Robert Ortenzio - Executive Chairman and CoFounder Marty Jackson - EVP and CFO.

Frank Morgan - RBC Capital Markets Chris Rigg - Susquehanna Financial Group Gary Lieberman - Wells Fargo Whit Mayo - Robert W. Baird & Co. Kevin Fischbeck - Bank of America A.J. Rice - UBS Financial Services Miles L. Highsmith - RBC Capital Markets.

Good morning and thank you for joining us today for Select Medical Holdings Corporation’s Earnings Conference Call to discuss the Third Quarter 2015 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 highlights 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. Please proceed, sir..

Thank you, operator. Good morning everyone and thanks for joining us for Select Medical’s third quarter earnings conference call for 2015. Prior to discussing the details of the quarter, I’d like to make a few general statements about our Q3 results. So while the results for Q3 were very disappointing, three of our four businesses did well.

Our outpatient rehab clinics continue to grow patient business with over a 5.3% growth on a same period year-over-year basis, and EBITDA growth of 7.7% for the same period of time.

Our inpatient rehab hospitals continue grow nicely, with increase revenue of over 8% on a same year-over-year basis and several new joint venture hospitals, equivalent clinic, and UCIC or signed idea opening in the next two quarters.

Concentra has exceeded our expectations for its first full quarter and was the primary driver of the 34.7% top-line growth for the company. Also we’re very excited about their future with Select.

We also realized a significant return of over $29 million on our investment in NaviHealth a post-acute managed care company, which was sold to Cardinal Health this quarter. We did experienced difficulties with our all LTCH this quarter, which was driven primarily by two issues associated with our move to patient criteria and a bad debt adjustment.

Important point I would like to make is that we consider all three of these issues as non-recurring in nature. I’ll now provide some overall highlights for the company 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.

Net revenue for the third quarter increased $34.7 million to $1.02 billion compared to $758.1 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, 20% from our outpatient rehabilitation segment, which includes both our outpatient rehabilitation clinics and our contract therapy services and 25% from our Concentra segment.

Net revenue in our specialty hospitals for the third quarter increased 1.1% to $562.3 million compared to $556.3 million in the same quarter last year. We generated approximately 81% of our specialty hospital revenue from our long-term acute care hospitals and 19% from our inpatient rehabilitation operations during the quarter.

The growth in net revenue in our specialty hospitals is attributable to 1.9% increase in patient days to over 338,000 patient days compared to 332,000 patient days in the same quarter last year.

Our net revenue per patient day decreased to $1,522 per patient day in the third quarter compared to $1,543 per patient day in the same quarter last year, and was driven by a decrease in our Medicare net revenue per day.

The revenue in our -- the reduction in our Medicare net revenue per patient day was primarily caused by an anticipated change in our year-end cost report dates for our LTCH.

In May of 2015 we received authorization from our largest fiscal intermediary to move a majority of our LTCHs existing year-end cost reporting dates, which span all 12 to a single month cost report year-end date of August 31st.

We received similar approvals from all but one of our other fiscal intermediaries for the remaining LTCHs during the same time period.

Based on the approvals, the change year-end dates, all our hospitals with the exception of hospitals within August 31st or August 31st year-end were require to file a stub or shorten cost report to bring hospitals into alignment of the approved August 31st year-end. Many of these hospitals had average length of stay below 25 days.

As you know from a compliance standpoint LTCHs must have an average length of stay of 25 days or greater for each of our hospital’s cost reporting periods to maintain their LTCH designation. We incorporated changes in our mission process for those hospitals that were below 25 day length of stay.

Calculation by pursuing patients with a much longer expected stays. This had the effect of reducing shorter stay patient volumes and increasing longer stay patient volumes in our fixed cost threshold category, which had the effective reducing our Medicare net revenue per patient day.

Net revenue on our outpatient rehab segment for the third quarter declined to $199.6 million compared to $201.7 million in the same quarter last year. The decrease is related to a reduction in revenue from our contract therapy operations, which was offset by increases in our outpatient rehabilitation clinics.

Net revenue on our outpatient clinic based business increased 6% to $163.5 million compared to the same quarter last year. For our owned clinics patient visits increased 5.4% to over 1.3 million visits compared to the same quarter last year. Our net revenue per visit was $103 in both the third quarter of this year and last year.

Net revenue on our contract therapy business in the third quarter decreased to $36.1 million compared to $47.4 million in the same quarter last year and resulted primarily from a large contract termination due to the sale of health facilities to a company that provided their own therapy services.

Net revenue in our Concentra segment for the third quarter was $259 million. Net revenue generated in the Concentra centers was $225.5 million in the third quarter. For the centers patient visits were over $1.9 million and net revenue per visit was $114 in the third quarter.

Concentra also generated $33.5 million in net revenue from its onsite clinics and community based outpatient clinics in the quarter. Overall adjusted EBITDA for the third quarter was $84.5 million compared to 86.8 million in the same quarter last year.

