Robert Ortenzio - Executive Chairman & Co-Founder Martin Jackson - EVP & CFO.

Frank Lee - Susquehanna Financial Group Frank Morgan - RBC Capital Markets Gary Lieberman - Wells Fargo Kevin Fischbeck - Bank of America Merrill Lynch A.J. Rice - UBS David Common - JPMorgan.

Good morning and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Second Quarter 2016 Results and the Company's Business Outlook.

Speaking today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter and then open the call for your questions.

Before we get started, we'd like to remind you that this conference 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..

Thank you, operator. Good morning everyone. Thanks for joining us for Select Medical’s second quarter earnings conference call.

For our prepared remarks I'll provide some overall highlights for the company and our operating divisions, and then our Chief Financial Officer, Marty Jackson will provide some additional financial details, before we open up for questions.

Before I provide the details on our second quarter results, I want to summarize for investors, for the significant activity we had in the second quarter.

Of course we had the continued implementation process for the LTAC hospitals going into patient criteria during the quarter, as well as the fine tuning of the LTAC's that had previously transitioned the criteria. In addition, we are integrating the LTAC that we received through the previously announced swap with Kindred Healthcare in June.

On the inpatient rehab side of the business, we recently opened two new rehab hospitals, one with our joint venture partners UCLA and Cedars-Sinai in Los Angeles, California and the second one with TriHealth in Cincinnati, Ohio.

We also continue to build census in the rehab hospital that we opened with Cleveland Clinic our joint venture partner in that hospital from last year.

Our outpatient business is continuing to integrate the physiotherapy operations we've acquired in March as well as to provide transition services for the contract therapy business that we sold at the end of the first quarter. Finally, we continue to realize additional synergies to the integration of our Concentra business segment.

With that, I’ll now cover some of the highlights for the quarter. Net revenue for the second quarter increased 23.7% to $1.1 billion compared to $887.1 million in the same quarter last year.

During the quarter, we generated approximately 54% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab business; 23% from our outpatient rehabilitation segment and 23% from our Concentra segment.

Net revenues in our specialty hospitals decreased 1.1% in the second quarter to $585.8 million compared to $592.3 million in the same quarter last year. The decline in net revenue was driven by decline in patient days. Patient days were 317,000 days compared to 344,000 days in the same quarter last year.

The decrease resulted from a decline in occupancy in our LTAC hospitals that are transitioning to patient criteria and the hospital closures. We are on the 105 with LTAC hospitals at June 30 2016, 72 of which were operating under the new patient criteria regulations.

The decline in net revenue due to reduction in our patient days was offset in part by an increase in our net revenue per patient day, which was $1,680 per day in the second quarter compared to $1,590 per day same quarter last year.

The increase was primarily driven by an increase in our Medicare revenue per patient day, principally due to an increase in patient acuity and our LTAC now operating under patient criteria. Net revenue on our outpatient rehabilitation segment for the second quarter increased 23.6% to $256.9 million compared to $207.8 million in the same quarter.

The increase is a result of additional volume for our physiotherapy clinics, which we acquired during the first quarter of this year as well as growth in our existing clients. So it's partially offset by the sale of our contract therapy business at the end of the first quarter.

For our owned clinics, patient visits increased to over 2.12 million visits, compared to 1.34 million visits in the same quarter last year. Our net revenue per visit was $102 in the second quarter of this year compared to $103 per visit the same quarter last year.

The slight decrease in net revenue per visit was the result of the acquired Physio clinics having a lower average net revenue per visit.

Net revenue in our Concentra segment for the second quarter was $254.9 million, including $222.6 million from the medical centers and $32.3 million balance coming from the onsite clinics community-based outpatient clinics and other services.

For the centers, patient visits were over 1.89 million and net revenue per visit was $118 in the second quarter. From the second quarter of last year, which includes the results. From our Concentra segment beginning June 1, we had approximately 674,000 visits and net revenue per visit of $112.

