Good morning, and thank you for joining us today for Select Medical Holdings Corporation Earnings Conference Call to discuss the Fourth Quarter and Full-Year 2018 Results and the company’s 2019 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 will 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 will turn the conference call over to Mr. Robert Ortenzio..

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical’s fourth quarter and full-year earnings conference call for 2018. Before I outline our operational metrics, I want to provide you with some summary comments and some updates since we spoke last quarter.

On an overall basis, 2018 was a year of nice growth for us in terms of net revenue and adjusted EBITDA. Net revenue adjusted EBITDA exceeded the prior year by 16.4% and 19.9% respectively. We acquired U.S. HealthWorks last February and our Concentra team is doing a great job of integrating this acquisition.

We also signed or closed several new joint ventures, commenced construction on several new JV hospitals and expanded our service lines in some of our existing joint venture partnerships. During 2018, we added two new rehab hospitals.

One in partnership with Ochsner Health in New Orleans and one was an additional hospital in our Baylor joint venture in the Austin market. We also started up one new critical illness recovery hospital, while closing four critical illness recovery hospitals throughout the year.

Our hospital on Panama City, Florida remains temporarily closed due to the devastation caused by Hurricane Michael. Also, entered into a joint venture with Banner Health, which started without patient services in 2018, and currently includes two new rehabilitation hospitals on a construction in Arizona scheduled to open in 2020.

We also announced plans to expand our Ohio Health joint venture to include outpatient services and announced the partnership with UC San Diego Health to open both a critical illness recovery hospital and a new rehab hospital in the San Diego market.

The UC San Diego critical illness recovery hospital joint venture opened earlier this year and we expect construction on the rehab hospital to commence later this year. Additionally, we expect to open our new 50 bed rehab hospital on partnership with University of Florida system in Gainesville later this quarter.

We also have new rehabilitation hospitals under construction in Las Vegas in partnership with Dignity Health scheduled to open in the second quarter and in Newport News, Virginia in partnership with Riverside Health scheduled to open in the third quarter. Our development pipeline remains robust.

For the fourth quarter, we had a 15.6% year-over-year growth in revenue and an 18% growth in adjusted EBITDA, which included double-digit growth in both our outpatient rehab and Concentra business segments.

Cash flow from operation was again very strong this quarter generating over $113 million and we repaid an additional 45 million in Select’s revolving debt during the quarter and $210 million during the year. I will now take you through our operational metrics for the fourth quarter and the full-year.

Overall, our net revenue for the fourth quarter increased by $170 million to $1.26 billion, which included top line growth in each of our four business segments. For the full-year, net revenue increased 16.4% to almost 5.1 billion. Net revenue and our critical illness recovery hospital segment in the fourth quarter increased slightly to $426 million.

The increase was driven by 1.5% improvement in rate to $1,717 per patient day in the fourth quarter. Occupancy in our critical illness recovery hospital segment was 66% in the fourth quarter, compared to 65% in the same quarter last year.

Our patient days and admission both declined slightly, compared to same quarter last year, driven by four hospitals we closed during the year, as well as our damaged hospital in Panama City. Excluding the hospitals that were closed, patient days would have increased 1.7% in the quarter.

For the year, net revenue in our critical illness recovery hospital segment increased $28.6 million to $1.75 billion, compared to last year. Despite a decrease in the number of facilities we operated, patient days and admissions both increased slightly for the year with occupancy at 67% this year, compared to 66% last year.

Net revenue for patient day was $1,716 for the year, compared to $1,704 last year. Net revenue in our rehab hospital segment in the fourth quarter increased 7.9% to $182 million, compared to $169 million in the same quarter last year. Patient days increased 10.9% to almost 82,000 patient days, compared to 74,000 days in the same quarter last year.

Net revenue for patient day was $1,610 in the fourth quarter, compared to $1,639 per day in the same quarter last year. The decline in net revenue for patient day was primarily driven by reduction in our Medicare rate at our California Rehab Hospital.

For the year, net revenue in our rehab hospital segment increased 13.7% to $708 million, compared to $622 million last year. The primary driver of the revenue growth was for growth driven in our patient days, which increased 16.9% to over 315,000 patient days compared to 270,000 days last year.