With overall adjusted EBITDA margin at 8.3% for the quarter compared to 11.5% for the same quarter last year. Specialty hospital adjusted EBITDA for the third quarter was $53.7 million compared to $81 million in the same quarter last year. Specialty hospital adjusted EBITDA margin was 9.5% compared to 14.6% in the same quarter last year.

In addition to our reduction in Medicare rate, that I mentioned previously our specialty hospitals experienced higher relative cost of services due to increased labor cost in the quarter.

In July 2015 we’ve received a letter from our largest fiscal intermediary rescinding the change in cost reporting dates and adjusting cost reported periods back to their original periods. We see similar letters from remaining fiscal intermediaries in the year-end date changes they previously proved.

These letters resulted in an acceleration of the hiring, training and education programs to address the higher acuity patients expected in a fully compliant LTCH population. This increased our nursing cost, while nurses went through on board training and program updates.

In addition, our specialty hospitals saw a 70 basis point increase in bad debt in the third quarter compared to the same quarter last year. Outpatient rehabilitation adjusted EBITDA for the third quarter was $23.8 million compared to $23 million in the same quarter last year.

Adjusted EBITDA margin for the outpatient segment was 11.9% in the third quarter compared to 11.4% in the same quarter last year. For the outpatient clinic portion of our business adjusted EBITDA increased to $22.5 million in the third quarter compared to $20.9 million in the same quarter last year.

The increase was attributable to our volume growth and corresponding revenue. For contract services adjusted EBITDA decreased to $1.3 million in the third quarter compared to $2.1 million in the same quarter last year. Primarily resolve of contract terminations I mentioned.

Concentra adjusted EBITDA for the third quarter was $25.6 million and adjusted EBITDA margin was 9.9%. Income before income taxes in the third quarter included the onetime gain of $29.6 million on the sale on an equity investment we had in NaviHealth that I mentioned earlier.

Our reported earnings per fully diluted share were $0.22 in the third quarter of this year compared to $0.20 in the same quarter last year. This time I’d like to provide you with an update on our post quarter activities. As most of you know we begin moving to LTCH patient criteria with three of our hospital commencing in October.

I will give early update on the progress of those hospitals. I need to be clear however that we have over 100 hospitals to move criteria and their early results are not an indication of how all or most of our hospitals will progress.

Having said that of the three hospitals that went into criteria on October 1st two of the hospitals are located in the Southern United States, one is a free standing hospital and one is a hospital in a hospital. The third is in the Western United States and is a hospital within a hospital.

All three hospitals are now operating with 100% LTCH complaint patient with no site neutral census. In addition all three hospitals have replaced 100% of their loss census with compliant patients.

I want to reiterate that while we are pleased with the early progress of our first three adopters, we believe that implementation at all of our hospitals will not be smooth and we expect uneven results over the next year to 18 months.

Also, I just mentioned earlier we are on track to open our new joint venture rehab hospital with a Cleveland Clinic at the end of this year and shortly thereafter our new joint venture rehab hospital with UCLA in Cedars, which is scheduled to open in late January.

Other signed joint venture deals where we expect new openings in 2006 including TriHealth in Cincinnati, Ochsner in new Orland. We are excited about adding these new facilities to our port with our new partners and our pipeline for new deals remain strong. I will now turn it over to Marty Jackson for some additional financial highlights for quarter..

Thanks Bob. For the third quarter, our operating expenses, which include our cost of services, general and administrative expenses and bad debt expense were $941.4 million, compared to $674.5 million in the same quarter last year. Operating expenses in our Concentra segment were $247.4 million in the third quarter.

As a percentage of our net revenue operating expenses for the third quarter increased to 92.2% compared to 89% in the same quarter last year. The increase as a percent of net revenue is due to a 320 basis point increase in our cost of services.

In addition we had a 40 basis point increase in bad debt, which was offset by 40 basis points reduction in G&A. Cost of services increased to $900.9 million for the third quarter compared $644.4 million in the same quarter last year. Cost of services in our Concentra segment was $229.7 million in the third quarter.

As a percent of net revenue cost of cost of services increased 320 basis points to 88.2% in the third quarter, compared to 85% in the same quarter last year.

The increase in cost of services as a percent of net revenue was due to the incremental labor cost in our specialty hospitals segment, which was related to training and turnover in the quarter that Bob mentioned. As well as higher relative cost of services in our recently acquired Concentra segment.

G&A expense was $22.2 million in the third quarter, which as a percent of net revenue was 2.2% this compared to $19.7 million or 2.6% of net revenues for the same quarter last year. Bad debt as a percent of net revenue was 1.8% for the third quarter compared to 1.4% for the same quarter last year.

