criteria, and we have some that are lagging behind, so it’s just a function of each market and continuing to work and improve in each of those markets. I think the other thing that makes it difficult to do a really – to really see how we’ve performed is that I think that we – I think other providers are seeing that we are entering one of the most of the most severe nursing shortages in the last six or seven years, and we do have bed holes at some of our hospitals where we are not taking admissions because we simply don't have the qualified staff to take higher patient volumes. So we think when it comes to criteria, we may be even doing a little better than the data suggests.

Frank, I think as a follow up to Bob’s comments, I think the other thing to remember and we’ve talked about this is that the approached – the multi-pronged approach that we’re taking, we think is having some success here. As you recall that multi-pronged approach is having the clinical liaison that are on the ground at each of our LTACs, the amount of time that they spend with the case managers, the discharge planners, we have our chief medical officer and his staff out talking to the discharging physicians from the short term acute care hospitals, and we have our finance people spending a bunch of time with the finance people at the short-term acute care hospitals. So I think over time, it really is an educational process, and over time we think it will become more and more successful.

Okay. Thank you.

Thank you. Our next question comes from the line of Chris Rigg from Susquehanna. Your line is open.

Good morning. Sort of a follow-up to just to some of the comments you were making there with regard to the phase and the criteria, is there any meaningful difference between ADC, you’ve had some facilities that have been phased-in for more than six months at this point versus the ones that are – have just phased in the last month or so. So when we think of, you know a 3.9% decline in census is that most heavily skewed towards the facilities that have just lift to the new reimbursement model or is it still pretty uniform across all 53 facilities?

Yeah, Chris it’s a great question. It’s interesting, if you take a look at, if you take a look at those facilities that have been in criteria from October through February, and you take a look at the reduction in ADC pre versus post criteria, that’s about 2.6%. And Bob had said that were 3.9% in total, that's really a function of what's going on with the last group of March hospitals. We anticipate that that will improve just like it’s done historically. So yes to your question, is that – as the hospitals come on board and as they mature we see improvement.

Got you. And then, when we think about sort of the real wage pressure, not the sort of dynamic around the churn, I guess how much pressure does that actually put on the SW&B line, like the wage increases, just trying to – some way to quantify or think about what's really going on in sort of nurse spaces?

Yeah, the larger part of the cost that you saw in the first quarter is really associated with the – what I refer to as the step function, as well as our election not to flex nursing, as opposed to the wage increases.

And then just, one final one here, more conceptually. You sort of have more facilities, at least equal to – more facilities in criteria now, than you’re going to phase in, in the second quarter. So should we think about this sort of being the transition period where hopefully we’ll start to see some margin improvement in the hospital division, just because the benefits that you’re going to see from the higher revenue per admission in the 53 facilities versus the potential churn in the 19 facilities in the quarter, is that the wrong way to think about it?

Sure, Chris. No, I think it’s the right way to think about it, the real question for us, as Bob had mentioned, there is a nursing shortage right now and we're going to monitor that, and not be quick to flex down because as again we anticipate we will get that volume back. And as you recall in the third quarter, we talked about the educational process, the educational cost that we incurred, and from our perspective as you well know, as all of the investors know is that when you flex down, the nurses can’t get their hours, they’re going to go someplace else, which means when the volume comes back that would really require us to recruit, retrain and the incremental cost of doing that it just doesn't make a lot of sense.

Got it. Thanks a lot.

Thank you. Our next question comes from the line of Gary Lieberman from Wells Fargo. Your line is open.

Good morning, thanks for taking the question. I guess as additional LTACs have to do with the criteria, are you seeing anything in the markets where that's happening, in terms of competition for the compliant patients, is it getting greater, and do you think that there is any potential there, as we sort of get into the third quarter when everybody has to deal with it, that may – might occur in some of your markets?

I think there are a lot, there is a lot of things going on in the market because the lack, just out of happenstance was really, what we call the early adopters of criteria. I think some of the activity in the markets will be a little delayed until many of the other providers go into criteria. But yes, I would tell you that we do see a lot of activity in the markets. CMS has already come out and projected that LTAC spending will be down by 7%. I think, my estimation is that it could go down faster and further than that in the out years. So, yeah, and I’m really not talking about the larger companies in the space, really talking about some of the smaller providers, the one offs, the non-profits. I think we see signs of some stress against their operations, particularly those that have a lot, much greater percentage of patients that are currently noncompliant. The other thing, which we have going on it’s a little hard to predict, is to what extent providers – LTAC providers will be successful in adopting a site neutral strategy, and that’s something that we just can’t quantify because – and frankly, we have no experience in it because in all 53 of our hospitals we are 100% compliant patient, so we really have no experience with how that’s going to work. And I do know that many of the other providers that have a larger non-compliant population are going to be moving toward a site neutral strategy. So it will be I think interesting to see how that plays out, and I think potentially can put more stress on certain providers in markets that perhaps don’t have the clinical expertise, don't have the programs to deal with the pulmonary and the high acuity post ICU patients.