Overall adjusted EBITDA for the second quarter was $141.5 million compared to $114.9 million in the same quarter last year, with overall adjusted EBITDA margin at 12.9% for the second quarter compared to 13% margin in the same quarter last year.

Specialty hospital adjusted EBITDA for the second quarter was $82.7 million, compared to $91.4 million in the same quarter last year. Adjusted EBITDA margin for specialty hospital segment was 14.1% compared to 15.4% in the same quarter last year.

Also incurred adjusted EBITDA start-up losses of $6.6 million in our new in-patient rehab hospital had additional $2.8 million in adjusted EBITDA losses related to the closed hospitals during the second quarter.

Outpatient rehabilitation adjusted EBITDA for the second quarter increased 32.8% to $38.1 million compared to $28.7 million in the same quarter last year. The increase resulted from our newly acquired clinics as well as the growth of our existing clinics offset slightly by the sale of our contract therapy business.

Adjusted EBITDA margin for the outpatient segment was 14.8% in the second quarter compared to 13.8% in the same quarter last year. The increase in adjusted EBITDA margin was primarily the result of divestiture of our contract therapy business, which had a lower adjusted EBITDA margins in our outpatient clinic business.

Concentra adjusted EBITDA for the second quarter was $43 million and adjusted EBITDA margin was 16.9%. Concentra had $11.2 million of adjusted EBITDA and 12.9% margin in the same quarter last year under our ownership beginning June 1, 2015.

Our reported earnings per fully diluted share were $0.26 in the second quarter of this year compared to $0.28 in the same quarter last year.

We had a non-operating gain of $13 million in the quarter related to the sale on exchange of businesses, excluding the non-operating gain and related tax effects earnings for fully diluted share would have been $0.23 in the second quarter of this year. Finally I’d like to provide you with a few updates since our last earnings call in May.

On the regulatory front late last week, CMS published the final rules for fiscal 2017 for in-patient rehab hospitals. Standard payment rate was increased approximately 1.5% which was slightly better than the proposed rule.

And earlier this week, CMS published the final rules for fiscal 2017 for LTCH, standard federal rate was increased approximately 1.7%. in addition to the LTCH payment rate update, CMS made changes to the 25% rule that combined two previously separate rules.

The full implementation of 25% rule is now schedule to go into effect for cost reporting period beginning on or after July 1, 2016 for freestanding LTCH in on or after October 1, 2016 for the balance of our HIHs.

On a side note, in July, the Ways and Means committee unanimously approved a bill which would once again raise to 25% rule to 50% and we’re hopeful that will gets passed sometime in the fall. I also want to make a brief comment about CMS proposed expansion of the mandatory bundling programs.

First of all, these programs just came out, we’re still evaluating how these new policies are going to work and what it will mean to Select Medical. I do think these new policies are likely to make general acute care hospitals pay more attention to the post-acute care continuum that’s not necessarily bad thing for Select.

I also think from a public policy perspective over the past several years CMS is being trying to discourage readmissions from post-acute back to general acute care hospitals and these policies may help with that.

As you know Select Medical’s privilege to work with some of the best hospital systems in the country and many of our post-acute care facilities are joint ventures with these systems.

So we already have some established close working relationship with our referring general acute care hospitals to ensure that we provide high quality, cost-effective care. I think this is the situation we're selecting benefits as we have already these established relationships and partnerships.

As we’ve previously announced in June, we completed a hospital exchange with Kindred where we transferred five LTAC hospitals to Kindred in exchange for three LTAC hospitals including two hospitals in Cleveland, Ohio and one in Atlanta, Georgia.

On July 1, we contribute the two LTAC in Cleveland acquired in the Kindred Hospital exchange and the two LTACs previously owned by Select in the Cleveland market to a new LTAC joint venture with the Cleveland clinic.

In July we opened 138 bed California Rehab Hospital in Los Angeles with our joint venture partners UCLA Medical Center in Cedars-Sinai and as I mentioned on our last earnings call in early May we opened the 60 bed TriHealth Rehabilitation hospital in Cincinnati, Ohio in partnership with TriHealth.

