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 18
--------------------------------------------------------------------------------
Table of Contents
• other factors discussed from time to time in our filings with the
including factors discussed under the heading "Risk Factors" in our Annual
Report on Form 10-K for the year ended
factors may be updated from time to time in our periodic filings with the
Form 10-Q.
Except as required by applicable law, including the securities laws ofthe United States and the rules and regulations of theSEC , 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 inthe United States . As ofMarch 31, 2020 , we had operations in 47 states and theDistrict 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 theDistrict of Columbia . Concentra, a joint venture subsidiary, operated 523 occupational health centers in 41 states as ofMarch 31, 2020 . Concentra also provides contract services at employer worksites andDepartment 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 endedMarch 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 itsDepartment of Veterans Affairs CBOCs . During the quarter endedJune 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. 19
--------------------------------------------------------------------------------
Table of Contents
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 endedMarch 31, 2020 , including our (i) net operating revenues and Adjusted EBITDA for the two months endedFebruary 29, 2020 andFebruary 28, 2019 , (ii) net operating revenues and Adjusted EBITDA for the one month endedMarch 31, 2020 and 2019, (iii) net operating revenues and Adjusted EBITDA for the three months endedMarch 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 endedDecember 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 andCongress 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 followedCDC 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. 20
--------------------------------------------------------------------------------
Table of Contents
Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS andCongress 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 followedCDC 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 endedMarch 31, 2020 , we defined the pre-COVID-19 outbreak period as the two months endedFebruary 29, 2020 , and the post-COVID-19 outbreak period as the one month endedMarch 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 endedMarch 31, 2020 . The performance measures and operating statistics presented for the two months endedFebruary 29, 2020 and the one month endedMarch 31, 2020 are, when combined, equal to the performance measures and operating statistics presented for the full quarter endedMarch 31, 2020 . The same is true for the prior year comparative data. 21
--------------------------------------------------------------------------------
Table of Contents 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 78,308Total 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/MTotal 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
_______________________________________________________________________________
N/M - Not meaningful.
(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 endedMarch 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 endedMarch 31, 2019 and 2020. 22
--------------------------------------------------------------------------------
Table of Contents
The COVID-19 pandemic and its adverse effects have become more prevalent throughoutApril 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 OnJanuary 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 . OnFebruary 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 endedMarch 31, 2020 , our net operating revenues increased 6.8% to$1,414.6 million , compared to$1,324.6 million for the three months endedMarch 31, 2019 . Income from operations increased 15.2% to$128.7 million for the three months endedMarch 31, 2020 , compared to$111.7 million for the three months endedMarch 31, 2019 . Net income increased 32.1% to$70.4 million for the three months endedMarch 31, 2020 , compared to$53.3 million for the three months endedMarch 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 endedMarch 31, 2020 and 2019, respectively. Adjusted EBITDA increased 10.1% to$187.3 million for the three months endedMarch 31, 2020 , compared to$170.1 million for the three months endedMarch 31, 2019 . Our Adjusted EBITDA margin was 13.2% for the three months endedMarch 31, 2020 , compared to 12.8% for the three months endedMarch 31, 2019 . The following tables reconcile our segment performance measures to our consolidated operating results: Three Months Ended March 31, 2020 Critical Illness Rehabilitation Outpatient Concentra Other Total Recovery Hospital Hospital Rehabilitation (in thousands) Net operating revenues$ 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 % 23
--------------------------------------------------------------------------------
Table of Contents Three Months Ended March 31, 2019 Critical Illness Rehabilitation Outpatient Concentra Other Total Recovery Hospital Hospital Rehabilitation (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 endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 : Critical Illness Rehabilitation Outpatient Concentra Other Total Recovery Hospital Rehabilitation Hospital 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 %
_______________________________________________________________________________
N/M - Not meaningful.