Great. And then you mentioned the statistic being down about the one day average, on average at each of the hospitals, is there anything significant about that one day, is that kind of like, you know is it tougher to get over that full line of getting back to parity with where you were prior year or that just – it just happened to kind of be fall out there?

I’ll let Marty, take a shot at that as well, but I want to emphasize that we kind of give that one, just to kind of give investors a sense of the magnitude of the shortfall that we'd experienced in terms of getting to where it were, but you got to remember, a lot of that is artificial and at its worse could potentially be misleading because you have – you don't know how the facilities were doing prior to going in, it’s three months. It’s not seasonally adjusted, for example, and also it’s certainly not an average of one across 25 or 50 of those hospitals, obviously you could have 10 at one hos, but all-in you could have three other hospitals that are over by three each on their ADC. So I don’t want to, I think you take it in the totality of how we're doing on at 53, but there is some variation across the 53 hospitals, but I think – I’ll reiterate, our judgment is that we are doing better than I anticipated quicker, than we anticipated that we have replaced the noncompliant patients with compliant patients.

Gary, as Bob mentioned, the 1.1 patient or ADC reduction is really an average, and I mean there is a span, one of the charts that we put out, we show how many are above pre-criteria and how many are below pre-criteria. On those that are above, there is 21 of our 53 hospitals are above, and of that 21, 12 of that 21 hospitals have an increase of zero to two days, eight have an increase of 3 to 5 days, and one has an increase of six to ten days. On those that are –32 that are a little bit below, zero to two of those hospitals – zero to two ADC reduction, there is 16 of the 32, three to five ADC reduction, there is ten of those. So the majority are in that range right there and then we have six that are above six. So that kind of gives you a range, but for the most part we’re, as Bob mentioned, we’re very pleased with where the operators are and we think we’re going to continue to be – we’ll see some continued success here.

Okay great. That is very helpful. Thanks a lot.

Thank you. Our next question comes from the line of AJ Rice from UBS. Your line is open.

Sure. We continue, obviously to beat the course of criteria, but maybe just asking a little differently, in your discussions with the hospital referral sources, I’m assuming that that net number of what's happening with the census is you’re not taking some patients you may have taken before, but you're trying to marketing it additional ones. Is the hospital, the acute care hospital finding other outlets for those patients, is that creating any back and forth between you and your referral sources as they have to do that or maybe you're still mostly taking those patients, just some flavor on that if possible?

Well, they absolutely are happen to find other discharge destinations for the patients that we historically took that we’re not taking, so yes, you can absolutely assume that for every patient that we took it’s a not criteria compliant patient is going to have to find another discharge destination. Now, that can manifest itself on a couple of ways AJ, the patient may stay in the acute care hospital a number of days longer and then the discharge to a skilled nursing facility. Arguably it could go to a competitor in the market that’s still taking that patient, but one of the questions that we got routinely before criteria, when we announced that our strategy would be to take compliant patients only was would our referral sources really push back hard against us for not taking patients that we historically did that would be otherwise called site neutral patient. And I mean, I can’t say universally, but I would say generally the results would suggest that that haven’t been the case. I think the result and our general experience has been that we have just become a more specialized hospital that’s taking the higher acuity patients, which you can see in the average revenue per day, the acuity is going up and we’d become a specialty provider to take those higher acuity patients. We'd like to think that as we become, as we own that scale and become just more specialized, that our acute care referral sources will come to rely on us more heavily to take that high acuity population and they will adapt to have those other noncompliant patients go to other post-acute care providers. So as with most things, whether its modifications in the 75% rule for rehab or changes in stiff regulation, you know the provider community is constantly adapting to where patients in the post-acute are being driven, and that’s usually Medicare patients and it’s usually driven by Medicare payment policy. So it isn’t something that is absolutely unique or first time experience out there in the post-acute market. I hope that responses the question.

Definitely. And then maybe just switching gears on Concentra, nice rebound in margins there. Some of that may be seasonality, but there's also the ramp up in synergies, can you just sort of tell us where you're at with respect to synergies, is Concentra sort of on plan for you, is it ahead of plan, what would you say?

We think Concentra is on plan right now AJ. First quarter was a little bit better than we anticipated. There is seasonality in the occupational medicine business, but it’s really the down quarters are typically the fourth and the first quarter, the second and the third quarters are typically the best. And with regards to synergies, we still have some more synergies to achieve that – always think we’re very happy and pleased with what was going on with Concentra right now.

Okay, great. Thanks a lot.

Thank you. Our next question comes from the line of Kevin Fischbeck from Bank of America. Your line is open.