Also in July we announced the partnership with the University of Florida Health to manage its 40 bed Shands Rehab Hospital with longer-term plans to incorporate the hospital into a joint venture partnership.

We also entered into a separate joint venture agreement with University of Florida Health for LTAC services and contributed Select’s 44 bed LTAC in Gainesville to the new joint venture. Finally I wanted to update you on the progress we have made on all of our hospitals that have gone through the patient criteria implementation through June.

As of the end of June, 72 of our 105 owned LTACs were subject to the new LTAC patient criteria rules and 33 remaining LTACs transitioning in the third quarter.

So a note that we've adjusted the following data to normalize our hospitals for seasonality, the seasonality adjusting from Q1 to Q2 represents a reduction of about one ADC per hospital per day.

Our criteria compliant rate for all patients at all of our LTACs at the end of June was 93.4%.Total post criteria averaged daily census was 2,061 patients and the change in ADC from pre-criteria to post criteria was a negative 9% the daily patient impact was the negative 204 averaged daily census and the average patient impact per hospital per day was a negative 2.9 from the average daily census.

As I mentioned we had a very strong increase to our LTAC Medicare rate due to increased compliant Medicare population that has a much higher case mixed index. Medicare case mixed index in our criteria hospitals was 1.30.We are pleased with the progress we're making on our transition to patient criteria.

With that I’ll turn it over to Martin Jackson to cover some additional financial highlights for the quarter before we open the call up to questions..

Thanks Bob. Good morning everyone. For the second quarter our operating expenses, which include our cost of services, general and administrative expense and bad debt expense was $960.4 million this compares to $780.2 million in the same quarter last year.

The increase in operating expenses is primarily due to the acquisitions of Concentra and user Physiotherapy. As a percentage of our net revenue operating expenses for the second quarter were 87.5% this compares to 88% in the same quarter last year.

The 50 basis point decrease as a percentage of net revenue consists of 40 basis point reduction in cost to services and a 30 basis point reduction in G&A which was partially offset by 20 basis point increase in bad debt. Cost of services increased to $917 million for the quarter compared to $743.9 million in the same quarter last year.

As a percent of net revenue cost of services decreased 40 basis points to 83.5% in the second quarter this compares to 83.9% in the same quarter last year, the decrease is primarily due to a decrease in expenses relative to the revenue in our Concentra segment as a result of cost-saving initiatives we’ve implemented.

G&A expense was $25.9 million in the second quarter which is a percent of net revenue was 2.4% as compared to $24 million or 2.7% of net revenue for the same quarter last year. Our G&A function includes our shared services activities which have expanded as a result of the significant acquisitions we have completed both this year and last year.

As Bob mentioned, total adjusted EBITDDA was $141.5 million and adjusted EBITDA margins was 12.9% for the second quarter this compares to adjusted EBITDA of $114.9 million and adjusted EBITDA margins of 13% in the same quarter last year.

Depreciation and amortization expense was $36.2 million in the second quarter compared to 21.8 million in the same quarter last year. The increase results primarily from the acquisition of Concentra and Physiotherapy.

We generated $4.5 million in equity and earnings of unconsolidated subsidiaries during the second quarter compared to $3.8 million in the same quarter last year. This increase is primarily the result of growth in our inpatient rehabilitation hospital joint venture partnerships.

As Bob mentioned during the quarter we had pretax non-operating gain of $13 million related to the sale of businesses. Interest expense was $44.3 million in the second quarter compared to $25.3 million in the same quarter last year.

The increase in interest expense in the second quarter is primarily the result of additional borrowings related to financing the Concentra acquisition in 2015 and the Physiotherapy acquisition in the first quarter of this year as well as an increase in interest rates on the debt we refinanced in the first quarter.

The company recorded income tax expense of $33.5 million in the second quarter. The effective tax rate for the quarter was 45% compared to the effective tax rate of 37% in the second quarter of last year.