The increase with the result of higher relative bad debt expense in our specialty hospitals in our Concentra segment in the quarter. Total adjusted EBITDA was $84.5 million and adjusted EBITDA margin were 8.3% for the third quarter this compares to adjusted EBITDA of $86.8 million and adjusted EBITDA margins of 11.5% in the same quarter last year.

The adjusted EBITDA decline was a result of the decline in our specialty hospitals, partially offset by the contribution from Concentra. As Bob mentioned we had three primary issues that drove the increase in cost in our specialty hospitals.

First, they move to change the year in cost report dates had a negative impact of approximately $15 million on both reduced revenue and increased nursing expenses. Second, we accelerate the training, education and nurse on boarding associated with patient criteria that increase cost by approximately $5 million.

And finally we made adjustments to our specialty hospitals bad debt reserve to approximately $4 million. Again we consider all three of these expenses non-recurring items. Depreciation and amortization expense was $31.5 million in the third quarter, compared to $17.6 million in the same quarter last year.

The increase resulted primarily from an incremental $13.3 million of depreciation and amortization expense in our Concentra segment. We generated $6.3 million in equity and earnings on unconsolidated subsidiaries during the third quarter compared to $2 million in the same quarter last year.

The increase was mainly the result of a contributions from NaviHealth and our rehabilitation joint ventures where we own a minority interest. As Bob mentioned we also had a gain on the sale of equity investment of $29.6 million in the third quarter this year related to NaviHealth.

Interest expense was $33.1 million in the third quarter compared to $21.8 million in the same quarter last year. The increase in interest expense in the quarter is a result of additional borrowings related to the financing of the Concentra acquisition. The company recorded income tax expense of $18.3 million in the third quarter.

The effective tax rate for the quarter was 35.9% compared to the effective tax rate of 38.8% in the third quarter of last year. Net income attributable to Select Medical Holdings was $29.4 million in the third quarter and fully diluted earnings per share was $0.22, compared to fully diluted earnings per share of $0.20 in the same quarter last year.

We ended the quarter with $2.35 billion of debt outstanding and $22.6 million of cash on the balance sheet, which includes $12.7 million of cash in Concentra.

Our debt balance at the end of the quarter included $750 million in Select term loans, which includes the original issued discounts, $711 million of the Select, 6.38% senior notes, which include issuance premiums, $646 million in Concentra term loans, which again include the original issued discounts, $225 million in Select revolver loans with the balance of $18 million consisting miscellaneous debt.

Operating activities provided $128.4 million of cash flow in the third quarter. The provision of operating cash is primarily driven by net income and non-cash items of expense as well as decreases in accounts receivable and other assets and increases in our accrued expenses, offset impart by decrease in accounts payable deferred taxes.

DSO was 52 days at September 30, 2015. This compares to 55 days at June 30, 2015 and 53 days as of December 31, 2014. Investing activities used $13.2 million of cash flow for the third quarter.

The use of cash was related to $45 million in purchases of property and equipment, $2.7 million in investments and acquisition payments, which was offset by $34.6 million from proceeds from the sale of equity investments and assets during the quarter.

Financing activities used $117.8 million of cash during the quarter the use of cash was primarily the result of $95 million of net repayments of Select revolver credit facility, $13.6 million of stock repurchases, $3.4 million in net repayments of other debt, $3.2 million in repayment of bank over drafts and $3.2 million in distributions to non-controlling interest.

During the third quarter we repurchased just over a million shares of common stock at an average price of $13.20, which includes the transaction fees, under our authorized share repurchase program. Under the program we’ve spent a total of $314.8 million of the $500 million authorization and have repurchased 35.9 million shares.

Additionally, I would like to outline our revised financial guidance for calendar year 2015 that was provided in our earnings release. This includes net revenue in the range of $3.675 billion to $3.725 billion, Adjusted EBITDA in the range of $400 million to $410 million and fully diluted earnings per share to be in the range of $0.92 to $0.97.

This guidance assumes $575 million of revenue, $55 million of adjusted EBITDA and $0.01 earnings per share of contribution from Concentra. We also continue to assume $17 million in adjusted EBIDTA startup loss in our specialty hospital segment for the year. This concludes our prepared remarks.

And at this time, I’d like to turn it 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 with RBC. .

Good morning. I’d like to go back to the issue in the quarter. Could you talk about what you’ve seen since the stub period ended in terms of where your overall patient mix and your length of stay mix sort of the distribution between normal short stay, long stay outliers..

Yeah Frank, the stub period was a function of us moving to different cost report dates. And given the fact we received notification from the FI that we are no longer able to do that. We’ve gone back to our normal operating procedure.

So from a length of stay the -- all of our hospitals are actually, I mean all of our hospitals and we anticipate all of our hospitals will meet the 25 day length of stay and there won’t be any issues there. With regards to shorts stay outliers and high cost outliers we haven’t seen the change in the mix there either..