(1) For the three months ended
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. 24
--------------------------------------------------------------------------------
Table of Contents
Regulatory Changes Our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 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 theDepartment 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 endedMarch 31, 2020 , and 26% of our net operating revenues for the year endedDecember 31, 2019 . Federal Health Care Program Changes in Response to the COVID-19 Pandemic OnJanuary 31, 2020 , the Secretary ofHealth 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 inthe United States . OnMarch 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 andChildren'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
the quality reporting programs.
vii.
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. 25
--------------------------------------------------------------------------------
Table of Contents
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 onMarch 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 onMarch 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
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 (
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
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. OnAugust 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 afterOctober 1, 2018 throughSeptember 30, 2019 ). Certain errors in the final rule were corrected in a document publishedOctober 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 . 26
--------------------------------------------------------------------------------
Table of Contents
Fiscal Year 2020. OnAugust 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 afterOctober 1, 2019 throughSeptember 30, 2020 ). Certain errors in the final rule were corrected in a document publishedOctober 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. OnAugust 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 afterOctober 1, 2018 throughSeptember 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. OnAugust 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 afterOctober 1, 2019 throughSeptember 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. OnApril 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 afterOctober 1, 2020 throughSeptember 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 MeritBased 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%. 27
--------------------------------------------------------------------------------
Table of Contents
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 afterJanuary 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 onJanuary 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, theCQ 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. 28
--------------------------------------------------------------------------------
Table of Contents
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 29
--------------------------------------------------------------------------------
Table of Contents 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. 30
--------------------------------------------------------------------------------
Table of Contents
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
3.1 %
3.8 %
_______________________________________________________________________________
(1) Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating costs. 31
--------------------------------------------------------------------------------
Table of Contents
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 13.0Total 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/MTotal 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) 155,110 199,903Total 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 2,948Total 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 endedMarch 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.
N/M - Not meaningful. 32
--------------------------------------------------------------------------------
Table of Contents
Three Months EndedMarch 31, 2020 , Compared to Three Months EndedMarch 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 endedMarch 31, 2020 . Net Operating Revenues Our net operating revenues increased 6.8% to$1,414.6 million for the three months endedMarch 31, 2020 , compared to$1,324.6 million for the three months endedMarch 31, 2019 . Critical Illness Recovery Hospital Segment. Net operating revenues increased 9.4% to$500.5 million for the three months endedMarch 31, 2020 , compared to$457.5 million for the three months endedMarch 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 endedMarch 31, 2020 , compared to 258,129 days for the three months endedMarch 31, 2019 . The increase in patient days was primarily attributable to the acquisition of three hospitals inApril 2019 and one hospital inOctober 2019 . Net revenue per patient day increased 4.5% to$1,839 for the three months endedMarch 31, 2020 , compared to$1,759 for the three months endedMarch 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 endedMarch 31, 2020 , compared to$154.6 million for the three months endedMarch 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 endedMarch 31, 2020 . Our patient days increased 14.2% to 94,568 days for the three months endedMarch 31, 2020 , compared to 82,816 days for the three months endedMarch 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 endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , 11,048 of those days occurred in January andFebruary 2020 . During the three months endedMarch 31, 2020 , certain of our rehabilitation hospitals, particularly those operating in areas more significantly impacted by the spread of COVID-19, such asNew Jersey , experienced lower patient volume. Further, our rehabilitation hospitals experienced overall lower patient volume duringMarch 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 endedMarch 31, 2020 , compared to$1,633 for the three months endedMarch 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 endedMarch 31, 2020 , compared to$246.9 million for the three months endedMarch 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 endedMarch 31, 2020 , compared to 2,054,483 visits for the three months endedMarch 31, 2019 . We experienced an increase of 150,615 visits during January andFebruary 2020 , as compared to the same period in 2019. DuringMarch 2020 , our outpatient rehabilitation clinics experienced a decrease of 82,433 visits, as compared toMarch 2019 . The decline in volume duringMarch 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 ofMarch 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 endedMarch 31, 2020 , compared to$103 for the three months endedMarch 31, 2019 . 33