The increase in patient days was primarily driven by maturation of the hospitals we opened in 2016 and 2017. Our net revenue per patient day for the year was $1,606, compared to $1,577 last year. The increase in net revenue per patient day was primarily related to an increase in non-Medicare net revenue per patient day.

Net revenue on our outpatient rehab segment in the fourth quarter increased 8% to $272 million, compared to $252 million in the same quarter last year. Patient visits increased 2% to 2.1 million visits in the fourth quarter, compared to 2.06 million visits in the same quarter of last year.

During 2018, we sold several clinics to non-consolidating joint ventures with Banner Health and our Baylor joint venture. Excluding the effects of those clinic sale, visits would have increased 5.6% in the fourth quarter, compared to the same quarter last year.

Our net revenue per visit was $103 in the fourth quarter, compared to $102 per visit in the same quarter last year. For the year, net revenue in our outpatient rehab segment increased 5.8% to $1.06 billion, compared to $1 billion last year. Net revenue per visit was $103 per visit this year, compared to $101 last year.

The increase in net revenue per visit is a result of improved contracted rate with some of our payers. Visits increased 1.5% to 8.36 million visits, compared to 8.23 million visits last year. The overall increase in visits resulted from new starts, as well as acquired clinics.

Again, excluding the effects of the clinics we sold to non-consolidating joint ventures, visits would have increased 5.1%, compared to last year.

We also had an increase in revenues related to management fees and contracted labor services provided to our non-consolidating joint ventures in both the fourth quarter and the four-year comparative periods.

Net revenue in our Concentra segment for the fourth quarter increased 53.8% to $384 million, compared to $250 million the same quarter last year, which was primarily driven by the contribution of U.S. HealthWorks.

For the fourth quarter, revenue from our centers was $349 million and the balance of approximately $35 million was generated from onsite clinics, community-based, outpatient clinics, and other services. For the centers, we had patient visits of $2.82 million or visits of 2.82 million and net revenue per visit of $124 in the fourth quarter.

This compares to 1.86 million visits and $117 per visit in the same quarter last year. For the year, net revenue in our Concentra segment increased 53.7% to $1.56 billion, compared to $1.01 billion last year. The addition of U.S. HealthWorks on February 1 of this year was the primary reason for the increase.

Visits in our centers increased 48.2% to 11.4 million visits, compared to 7.7 million visits last year. Revenue per visit was $124 this year, compared to $115 per visit last year. The increase in revenue per visit is primarily related to U.S.

HealthWorks, as well as an increase in worker’s compensation employer services reimbursement rates in our existing Concentra Centers.

Total company adjusted EBITDA for the fourth quarter increased 18% to $147.1 million, compared to $124.6 million in the same quarter last year, with consolidated adjusted EBITDA margin at 11.6% for the fourth quarter, compared to 11.4% same quarter last year.

For the year, total adjusted EBITDA increased 19.9% to $645.2 million, compared to 538 million last year with consolidated adjusted EBITDA margin at 12.7% for the year, compared to 12.3% last year.

For our critical illness recovery hospital segment, adjusted EBITDA was $56 million in the fourth quarter, compared to $58.4 million in the same quarter last year. Adjusted EBITDA margin for the segment was 13.1% in the fourth quarter, compared to 13.8% in the same quarter last year.

Our adjusted EBITDA and margin were impacted by changes in other operating expenses relative to our net operating revenues during the fourth quarter, compared to the same quarter last year. For the year, critical illness recovery hospital segment adjusted EBITDA was $243 million, compared to $252.7 million last year.

Adjusted EBITDA margin was 13.9%, compared to 14.6% last year. Adjusted EBITDA margin were both impacted by increases in employee cost and other operating expense this year compared to last year.

Our rehabilitation hospital segment adjusted EBITDA increased slightly in the fourth quarter to $28.6 million, compared to $28 million in the same quarter last year. Adjusted EBITDA margin for the rehab hospital segment was 15.7% for the fourth quarter, compared to 16.6% in the same quarter last year.