Is it fair to say that you’ve already seen sort of a recovery now you called out like $15 million. As you look at sort of the run rate of the business now since the patient population is stabilized.

Would you say that you’re back on track and you’ve recouped most of that $15 million that was sort of lost in the third quarter?.

Well, what we have seen is it was actually -- when you recoup that was the one time impact it happen. I can’t tell you that if you take a look at prior to May when we started down this path of change in the year-end cost reports dates, we had a very nice Medicare rate.

That dropped precipitously in particular in the July and continued into the August timeframe. It bounced back in September and as of October from what we can tell, its back up to where it was prior to making these -- going down the path of attempting those change. .

Right. Yeah, I guess recoup was a bad word. In terms of just the accelerated training and the education and on boarding cost presumably there will be some portion of that $5 million that will probably always continue to the expenses.

So actually we think about that run rate, should that drop down to the $5 million that you incurred in the quarter, what would be a normalized run rate for that going forward?.

Yeah. I mean you raised a good point Frank. I mean the fact is that in our business there is turnover in our ends. And so you’re constantly going to be educating, going to be training the staff. So -- but to give you numbers probably less than $1 million a quarter..

Okay. And then lastly….

Yeah. Just a little information on the types of things that we’re doing. I mean when you take a look at the training and the education that we’re providing to our nurses. A lot of it has to do with critical care certifications.

Its taking place, so a lot of nurses are being -- we're certifying them in critical care and that’s really being provided by the -- that certification is really backed by the Society of Critical Care Medicine. We’re also focused on primary centers of -- actually pulmonary centers of excellence. So there is a lot of education happening there.

And then finally just the on-boarding of a NICU, CCU type nurses..

Yeah Frank it's Bob. It’s a little hard -- I mean your questions are good one and I know that that’s what investors are looking at. When you have as many hospitals as we have coming on to the new criteria as they are coming.

It’s really sometimes difficult, I mean you could look at what we’ve done and said well, could we’ve done a better job of spreading the training cost over a longer period of time.

Yes, maybe we could have, how much more will we see in the future as we continue to go through the balance of this year and through the first half, three quarters of next year? That number is a little soft, I mean we’re evaluating that on the kind of a real time basis as each hospital goes through its preparedness and then implements in terms of what kind of -- how quickly are they replacing their LTCH non-compliant, patients under the new criteria with compliant patients.

If you are really getting an influx and you are replacing those patients faster, we may need to accelerate and train more that’s a good thing or if you have a hospital that can’t replace them because they are not clinically ready that’s a bad thing we’ll have to spend money there.

So it does move around a little bit and this is as Marty and I continue to use the term choppiness in terms of implementation and that’s really the genesis of that kind of term and our observation on how it’s gone..

But we can assure you Frank that we will not see training cost magnitude that we’ve seen. A good portion of the training has taken place with that $5 million..

Okay. One more and I’ll hub off. Just in terms of the hospitals that have flipped over to criteria, certainly it’s always good to be conservative.

Is it more a function of just the fact there something you see is maybe statistically out of the norm for these ones they have gone early or is it just concern over the sheer numbers that will be happening over the next several quarters? I’ll hub off, thanks..

Yeah, the reason that I articulated where the hospitals were geographically in United States and the fact that one was a free-standing and two were hospital within hospitals, to try to get a sense that there was not anything necessarily, I mean all hospitals are unique, but anything necessarily unique.

I mean I needed to provide all the caveats that the early success of those are certainly not an indication of future success of all of our hospitals and I think you are absolutely right.

You can assume that the first three got a lot of attention and in a quarter where we may have 30 hospitals go in, that may -- you may have just some uneven results just as a function of attention. So I think the point that I would make relative to the first three is a point that I and Marty has made in past is that we feel that we can get there.

There may be some choppiness along the way and it’s not a question of if we’ll get most of our hospitals adjusted to the new criteria, it’s really when? And I said this a very big thing, I think I said on the last conference call that this new criteria is really the biggest most significant systemic change to the LTCH division since I’ve been in the business back in the mid-90s..

Your next question comes from the line of Chris Rigg with Susquehanna Financial Group. Please proceed..

Good morning. Just want to follow-up on a comment you just made Bob with regard to the choppiness. You said something that I never really thought of for some facilities may not be clinically ready versus others.

I mean when we think about the choppiness is some on that going to be related to sort of you guys holding back a little bit of certain facilities just saying like for whatever reason this facility may not be ready to take on some level of new criteria of patients or you feel like generally speaking most facilities are ready today or will be ready at the time they are moving to the new criteria to take on whatever they can..

It’s a good question and we certainly want them to be ready at the time that they go in and we are making all preparations for them to be ready. But having said that, doesn’t always work and I will sit here and represent that it will work in every one of our hospitals at the time they go in because it clearly won’t, I mean it just won’t.