The increase in our effective tax rate is primarily related to hospital exchange transaction where our tax basis in the specialty hospitals was less than our book basis creating a tax in that exceeded our book gain.

Net income attributable to Select Medical Holdings was $33.9 million in the second quarter and fully diluted earnings per share was $0.26 compared to fully diluted earnings per share of $0.28 in the same quarter last year.

At the end of the quarter we had $2.72 billion debt outstanding and $78.4 million of cash in the balance sheet which includes $17.5million of cash to Select and $60.9 million of cash to Concentra.

Our debt balance at the end of the quarter included $1.15 billion in Select term loans, $240 million in Select revolver loans, $710 million in Select 6.38 senior notes, $645.5 million in Concentra term loans. These were offset by close to $60 million in unamortized discounts premiums and debt issuance cost to reduce the balance sheet debt liability.

In addition we had close to $31 million consisting of other miscellaneous debt. Operating activities provided $66.8 million of cash flow in the second quarter this compares to $37.5 million in the same quarter last year.

Our days sales outstanding was 51 days at June 30, 2016 as compared to 52 days at March 31, 2016 and 53 days at December 31, 2015.Investing activities used $34.3 million of cash during the second quarter use of cash was related to $33.5 million in purchases of property and equipment and $9.6 million of acquisitions and investment in business cost which were offset in part by $8.8 million in net proceeds from the sale of assets during the quarter.

Financing activities used close to $40 million of cash in the second quarter, the use of cash primarily resulted from $75 million in net repayments on Select’s revolving credit facility, term loan payments of $2.7 million and $1.6 million of distributions to non-controlling interest.

This was offset in part by $9.9 million in net proceeds from other debt, proceeds from bank overdrafts $26.5 million and $3.1 million of proceeds for the issuance of non-controlling interest. Additionally, in our earnings press release, we provided revised financial guidance for calendar year 2016.

This includes net revenue in the range of $4.25 billion to $4.35 billion, adjusted EBITDA in the range of $500 million to $530 million and fully diluted earnings per share to be in the range of $0.87 to $1.

The update to our guidance for 2016 includes revised expectations to our inpatient rehabilitation joint venture hospital openings, closures in our long-term acute care hospitals and the effective tax rate impact in the second quarter.

This concludes our prepared remarks and at this time, we’d like to turn it back to over to the operator to open up the call for questions..

[Operator Instructions] Our first question is from the line is Chris Rigg of Susquehanna Financial Group. Your line is open..

Good morning this is Frank Lee on for Chris. Thanks for taking my question. 33 facilities are going into criteria in the third quarter.

What proportion entered in July and can you give a sense for how this impacted second quarter admissions and EBITDA?.

Frank, of the 33 that are going in the third quarter, 10 will be going in July and there is just a shade below 900 days were impacted by in essence as you know what we do is we start the months before hospitals go into criteria with regards to the admissions of only criteria, only those patients that will meet criteria and consequently there was about close to 900 days of reduced patient days in the second quarter for those 10 hospitals..

Okay. Thanks. And then the opening of the California rehab institute was delayed from your original expectations. I think that was February of this year.

Can you give us a sense of what the negative carry from rent in the quarter was and how much of a drag on 2016 EBITDA is created by start-up cost for that facility versus your original expectations?.

Yes, Frank I can go one better than that. I can tell you that because of approximately a six-month delay that represents a little bit more than the $10 million of reduction of the top line on EBITDA that we’re reducing it by. So that was really a function of what was going on with the CRI..

All right thanks a lot..

Thank you. And our next question is from the line of Frank Morgan of RBC Capital Markets. Your line is open..

Good morning.

Two questions I guess, one high level legislatively wanted to get some comments from Bob on possibility of this 25% ruled legislation, actually getting passed and how you see that playing out over the next several months? And then the second question was if you look back at some of the early hospitals that have converted over criteria, now that you look at them I guess if you got your first batch from last September through December, how do those look today really the occupancy, obviously we know what the compliance is but have you seen any kind of improvement in the occupancy on the buildings that have been on the criteria for a long time..