--------------------------------------------------------------------------------
Table of Contents
Concentra Segment. Net operating revenues increased 0.6% to$398.5 million for the three months endedMarch 31, 2020 , compared to$396.3 million for the three months endedMarch 31, 2019 . Visits in our centers were 2,877,395 for the three months endedMarch 31, 2020 , compared to 2,911,607 visits for the three months endedMarch 31, 2019 . We experienced an increase of 93,147 visits during January andFebruary 2020 , as compared to the same period in 2019. DuringMarch 2020 , our Concentra centers experienced a decrease of 127,359 visits, as compared toMarch 2019 . InMarch 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 ofMarch 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 endedMarch 31, 2020 , compared to$124 for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2020 , compared to$1,160.8 million , or 87.7% of net operating revenues, for the three months endedMarch 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 endedMarch 31, 2020 , compared to$1,132.1 million , or 85.5% of net operating revenues, for the three months endedMarch 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 endedMarch 31, 2020 , compared to$28.7 million , or 2.2% of net operating revenues, for the three months endedMarch 31, 2019 . Adjusted EBITDA Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 21.3% to$88.6 million for the three months endedMarch 31, 2020 , compared to$73.0 million for the three months endedMarch 31, 2019 . Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 17.7% for the three months endedMarch 31, 2020 , compared to 16.0% for the three months endedMarch 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 endedMarch 31, 2020 , compared to$25.8 million for the three months endedMarch 31, 2019 . Our Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the three months endedMarch 31, 2020 , compared to 16.7% for the three months endedMarch 31, 2019 . The increases in our Adjusted EBITDA and Adjusted EBITDA margin primarily occurred as a result of our operating performance in January andFebruary 2020 , as compared to the same period in 2019. Adjusted EBITDA increased 72.5% to$27.4 million for January andFebruary 2020 , compared to$15.9 million for the same period in 2019. Adjusted EBITDA margin increased to 22.4% for January andFebruary 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 inMarch 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 endedMarch 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 endedMarch 31, 2020 , compared to$29.0 million for the three months endedMarch 31, 2019 . Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 10.6% for the three months endedMarch 31, 2020 , compared to 11.7% for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , the decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by an 11.6% decrease in visits duringMarch 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 andFebruary 2020 , compared to$17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for January andFebruary 2020 , compared to 10.7% for the same period in 2019. 34
--------------------------------------------------------------------------------
Table of Contents
Concentra Segment. Adjusted EBITDA was$61.5 million for the three months endedMarch 31, 2020 , compared to$66.3 million for the three months endedMarch 31, 2019 . Our Adjusted EBITDA margin for the Concentra segment was 15.4% for the three months endedMarch 31, 2020 , compared to 16.7% for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , the decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 12.6% decrease in visits duringMarch 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 andFebruary 2020 , compared to$40.8 million for the same period in 2019. Our Adjusted EBITDA margin increased to 16.6% for January andFebruary 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 endedMarch 31, 2020 , compared to$52.1 million for the three months endedMarch 31, 2019 . Income from Operations For the three months endedMarch 31, 2020 , we had income from operations of$128.7 million , compared to$111.7 million for the three months endedMarch 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 endedMarch 31, 2020 , we had equity in earnings of unconsolidated subsidiaries of$2.6 million , compared to$4.4 million for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2020 , compared to$50.8 million for the three months endedMarch 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 endedMarch 31, 2020 , which represented an effective tax rate of 23.7%. We recorded income tax expense of$18.5 million for the three months endedMarch 31, 2019 , which represented an effective tax rate of 25.7%. For the three months endedMarch 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 endedMarch 31, 2020 . Net Income Attributable to Non-Controlling Interests Net income attributable to non-controlling interests was$17.3 million for the three months endedMarch 31, 2020 , compared to$12.5 million for the three months endedMarch 31, 2019 . The increase was principally due to the improved performance of several of our joint venture rehabilitation hospitals. 35
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source