And to your first question is we often have what we call bad holds on hospitals that do not accept patients because they are either don’t have the clinical staff or don’t have the preparedness or not, just don’t have the resources that they have to take care of patients and if you look at the -- we are really very dialed into our quality data and those things take precedent over all other things.

So yes, if we are not ready the worst thing you can do is accept high acuity patients that your staff is just not ready to care for. So in those situations we may hold back, that’s obviously not the preferred model of our business and we are doing all things that we can to be ready.

Including spending more than we would have liked in training this quarter. It’s -- so I hope that’s responses to the question. .

Right it is.

And then you touched on this a little bit, but can you give us a sense for in the three facilities that switched over, how the CMI for the patients sort of the non-criteria patients that are no longer there, compare to the current -- to the backfill admissions?.

I’ll let Marty maybe look at the data little more, but I think it’s fair to say that all of those facilities that are now running 100% compliant, LTCH compliant patient, the CMI has gone up. And that it’s exactly what we expected is what we knew would happened.

As you are not taking the wound care patients and the lower acuity patients, and you’re taking patients that are either pulmonary, on vent or right from ICUs, CMI is up..

Right and then, okay Marty sorry..

Chris with regards to that, it’s really kind of early to make that determination, but what we’ve done is we’ve really taken a look at the in-house CMI. And what we’ve seen on average across the hospitals is about a 14 point expansion or increase in case mix.

And when I say 14 points, I want to make that people understand that it’s not percentage increase it’s actually a 14 point increase. So if we’re sitting with the case mix index of 1.2 the 14 points takes you to a 134..

Right. And -- but I guess and you may not have the data handy, but some of the work that we’ve done which suggest that the non-criteria patients have their CMI is more like 0.7 to 0.8 in the criteria of patients. So obviously closer to 1.4 maybe even a little higher.

I guess is that directionally sort of what we should assume?.

Yeah, I think what you should assume is that -- I can tell you what our population is not what the industry is. I think you’re probably right on the industry, for our population the non-compliant are just a shade under 1. And the at the higher end is probably just a little bit higher than that..

Got you, okay. And then last question, I understand that the need to be conservative, but your desire to be conservative with how things are going with regards to the phasing as things you get more facilities.

But I guess when I think about it the profit that you’re going to generate for each criteria of patient is going to be substantially more than the profit you would have generated for the non-compliant admissions.

And so I guess I know you’re not going to say you’re going to generate maybe not the same amount of admissions, but is it fair to assume that within like a year or two you’ll be no worse than breakeven in sort of on an EBITDA basis maybe a little higher?.

Yeah, we anticipate that given the fact it’s a higher acuity patient population. Some of the staff that we’re bringing on board is ICU, CCU type nurses. There is going to be increased costs. So you’re going to have staffing cost increases, I suspect you’ll have some pharmacy cost, supply costs.

So while yes you’ll see increased revenue coming from the compliant patient population I think you’ll see some increased cost. Now whether that will expand the margin or not we’ll just have to wait and see..

Got you. Okay, thanks a lot. .

Thanks, Chris. .

Your next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed. .

Good morning, thanks for taking the question. Marty can you just clarify one thing you said, you said in answer to the last question that for Select the non-compliant patient was just under 1.0 and then you said the higher end was higher than that.

What was the number that you are referring to where the higher end is?.

Yeah what I was referring to Gary is I was referring to the high end that Chris had mentioned the 1.4..

Okay that’s what I thought I just wanted to make sure there. So we’ve heard from a lot of acute care companies and it seems like one theme is just been pressure on labor and increased use of contract labor.

You made a couple of comments about labor, are you seeing that trend are you concern at all that that might continue and put additional pressure on labor cost?.

Yes, I would say that from business standpoint of course we’re concerned about that, I mean we are moving into a labor and nursing shortage and pressure. I don’t think there was any question about that. And we compete more now than ever for the same labor as the acute care hospitals.

So while we may not see it in the same way that they do it we are all certainly seeing the same thing out in the market place and I think most companies for profit, non-profit, large or small will tell you the same thing. So it is out there..

So you guys saw an increase in contract labor in the quarter?.

Yes we did see a little increase in there, but a portion of that Gary had to do with the fact that we were on-boarding some of the nurses that had ITU, CCU that were going through select training and consequently while we were paying them, we were also paying agency far as taking care of the patients..

Got it.

And then you mentioned that a bad debt write-off could you give us a little bit more color on that?.

Sure what we had seen over the last quarter was an increase in a category we refer to as Medicare Exhaust and we have seen that kind of creep up over the last two to three quarters and we had decided at this point in time just to take -- I mean we’re going to continue to pursue those claims, but we’re going to reserve it and we needed to increase the reserve and consequently a bad debt increase..

Could you -- I haven’t heard that term before, Medicare Exhaust so that just mean you I guess what does that refer?.