For the year, our rehab hospital adjusted EBITDA increase 21% to $108.9 million, compared to 90 million last year. Adjusted EBITDA margin was 15.4%, compared to 14.5% last year.

The increase in adjusted EBITDA margin were primarily related to the maturation of hospitals we opened in 2016 and 2017, as well as increase in net revenue per day I previously mentioned. Adjusted EBITDA losses in our startup hospitals were $4.7 million this year, compared to 7.5 million last year.

Outpatient rehab adjusted EBITDA increased 16.8% to $35 million in the fourth quarter of this year, compared to 30 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 12.9% in the fourth quarter, compared to 11.9% in the same quarter last year.

For the year, outpatient rehab adjusted EBITDA increased 7.1% to $142 million, compared to $132.5 million last year. Adjusted EBITDA margin was 13.4%, compared to 13.2% last year.

The growth in adjusted EBITDA and margin for both the fourth quarter and the full-year was a result of increase in payment visits and the rate increase I previously mentioned. Concentra adjusted EBITDA was $52.9 million for the fourth quarter, compared to 31.9 million in the same quarter last year.

Adjusted EBITDA margin was 13.8% in the fourth quarter, compared to 12.8% in the same quarter last year. For the year, Concentra adjusted EBITDA was $252 million, compared to 157.6 million last year. The increase in adjusted EBITDA is primarily the result of the acquisition of U.S. HealthWorks.

Adjusted EBITDA margin for the Concentra segment was 16.2% this year, compared to 15.6% last year. The increase in adjusted EBITDA margin for both the fourth quarter and the full-year was a result of lower relative operating cost across the combined Concentra U.S. HealthWorks businesses.

Earnings for fully diluted share was $0.18 for the fourth quarter compared to $0.75 in the same quarter last year. Adjusted earnings for fully diluted share was $0.20 for fully diluted share for the fourth quarter, compared to $0.32 in the same quarter last year.

Adjusted earnings for fully diluted share exclude the pre-tax losses on early retirement debt and its related tax effects in the fourth quarter this year. During the fourth quarter last year, adjusted earnings per share excluded U.S.

HealthWorks acquisition cost and related tax effects, as well as the income tax benefit resulting from federal tax reform legislation. Earnings for fully diluted share was $1.02 for the year, compared to $1.33 last year. Adjusted earnings per fully diluted share was $1.03 for fully diluted share for the year, compared to $0.98 last year.

Adjusted earnings for fully diluted share excludes the pre-tax losses on our retirement of debt, non-operating gains, U.S. HealthWorks acquisition cost, and the related tax effects for the year. Last year, adjusted earnings per share excluded the loss on our early retirement debt, U.S.

HealthWorks acquisition cost and related tax effects, as well as the income tax benefit resulting from federal tax reform legislation. I’ll now turn it over to Martin Jackson for some additional and financial details before opening the call up for questions..

Thank you, Bob. Good morning everyone. For the fourth quarter, our operating expenses, which include our cost of services and general and administrative expenses were $1.1 billion. This compares to $978 million in the same quarter last year. As a percentage of our rate revenue, operating expenses for the fourth quarter were 88.9%.

This compares to 89.3% in the same quarter last year. For the year, our operating expenses were $4.5 billion. This compares to $3.8 billion last year. As a percentage of our net revenue, operating expenses for the year were 87.8%. This compares to 88.2% in the same quarter last year. Cost of services were $1.09 billion for the fourth quarter.

This compares to $947 million in the same quarter last year. As a percent of net revenue cost of services were 86.5% for both the fourth quarter of this year and last year. For the year, cost of services were $4.3 billion. This compares to $3.7 billion last year. As a percent of net revenue cost of services were 85.4% for the year.

This compares to 85.6% last year. G&A expenses were $30.3 million in the fourth quarter. This compares to $30.6 million in the same quarter last year. G&A expense in the fourth quarter last year included $2.8 million in U.S. HealthWorks acquisition costs. G&A as a percent of net revenue was 2.4% in the fourth quarter.

This compares to 2.8% of net revenue for the same quarter last year. For the year, our G&A expense was $121.3 million. This compares to $114 million last year. G&A as a percent of revenue was 2.4% this year. This compares to 2.6% last year.

