Q3 2024 Earnings Summary
- The outpatient rehab division is expected to improve margins significantly due to the implementation of a new, internally developed technology aimed at enhancing clinical efficiency, which management describes as a "game changer" for next year.
- The company is effectively deleveraging, targeting a net leverage ratio of 3x, enhancing financial flexibility and stability, which could lead to better financing terms and allow for opportunistic capital allocation.
- Management anticipates further reductions in Salaries, Wages, and Benefits (SWB) as a percentage of revenue, driven by successful commercial contract negotiations achieving mid-range single-digit increases and expected volume increases, potentially improving profitability.
- Closure of underperforming facilities: Select Medical closed a long-term acute care (LTAC) hospital in Ohio due to underperformance and consolidation, indicating potential challenges in certain markets.
- Limited LTAC expansion plans: The company plans minimal capital deployment in the LTAC segment, with only one new LTAC project of 26 additional beds planned through 2026, which may limit growth in this segment.
- Reliance on uncertain Medicare Advantage improvements: The company's strategy to reduce Salaries, Wages, and Benefits (SWB) as a percentage of revenue depends on hoped-for improvements in Medicare Advantage preauthorization admission approval rates, which may not materialize as expected.
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Outpatient Rehabilitation Division Efficiency and Technology Innovation | Previously discussed in Q2 2024 with emphasis on clinical efficiency improvements and new scheduling modules ( ), and in Q4 2023 highlighting clinical efficiencies (with no mention of technology innovation); Q1 2024 did not mention technology aspects ( , ) | Q3 2024 placed strong emphasis on clinical efficiency alongside a significant, “game changer” technology release planned at the end of 2024 to drive margin improvements ( , ) | Increased emphasis on technology innovation driving operational efficiency |
LTAC Operational Challenges and Limited Expansion Strategy | Earlier quarters (Q1 2024, Q2 2024, and Q4 2023) noted challenges such as high-cost outlier thresholds and operational hurdles while underscoring a cautious, limited expansion approach ( , , , , ) | Q3 2024 continued to acknowledge tougher operational challenges due to evolving thresholds and highlighted a more capital‐efficient “hospital within a hospital” model tied to a limited expansion strategy ( , ) | Consistent cautious outlook with steady focus on operational efficiency and conservative expansion |
Critical Illness Recovery Hospital Performance and Labor Cost Optimization | Q1 2024 showcased strong revenue and EBITDA growth with robust labor cost optimization ( , ); Q2 2024 and Q4 2023 discussed margin improvements and reductions in labor-related costs ( , , , , ) | Q3 2024 reported a 3% revenue and 9% EBITDA increase, with further improvements in labor cost metrics such as reduced agency costs and decreased orientation hours ( , ) | Steady performance improvements paired with rigorous cost-management over time |
Inpatient Rehabilitation and Concentra Strategic Growth | Across Q1 2024 and Q2 2024, discussions focused on substantial revenue/EBITDA growth and an active development pipeline, while Q4 2023 introduced strategic moves including plans for a Concentra spin‐off and new partnerships ( , , , , ) | Q3 2024 continued to report double-digit growth in inpatient rehabilitation and detailed Concentra’s IPO, financing arrangements, and strategic capital initiatives ( , ) | Accelerated strategic growth with heightened focus on capital deployment and Concentra’s evolving role |
Financial Leverage Management and Interest Rate Sensitivity | Q1 2024 and Q2 2024 provided detailed leverage ratios and debt composition, while Q4 2023 noted concerns about rising interest expense with planned increases due to expiring caps ( , , , ) | Q3 2024 highlighted significant debt reduction (a $498 million reduction and consolidated leverage near 3.38x) but also noted increased interest expense from rate adjustments ( , ) | Transition toward lower leverage while maintaining caution amid rising interest costs |
Medicare Reimbursement Dynamics and Regulatory Impacts | Q1 2024 mentioned adverse impacts from Medicare fee schedule cuts ( ), Q2 2024 discussed the final rules for IRF and LTAC with rate increases ( ), and Q4 2023 noted headwinds from Medicare cuts along with expectations for improved revenue per visit ( , , ) | Q3 2024 reported improved Medicare Advantage preauthorization and noted modest improvements in rates along with slight increases in net revenue per visit for outpatient rehab ( , , ) | Mixed regulatory impacts with emerging signs of improvement in reimbursement dynamics |
Reliance on Non-Recurring Earnings and Supplemental Revenue Risks | Q1 2024 contained a mention of a one-time $4 million supplemental payment, implying non-recurring earnings ( ); other quarters did not address this topic | There is no mention of the topic in Q3 2024 | Topic has been dropped, indicating diminished relevance |
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Capital Deployment & Leverage
Q: What's your capital deployment strategy post spin?
A: Management intends to maintain leverage at 3x. With a robust development pipeline, they plan to allocate capital opportunistically, focusing on development projects while balancing deleveraging through free cash flow and potential stock buybacks. Maintaining a 3x leverage ratio is a priority to preserve flexibility. -
SWB as Percentage of Revenue Outlook
Q: Can SWB as % of revenue improve further?
A: They believe SWB as a percentage of revenue can decrease next year. This year, they expect it to end around 57% , compared to 54-55% in the first quarter. Improvement will be driven by mid-range single-digit increases in commercial contract rates and volume increases, especially from improved Medicare Advantage admissions due to CMS mandates. -
Outpatient Rehab Margin Improvement
Q: What's the outlook for outpatient rehab margins?
A: Significant margin improvement is anticipated next year in the outpatient rehab segment. This will be achieved through enhanced clinical efficiency via internally developed technology, allowing therapists to see more patients per day. A major system release at year-end is expected to be a "game changer". -
LTAC Development Plans and Strategy
Q: What's your approach to LTAC development?
A: The company focuses on LTAC growth through partnerships and hospital-within-a-hospital models, which are less capital intensive. They plan to be judicious with capital deployment in this area, preferring opportunities that require less capital, though some de novos will still occur. -
IRF Rates Update
Q: Are Medicare IRF base rates around 3%?
A: Yes, management confirms that the Medicare Inpatient Rehabilitation Facility rates are in the 3% range , aligning with the final rule's net market basket adjustment. -
LTAC Occupancy Trends and Outlier Thresholds
Q: How are LTAC occupancy trends and outlier thresholds affecting you?
A: Occupancy rates were higher than the prior year's same quarter, which pleased management. The seasonal decline is normal for the third quarter and not related to staffing issues. Operators have effectively managed high-cost outliers, with minimal impact observed. -
Closure of an LTAC Hospital
Q: Was there a reduction in LTAC hospitals?
A: Yes, they closed one LTAC hospital in Ohio due to consolidation. -
Contract Labor Costs in Outpatient Rehab
Q: Are you seeing higher contract labor costs?
A: They've seen a sequential decline in agency staffing costs, which has helped margins. Additionally, technology improvements are expected to enhance clinical efficiency in the future.
Research analysts covering SELECT MEDICAL HOLDINGS.