Yeah let me define what Medicare Exhaust is, Medicare Exhaust is where a patient is actually admitted into the hospital under Medicare, under being paid by Medicare, but what they would do is exhaust their Medicare days. And then what you have to do is go to the secondary insurance. .

Got it. Okay great, thanks very much. .

Sure, thanks Gary. .

Your next question comes from the line of Whit Mayo with Robert Baird. Please proceed. .

Hey, thanks.

Back to the three facilities that have transitioned into criteria just to be clear are you saying that 100% of the census today is now been later in ICU?.

We’re saying that 100% of the census today is compliant patient. So would they have either a three plus day ICU stay or they have a discharge DRG firm the short-term acute care hospital indicates they’ll be on event for 96 hours..

Great.

And maybe it’s impossible to answer this, but how do you think this short stay outliers would be trending on those facilities?.

We have not noticed any change in the normal mix Wit between outliers either on the short side or on the high cost outlier side. .

But it is early and you might expect that your short stay would -- your short stay outliers might be last than normal distribution in a totally non-criteria hospital because some of your -- you’re dominated by your pulmonary patients and perhaps longer stay patients, but we haven’t seen that we just don’t have enough data.

And back to your initial question just so we are clear when we talk about the complaint patients 100%, we’re talking about the Medicare side. .

Yes. That’s helpful. And is there anything when you look at the characteristics of those markets that are unique, similar, dissimilar to maybe some of your other markets and other LTCHs in the markets, is there something about the population I guess I’m trying to appropriately put this in context..

It’s a good question and when we discuss and decided to put the first three hospitals into the discussion as we did today to give a little bit more information transparency on how things are going.

We really try to think about that and geographically they are different one free standing, two HIHs I would say in one market we are the sole provider in the other two markets we have competition.

So when you stir it around and you kind of look at it from a couple of different angles it’s hard for me to say that these three hospitals have anything that I can see in common that would differentiate them from the rest of the hospitals in the company’s portfolio..

Got it. And I guess one of the challenges that we’ve heard or this is something maybe new I heard in the past a month or so, the host hospital actually or the referring hospital has to tell you in fact that this patient does meet the criteria.

Have you seen any challenge with getting hospitals to change some of their practices or discharge planning and just any comments around just that process?.

Sure Wit early on when we started down this process that was certainly a challenge. But given the fact that we’ve been added 12 to 18 months as far as collecting the ICU data. Most of our hospitals are 100% compliant as far as collecting that data. .

Okay. And maybe one last one, just I want to make sure I am wind up with some of the joint ventures and just deals that you have coming out of the ground right now.

Can you just remind us like what some of the rehab hospitals are that are going to be headwinds or tailwinds over the next year? And I guess what I'm really trying to think about is what the potential earnings opportunity could be into 2017, because you’ve got substantial amount of activity underway..

Yes we do. We have coming onboard fourth quarter, actually in December. Cleveland Clinic, which is a 60 bed rehab hospital and that’s on the west side of Cleveland. And then next year, the end of the next year we should be coming onboard with another Cleveland Clinic rehab hospital on the east side.

In the first quarter of ‘16, we have UCLA Cedars-Sinai coming onboard that is a 138 bed rehab hospital right in the middle of century city, which we’re very excited about. And then in second quarter we have TriHealth down in Cincinnati. I think that is a 60 bed also..

Okay. And then should we expect I’m just trying think through the headwinds and tailwinds of preopening expenses if we should see anything….

Yeah we’re incurring preopening expenses right now on both Cleveland Clinic and UCLA Cedars-Sinai. .

And that’s all under $17 million. .

That is in the $17 million number, that’s correct. .

And you will have startup losses on those hospitals when they open so they get to breakeven. .

Okay, perfect thanks guys. .

But you’re absolutely right ‘17 should be a very good year for joint venture transactions. .

Your next question comes from the line of Kevin Fischbeck with Bank of America. Please proceed. .

Great, thanks.

I don’t know if it’s too early or not, but is there any way to talk about the profitability of those three facilities in Q3? Did that -- you already talk before about case mix filling up, potentially labor cost going up, I mean did you see any change the underlying profitability of those assets versus what normal LTCH might look like or what those LTCHs look like previously?.

Yeah it’s a little too early to tell right now, Kevin..

Okay. And then as far as I forget what the work was choppiness or lumpiness over the next year to 18 months as far as a transition.

How do you think about the profitability of just I think it’s just about the LTCH business itself, do you think that LTCH EBITDA will be able to grow over the next year during this transition? Or do you think it’s going to be flattish or down before it comes up? I mean just directionally how do we think about what LTCH profitability might look like as you go through this transition?.

I’ll let Marty address maybe more specifically, but I don’t have any expectation that the LTCH EBITDA or profitability is going to grow during the transition. We’ve said that it’s going to be choppy is the work we keep coming back to. So we’re going to have some winners and we’re going to have some lagers.