Okay, great. Thanks. Just wanted to confirm the – when we were looking at the guidance, it looks to me like you’re basically reaffirming kind of the core numbers and just simply updated the guidance for the asset sales and for the acquisitions, is that right, the underlying case for the core business?

That’s correct Kevin, if you take a look at both the – on revenue, EBITDA and EPS line, that’s what it reflects. On the EBIDTA, it’s a net differential of about $30 million. What we’ve done is we've assumed that for full year, Physio would be a $37 million and we needed to back out the EBITDA associated with contract there will be a seven. And then on the EPS line, it’s a net $0.15 and the way that we arrived at that was taking a look at the $0.19 gain on the contract therapy sale, plus approximately $0.03 for the Physio transaction, less about $0.06 associated with the refi, less about $0.01 for the contract therapy sale. So, netting out to all of that it’s about $0.15 and that’s what you see in the guidance.

Okay perfect. And I guess you mentioned the proposed rule 25 days stay, looks like you’re trying to put that back in place, if that was to go back in place what would the impact of that be?

Well, as per the rule – the 25% rule is again going to go back into place in July of this year. The proposed rule had some proposal about different calculation for the 25% rule. We’ll be commenting on that with CMS in the proposed rule, but we typically don't give any impact related to proposed rules and we’re probably way to the rule is final and the other thing is 25% rule is kind of a moving target, and particularly what changed probably for us as hospitals go into criteria.

Well I guess, the 25% rule impact your ability to deal with criteria, if you’re mostly [indiscernible] it wasn't clear whether there would be some difficulty in getting enough compliant patients if you have to deal with 25% rule as well.

Well it depends on the market. We've been fairly consistent that the old 25% rule that CMS proposed back in 2004 has really been overcome by events, particularly criteria, I mean the 25% rule was put into place back in 2004 and in 2007, and in every two or three years after that the Congress has stepped in to keep 25% rule at 50%. The original thinking behind the 25% rule was a couple fold for CMS, it was the absence of criteria really a way potentially to slow the growth and some concern over LTAC margins going back to all the way to 2004. If you look at today, you have stringent criteria by CMS to some of the admission 7% reduction in Medicare spend for LTACs. LTACs have not been growing at all, primarily because of the moratorium, but also now because of criteria and the Medicare margins for LTACs are probably the lowest in the post-acute. So we’re hoping that Congress steps in and keeps the 25% rule at 50%. It will have an impact on the company’s business if it goes to 25%, particularly when you think about criteria and getting patients for Select, primarily from intensive care unit. So those bed tend to be more concentrated in bigger acute care hospital. So we’re pleased to support congressional legislation that’s been introduced in both of the house and the Senate to keep the 25% rule at 50%, as they have done consistently since 2007. And so, we'll see how that plays out, but we’re not quantifying, but an acknowledgment to guess I would have an impact, but we’re hoping that Congress will step in and keep it at 50% as they have since 2007.

Okay. And then, the nursing commentary about the nursing shortage, is that – are you seeing that differential across your business lines, is it harder to get skilled nursing, it impacts more of the IRFs and the LTACs or is it broader that’s hitting Concentra as well there?

I’ll let Marty comment, we obviously can comment on skilled nursing. I would – on skilled nursing facilities, I would say that for us it’s primarily in the LTACs for us because as we converted to criteria we need a higher trained nurses, greater certification, and frankly it’s a tough environment. So I think we’re seeing it more there by – we believe that nursing shortage exist across all segments including general acute care hospitals, but Marty…

With regards to your question on Concentra, we don’t really see the same type of issues in Concentra that we see on our specialty hospitals.

Okay. And then last question, you mentioned that EBITDA for the hospital business you mentioned the higher costs on the labor, I think you covered that well. I think you guys mentioned the hospital closure, can you breakout how much of it was the hospital closure versus the nursing pressure.

Yeah, there was a $10 million reduction in specialty hospitals on a same quarter year-over-year basis, $3.8 million of that had to do with the – on the inpatient rehab facilities, that was $3.8 million startup costs, there was about $1.3 million associated with the closed hospitals, and then the balance had to do with the labor that we talked about.

Then you had incurred losses last year, right? So if the $3.8 million that’s higher losses year-over-year or that was just a loss?

$3.8 million in total this year versus – I think it was $5 million, little bit north of $5 million last year.

Okay. So loss was actually like a tailwind to that number.

What I am doing is giving you an idea that the $10 million component. So it would have been a little bit of a tailwind.

So that’s a tailwind, the headwind…

The labor when you walk it through, it’s just the labor cost. But I want to make sure that people are aware that on the inpatient rehab side there is $3.8 million worth of labor expense – or $3.8 million with the startup cost.

Okay. Alright perfect. Thank you.

[Operator Instructions] And that’s all the questions that we have in the queue at this time, so I would like to turn the call back over to management for closing remarks.

No closing remarks operator. Thanks for joining us, and we look forward to updating you next quarter.