Sure Frank. Let me take a stab at the first one. We obviously had a goal to get the 25% rule release extended before it lapsed and we obviously were not able to get that accomplished because it goes into effect in July.

Having said that we were pleased that in mid July we were able to get the Ways and Means Committee to a approve bill HR-5713 which would -- it’s not really an extension of the old release, but in fact it's actually a new bill that would extend the 25% rule to 50%.

It was not a two-year -- it’s not two-year relief, it’s more like a 9 to 12-month relief. There is a companion bill in the Senate that essentially does the same thing.

So we’re pleased that we had enough support in the House particularly through ways and means and in the Senate that there were enough members paying attention that they passed through these bills for a relief on the 25% rule.

The problem is in finding a vehicle under which this can be attached that’s a Medicare bill that has any expectation of moving anytime soon. I think my best estimate is really hard to handicap it. I would be very surprised if there was any bill that moved that we could be on before October-November.

Now this being a Presidential Election year, I am being advised that there is pretty good chance that nothing will move unless there is some must move provisions. And there may be a vehicle that comes in the fall but there may not be. So I think optimistically I would say 50-50 but that’s the best I can handicap it..

Frank and in your question the 72 hospitals that have gone into criteria and the timing and the improvement that’s occurring on a quarter-over-quarter basis, what we’re finding Frank is that while the timeframe that the hospitals have gone under criteria is a decent indictor that there has been improved performance.

The real variable that we’re seeing is making a difference here is the size of the hospital.

So if you were to take a look at and it’s something that Bob and I have talked about consistently as our expectations was that the smaller hospitals, the HIH type hospitals, we would have an easier time replacing the patient that’s exactly what we were seeing. So let me give you an example.

If you take a look at the number of hospitals that we have in criteria right now and what we’ve done is we’ve taken a look at 69 in detail because we have not added in the three hospitals that we’ve gotten from Kindred yet, but if you take a look at those, for those hospitals that are 50 beds or higher we have 16 of the 69.

When I take a look at the ADC per hospital per day on a seasonally adjusted basis, that’s almost 8 and 53 hospitals are under 50 beds seasonally adjusted ADC is 1.4 per hospital per day. So you can see the significant difference there.

Obviously our focus is to make sure that those 16 hospitals that we have we’ve got to make sure that we’re out in the marketplace going to the tertiary hospitals and increasing their volume. But that for us that’s really been the key indicator or the key variable to focus on..

And then of the -- have you noticed in markets where there are multiple LTAC offerings or some of these bigger markets, is there any kind of confusion out in the marketplace with regard to oh, we're only looking for compliant cases versus we’ll take anybody.

Have you seen any of that effect out there or how you assess kind of where the market is in terms of education through the new rule and I’ll hop off. Thanks..

Frank it’s a good question and I’ll tell you that it was something that we were concerned about and we talked about even before we in the criteria, but I think factually we really haven’t seen that much. There is not that much confusion in the market as we look across.

We've staked out our strategy and our communication to our referral sources of exactly where we’re positioning ourselves in the market, which is to take just a very high acuity patient the ICU and the pulmonary vent bled patient and that’s been as you can see just from the data, the statistics, it’s been fairly well received.

I think it’s also the fact that most of the other LTACs in the industry are just now beginning to transition in any large measure, we’ll start to see probably the dynamics change in some of the markets and I think that that can be positive for us.

So I mentioned in my prepared comments that I am really pretty pleased with how we’ve done under that transition to criteria. There were a lot of unknowns about it and we made a bunch of assumptions based on lot of analytics and data, but I think their results have exceeded my expectation.

And I think the other point that I would make is we can continue to get better. In the first couple months after the transitioning to criteria is obviously not excluded in GAAP. We think we can continue to prove over the next couple of years. So I feel okay with our position now.