And so net-net I can’t imagine that we would see growth of EBITDA. We’re striving hard to maintain our level of profitability. And we think the longer-term that these hospitals can have a nice profit profile. But I certainly wouldn’t expect that through the later part of this year and into next year..

Yeah Kevin as far as profitability LTCH in '16. I mean it really is a transition year for us and I would say it being down a little bit on the LTCH side..

And then as we get up to the other end of that 2017 is there an acceleration from there or that’s the base and now we are growing kind of we would normally expect of that mix [indiscernible]. .

Yeah, in ‘17 we would expect to as we backfill the non-compliant patience with compliant patience we would expect to see improvement in the EBITDA number..

And also I think the improvement because of replacement of patients and a reset in the entire industry. Remember we are the first ones that are going through, I think many others in the industry are more backend located on their cost reports.

So that we are going to have competitors in the market a lot of the smaller providers I think some of them non-profit by the time they go through with sometime I think there is a shakeout in a lot of markets this is what I am predicting that over the long-term not only will we be fine tuning our operations to take only to compliant patients there is going to be in my estimation significant change in the markets.

And so there will be more patients available for the remaining providers those that are still standing.

I mean I like to keep coming back and reiterating that this is though criteria and from a clinical standpoint and a marketing standpoint and a staffing standalone I mean I think this is tough start and I don’t think everyone is going to make it and I don’t think that they are projecting to make it by whether it’s by CMS or internal AHA resources.

So I think this is going to be a resetting in this industry in my opinion again we’ll look very different in the out years whether that’s late ‘17 and ‘18. .

Yes so I guess you guys were trying to change your fiscal years impart because you wanted to be growing along with everyone else at the same time having the same message out in the market and you didn’t want to be potentially disadvantaged I guess during that time period, which makes some sense to me, the amount of disruptions that’s going to happen at peers and wanting to be transitioning when others are struggling makes sense, but I guess conversely do you think going early maybe help these facilities, I mean are you seeing your competitors in those two markets where you did have competition are they going out there more aggressively going after these same patients or have they not done that because their fiscal years are next year and they are not as focused on and so you actually have a first mover advantage to that scenario?.

Yeah, I would like to think so, but I truly don’t know I mean it is very difficult to predict the behavior of your competitors. I mean look the two big companies that are in this space are high acuity providers and are going to be survivors in this.

And so -- but whenever they go in but you are right I mean it’s hard to predict there are clearly some providers that we observe in some of our markets that are small not big companies that are that to our perception are not doing anything for criteria at this time because it’s they are cautious, but they maybe into the later part of next and they are just not doing it.

So is it an advantage and I think your point and I think you stated it very well, we first move to change our cost report years because of concern that I had that we would putting our hospitals at a competitive disadvantage relative to others.

Unfortunately we got approved and then disapproved, which put us a little bit of a disadvantage such that I wish in high side never would have applied for the move.

And also I think it was reported by some that we were doing it because we were fear for we weren’t ready for the transition, which I think was an unfair characterization of really where we were, I mean we promoted the criteria we were supporters of the criteria we knew it would be taught, but we knew that it had to happen to rationalize the industry.

And now we are in it and we are going to have in the next couple of three-four quarters we are going to have a though choppy goal of it to get all of our hospitals moved into criteria, but I think ultimately we will and I think with time we’ll be successful. .

And then last question. I guess, I think your characterization of how things are going to go some will do well some will struggle I guess makes sense to me, but the fact that you got three 100% in surprised me for the upside.

So is there anything that you can take away from where that volume came from when you can give us a little bit more color or comfort about the ability to do this at the other facilities? I know you’ve talked about getting some of this data referral so but just is there any color you can provide about exactly where this came from and so we can get a sense that this is something that can replicated in the market?.

It’s a good question and I think it’s a right question for you to ask, that would be very difficult I think for us to characterize. I mean this is an execution business, I mean this is work on the ground and it’s a number of different elements.

It’s clinical preparedness, you have to have a safe good environment for patients or you just will not get the referrals. So I think it starts there and I think our focus and I’m pleased with one month.

But I think it’s focused by the resources that we have, the corporate and more importantly I think the operators at the hospitals that they were in communication with the referral sources, they were prepared internally from a clinical standpoint to lose the non-compliant patients and to replace those with compliant patients.

In terms of where they came from, I mean with the new criteria it’s not hard. They came from ICUs or they are a pulmonary patients on vents. So that part of it is I can say what’s insured us I know where they came from, those two elevations..

You highlighted one more last question. Do you think it’s an 8% same store revenue if I kind of do math that implies LTCH revenue was down by like 0.5% or so in the quarter and obviously the rate change about the fiscal year is kind of skew things.

If we adjust for that change, do you know what LTCH revenue would have been up?.