I've already made the comment about we have had less success with our larger hospitals and we think that it's just a testimony that there is no thought of changing our strategy to take site neutral patients even those larger facilities.

So we are staying with our strategy and we think that over time those larger facilities will do well under criteria and under our strategy..

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

Good morning. Thanks for taking the question. You have made some comments about the seasonality in the 2Q and the impact it had on ADC.

Can you talk about the third quarter, which as we know is a seasonally weak quarter? How should we think about the impact of the seasonality in the third quarter and what we might see in results?.

Yes, Gary, there will be as you know going from the second quarter to third quarter, there will be a downward adjustment for that also..

Is there any way to help us quantify that in terms of number of days?.

I think you would probably see another if we did it on a per hospital, per day basis we would probably see a reduction of another one ADC..

Okay.

And then as additional competing LTAC it had to deal with criteria or incrementally as they will, have you seen any greater degree of competition for the patients or are you expecting that?.

We always expect competition. That’s going to be a market-by-market but I can’t say that overall, when I hear from the operators that it’s about competition, it’s really more about the education and us working with our referrals or so.

So I really think -- we think that this -- much of this is within our control, that if we execute from what we have seen so far, we think if we execute we'll be successful. And I’ve said before, I think the competition particularly with some of the smaller providers; I do believe that they are going to struggle.

This is not just a marketing issue this is a -- its a clinical preparedness and the ability to take these higher acuity patients in a good shape productive patient environment.

So I feel pretty good about where we are right now and while we had set some trepidation of being the first company to go into criteria, I think having done it to where we are right now, I can look back on and say I am glad we did and we think that it may turn out to be a little advantage to be able to go through it first..

Got it. And then maybe final question, Marty. In the past, you had quantified the impact of the 25% rule. I think it was, like, $15 million annual number.

Have you guys had a chance to recently go back and look at that again?.

Yes, Gary, good question. We have taken and look at that $15 million is a pretty good number right now. I will say that the $15 million is an unmitigated number and we will be focused on that to reduce that number.

I think just to add to that is if you take a look at 2016 impact of the 25% rule, we do not anticipate that that’s going to significant at all -- just as you know those in October and it goes based on year-end cost report date..

Got it. Thanks a lot..

Thank you our next question is from the line of Kevin Fischbeck of Bank of America Merrill Lynch. Your line is open. .

Great. Thanks. I just want to understand the comparison that you made, I guess from Q1 to Q2, on the LTAC criteria. If I understand correctly, you're saying that seasonally, ADC is down about 1, seasonally, a minus 9%.

Would that have been minus 10% on a reported basis but you would expect it down 1 anyway, so minus 9% is the way to think about the effect of criteria. Is that -- that's the way to think..

Yes. It would have been higher than 9% Kevin, it was about 11.5% on a percentage basis..

Okay, and is this -- you guys have given the impact for the last few quarters.

Is this the first time that you adjusted for seasonality or do you know that other than that I guess in the Q4 comparison you would have expected ADC to be up a couple percent from Q3, was that number you gave us in Q4 is an adjusted number or was it the reported number?.

It was not adjusted..

Okay.

Do you have any sense of what that impact on Q3 to Q4 would have been in the numbers?.

No, I haven’t gone through that analysis..

Okay.

And then I guess when we think about the use of the case mix in the facilities that have moved over is 1.3 what's the case mix of the facility that haven’t moved over yet?.

What we've done is if you take a look at the - actually there’s about 12 to 13 points differential. I think the case mix associated with the hospitals that have not gone probably in that 117 to 118 range, which is the start….

And is that - how do you think about that from like a pricing whether it's 0.1 the case mix maybe from the pricing perspective?.

Say that again?.

Like what is that - what is safest to assume like 1.3 to 1.3 what impact does that have on a facility it’s pricing?.

Significant impact. I mean, the way that that works is if it’s a 10 point differential, that 10 points applied against your base rate. So if your base rate is $40,000 into about a $4,000 impact per case..

Okay.

So the 12 to 13 point differential on it if there is 12 to 13 point a percentage increase potentially obviously on the Medicare component of the revenue at that side?.

That’s correct..

Okay. All right..

Kevin that’s why we’ve been focused on talking to people about the differential between - it’s really focused on the spread which is the differential between the compliant versus non-compliant patients and we've talked all along about that spread differential being in the 30 point range..

Okay.

And this - I sort of didn’t remember if you guys ever doing JVs on the LTAC side before because about what you expect to get from those?.

Well, you know when you look at our model which it started out as doing the joint ventures back to days that when we first did the Baylor Health System and then Penn State University and then moved on to Emory and Cleveland clinic.

Once we’re in the partnerships it does make sense or in the rehab or the outpatient, it does make sense as I think our partner see our skills on the post-acute to snap on additional services. So this makes all the sense in the world for us.

So I think the first place we did it was an Emory where Emory took a small -- in addition to the rehab joint venture, Emory took a small interest in our LTAC. And then in Cleveland where we obviously signed a deal and built the first rehab hospital after our swap with Kindred we owned four LTACs in the Cleveland market.

So adding them to the joint venture this begins to -- these joint ventures begin to look a lot more like post-acute joint ventures rather than just rehab joint ventures. And that’s obviously our goal.

So if we can move the company toward being a partner in all the post-acute with our partners and we've seen that and in some of our joint ventures we do day rehab, we do outpatient, now we do LTAC, we do rehab. And we can snap on other post-acute elements to it. If the market calls for our partner wants us to.

So I think it’s something that you could probably expect, it will be our goal to continue do that. So now we've done with hoped to be doing with Florida, Shands, Cleveland Clinic, Emory and hopefully others..

Okay. And this is my last question, the margins on both Concentra and the outpatient rehab business really improved noticeably I guess the outpatient one seems more like a sophisticated divestiture of low margin business. So that seems to me to be sustainable.

The Concentra boost it sounds like there are a lot of the cost-cutting there so that one also sounds sustainable, are these good run rates or how is there anything unusual either seasonality or any other reason I think that isn’t the right run rate for those margin?.

Yes, Kevin there is seasonality in the business. If you take a look at the Concentra business and second quarter we were – the margins at 16.9 was very significant. Second and third quarter for the Occupation Medicine is typically their best quarter and the first and the fourth quarters are down.

On the outpatient clinic business first and second quarters are typically the better margin quarters and third quarter is typically down further and where we come back..

Hi, Kevin if you look at the quarter on the outpatient I think it’s really nothing the good news. I mean, the revenue offers the just because of the divestiture of the contract therapy business but beyond that business on a same-store basis and Physio integration I think that this is the stronger quarter in the outpatient as you’ll see..

All right, thanks..

Thank you. Our next question is from A.J. Rice of UBS. Your line is open..

Hi, everyone. A couple of questions, first of all on the labor side across your business portfolio sort of had a mixed message from some providers saying they’re seeing a little pressure other people are saying they really haven’t seen much retain.

I just wonder inpatient therapist, outpatient therapist, nursing talent you've got a spectrum of nursing talent, what are you – give us an update on what you’re seeing?.

Well, A.J. it's Bob. I think there is – we believe that there's pressure on the nursing side and we've seen it and we think that that's real. And less so on the therapy side, the therapy side is I think always difficult to recruit and retain a paid therapist. But I don't - we don’t see a dramatic difference in that.

Where we have gradually over the last couple quarters and I think we've said that we do think we're entering into a pressure on the nursing side of business. So we do see it..

Great.

Any metric like your average yearly increases or annual updates that you’re providing is that changed in any way your use of contract labor, any thoughts relating to that?.

Yes, A.J. I mean what we’ve seen over the past five or six years as far as increase our concern for nursing. It’s been in the neighborhood of 0.5% to 2%. We’re seeing that escalates so we’re seeing in the 3% range 3 plus percent range..

Okay.