Yeah, I want to make sure I understand the question, Kevin. If we would have used the same rate of Q3 of '14 what would be LTCH....

Yeah..

Well, the LTCHs were up on a volume basis 1.9% I believe..

Was that hospital volume or LTCH volume?.

That was LTCH volume..

Okay. So that was up higher, so you would have 1.9% up if the rates were flat year-over-year..

Yeah, I mean that was -- we can probably provide you was 5308 days, patients days up on a same quarter year-over-year basis..

And I think that’s an important point, I mean, look we had a tough quarter and we are disappointed with the quarter.

But when I look across things that I look at for the health of our company and I say well in a relative tough environment and the LTCHs were up 1.9% on volume, I mean I take some from that that makes me feel good because the other things I think we can control and we can get through, things like additional cost or training.

Now comment that was brought up before about nursing shortages, those are the kind of things that faced industry that sometimes there is not a lot you can do about. But I’m gratified that referrals and admissions were up in our LTCH. The rate -- can always be always be hurt rate, I think we’ve tried to explain that the best that we can..

Alright, perfect. Thank you..

Your next question comes from the line of A.J. Rice with UBS. Please proceed..

Thanks, hello everybody. Maybe a few questions in other areas.

So can you just give us a little bit more flavor for how you feel Concentra is doing anything new or different and your thoughts there I know you raised your revenue a little bit, you’re sort of holding the line on EBITDA, any commentary around Concentra more?.

Yeah. As we indicated we thought Concentra performed nicely. They really kind of beat our expectations. I think we are starting to see some synergies take effect and we will continue to do that over the next couple of quarters and to achieve where we think we should be with Concentra..

Okay..

The strong management team, we have a lot of confidence that their ability to execute is very good..

Okay. And I know the focus has been on LTCH criteria and obviously that’s got the biggest impact on you, there are all these bundle payment initiatives which I guess will be more relevant to the rehab side of the house.

But I wondered if are you guys participating in either the BPCI or the joint replacement initiatives and any thoughts on that and the impact there or the opportunity?.

No impact and I don’t think we’re not participating in any of those studies, but we’re following it and I did talk about bundling last quarter and I think as I said at the time it is a bundling program, but it still feels a little bit more like pay for performance to me than a true bundled program.

But I think we’re going to see bundling is certainly something that is the policy [indiscernible] and we’re seeing a lot more activity around it and I think we’re going to hear a lot more..

Okay.

And then just on that, this is a technical modeling question here kind of the issue from unconsolidated subsidiaries obviously NaviHealth has been sound like that’s been contributing do you have sort of a run rate for the fourth quarter or next year that would be a good number to plug in there?.

Yeah probably on a quarterly basis A.J. probably $4 million a quarter..

Okay, all right that sounds great, thanks a lot. .

Your next question comes from the line of Miles Highsmith with RBC. Please proceed..

Hey, good morning guys.

Just had a couple of broader kind of qualitative questions I know you’ve talked before about the pie of potential patients being quite large and I’m just curious and realizing there’s a small sample here early going, have you seen or do you expect to see any incremental competition for these compliant patients either from less compliant LTCHs or others like yourselves out there who are trying to capture these guys? And then second question is, for the patients where you choose to not accept a non-compliant patient are there any implications from that from the standpoint of like that discharge plan are potentially being incrementally hesitant to send other potentially compliant patients your way.

Is there anything to that or is that just not the right way to think about it? Thanks..

I will answer your second question Miles.

I think that is a concern I mean in a market is competitive to your first question yes, we will compete for LTCH compliant patients with other LTCH competitors in the market and if they can take care of the patient as well as we can then they will compete with us or I guess if they are geographically better situated they may compete with us.

So yes, we expect to see competition. And to your second point it is the right way to think about it and it certainly is a concern. But we’ve made a determined decision, strategic decision that where we want to position ourselves in our market is to be the provider for the high acuity post ICU pulmonary vent population.

And we’re going to be very specialty provider in that way and hopefully we’ll distinguish ourselves in the market with the physicians and the referral sources and the discharge planners. The answer to question, absolutely we would be vulnerable to competitor that says give me everything and I’ll take care of it, it’s easier.

And so that’s something we have to compete against. As I’ve said before I think the good news for us is we have smaller hospitals often time HIHs that I shall take the replacement number is aren’t that good and I think we’ll fair well as specialty high acuity provider.

I’ve also said that and I believe it that I think the site neutral patients are going and the payment mechanism for the site neutral patient is going to be difficult to manage successfully. And so I think that by us having a little bit more of a narrow focus I think we maybe -- I believe we will be better off..

Great, thank you..

And ladies and gentlemen we’ve reached the end of our allotted time for question and answers. I will now turn the call back over to Robert Ortenzio for closing remarks..

Thanks everybody for joining us and we look forward -- we are truly looking forward to next quarter’s conference call..

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a great day..