I would tell you that some of that also is a function of the types of nurses we're hiring. I mean, historically we may have hired a standard RM we're now really focused on either critical care nurses or ICU nurses. So I think that may also play a role..

All right. Next I want to ask you about is obviously in your case there's been a lot of focus on criteria, the whole post-acute space is also with the bundled payments that sort of care type of discussions that type of thing.

And I could see you know based on some of the comments we’re hearing from the Health Systems and it might even be an opportunity for the outpatient rehab people are getting pushed out of nursing homes and home health or something.

But having still in the rehab, I’m just curious we’ve had the joint replacement program and what you’re seeing announced earlier and now get this proposal around the cardiac, how are you guys engaged at any level with your different aspects of your business and what - how do you think about what’s happening in those areas?.

Well, in a lot of - I think you’re absolutely right, A.J. There is more discussion and more energy focused around this post-acute than I think I’ve ever seen in my career. And in a lot of ways it’s good for us in some ways I think people take a little pause because there’s a little uncertainty around it.

But yes, we are engaged, we're engaged really with our partners on this. I mean I don’t - as much as we look and we know what our capabilities are we really follow our partners.

So for example, I mean if the Cleveland Clinic or Emory or UCLA or Cedars or Penn State University of Clinical Health any of our partners, it won’t embark or need to I mean we are there at the table with them having discussions.

We can bring in our analytics teams, we can bring in our clinical people and we can do what - we want to be responsive to what's happening in that market with our referral source. So I think we have all the capabilities but I’m going to give you the sense that where it's driving it is much as we are being responsive to what we see in the market.

Our understanding is, we see a lot of this stuff it's happening. But at the end of the day a lot of this is going to be driven by the referral sources. It's going to be driven by the general acute care hospitals.

Some that are very, very focused on readmission and we are right there with them using our LTACs or rehab hospitals utilizing outpatients, same with the bundling proposals. So that's where we are trying to go..

Okay. All right. Thanks a lot..

Thank you. Our last question is from the line of David Common of JPMorgan. Your line is open..

Yes, good morning. Thanks for the opportunity. You mentioned that part of moving the compliance ratio up has been a closure of a handful of locations.

Did you mentioned - have you mentioned what the outlook for additional possible closures is for your own Company? And then also, could you speak to competitor closures that you're - that you've seen and expect to see? Thanks..

Thanks, David. No, I don’t think we've given a lot more guidance. I mean Marty and I gave guidance on our expectations some quarters ago about closure. I think we said we were going to close around 10 hospitals. I think we've closed that many.

And as we go forward over the balance of this quarter and the next quarter the balance of this year, we could be looking critically at a couple. I don’t have any if they are really - on the block right now. So if there is anything for us it's not going to be material. It's not going to be something that disrupts a quarter.

And I think that's also testimony to the profile of our hospitals. We have leases coming due all the time through our hospitals are leased tenure is lot shorter than it would be. We had long 10 or 15 year REIT or third party lease payments they are longer term. As far as the rest of the market again, many of them are early in criteria.

I'm going to stand behind my prediction of couple of quarters ago that when the dust really settles on this, there is going to be considerable closing mainly in the smaller non-chain maybe perhaps the nonprofit world. I think it's usually always it will take longer than what I might think it would, but I am going to stand by that.

So I think you could see considerably less LTACs two years from now than we have today..

And would it be pretty much a function simply of the percentage of non-compliant Medicare patients heads in the beds; is that really the main driver overwhelmingly?.

I think it will be because you have your first two years when a hospital is in the criteria that they get a blended rate on what they call the slight neutral patient, and I think that potentially given the profile of the hospital can be helpful, but when that goes away, I think it's going to be fine..

Okay. Well, thanks for the color..

Thank you. And I'm not showing any further questions. I would like to turn the call back over to Mr. Ortenzio for any further remarks..

We have no further comments. Thanks for joining us. And we look forward to updating you next quarter..

Ladies and gentlemen, thank you for participating in today's conference. That concludes today's program. You may all disconnect. Everyone have a great day..