As Bob mentioned, total adjusted EBITDA was $147.1 million, and adjusted EBITDA margin was 11.6% for the fourth quarter. This compares to adjusted EBITDA of $124.6 million and adjusted EBITDA margin of 11.4% in the same quarter last year. Total adjusted EBITDA for the year was $645.2 million. This compares to $538 million last year.

Adjusted EBITDA margin was 12.7% this year. This compares to 12.3% last year. Depreciation and amortization was $52.6 million in the fourth quarter. This compares to $40.4 million in the same quarter last year. For the year, depreciation and amortization expense was $201.7 million. This compares to $160 million last year.

The increase in depreciation and amortization expense in both the fourth quarter and the full-year is primarily the result of the U.S. HealthWorks acquisition. We generated $7 million in equity and earnings of unconsolidated subsidiaries during the fourth quarter. This compares to $5.4 million in the same quarter last year.

For the year, we generated $21.9 million in equity and earnings of unconsolidated subsidiaries. This compares to $21.1 million last year. We had several one-time items both this year and last year. We recognized a loss of early retirement of debt in the fourth quarter of $3.9 million.

For the year, we recognized $14.2 million of losses on early retirement of debt. We also recognized non-operating gains of $9 million during the year. This was primarily related to the sale of outpatient clinics to Banner and Baylor JVs that Bob mentioned. Last year, we recognized a loss on early retirement of debt of $19.7 million.

Interest expense was $50.5 million in the fourth quarter. This compares to $38.5 million in the same quarter last year. Interest expense for the year was $198.5 million. This compares to $154.7 million last year. The increase in interest expense is primarily related to the financing of the U.S. HealthWorks at Concentra.

We recorded income tax expense of $58.6 million this year. This compares to an income tax benefit of $18.2 million last year. The tax benefit in 2017 includes the effects resulting from the federal tax reform legislation, which caused us to revalue our tax reserves upon the enactment of the legislation.

Net income attributable to Select Medical Holdings was $137.8 million for the year, fully diluted earnings per share was $1.02. Excluding the pre-tax losses on early retirement of debt, non-operating gains, U.S. HealthWorks acquisition cost, and the related tax effects this year our adjusted earnings per share was $1.03.

At the end of the year, we had $3.29 billion of net debt outstanding and $175.2 million of cash in the balance sheet.

Our debt balance at the end of the year includes $1.13 billion in Select term loans, $20 million in Select revolving loans, $710 million in Select 6.375% senior notes, $1.17 billion in Concentra first lien term loans, $240 million in Concentra's second lien term loans, $44.5 million in unamortized discounts, premiums, and debt issuance cost to reduce the overall balance sheet debt liability.

And we had $63.8 million of other miscellaneous debt. Operating activities provided $113.2 million of cash flow in the fourth quarter. This compares to $108.2 million in the same quarter last year. For the year, operating activities provided $494.2 million, compared to $238.1 million last year.

Our days sales outstanding or DSO was 51 days at December 31, 2018. This compares to 54 days at September 30, 2018 and 58 days at December 31, 2017. Investing activities used $50.6 million of cash in the fourth quarter.

The use of cash was primarily related to $46.2 million in purchases of property and equipment and $4.4 million of acquisition and investment activity during the quarter. Investing activities used $697.1 million for the year.

The use of cash was primarily related to $536.6 million in acquisition in investment activity, primarily related to the acquisition of U.S. HealthWorks and $167.3 million in purchase of property and equipment during the year. Financing activities used $47.9 million of cash in the fourth quarter.

We had net repayments of $45 million on Select’s revolving loans, $5.1 million in distributions to noncontrolling interests, and $2.9 million in term loan payments in the quarter. This was offset in part by net borrowings of other debt of $4.8 million. For the year, financing activities provided $255.6 million of cash.

We had net proceeds from term loans of $768.3 million in net borrowings of other debt of $17 million during the year. This was offset in part by net repayments of $210 million on Select's revolving loans and $311.5 million in distributions and purchases of noncontrolling interest during the year.

Additionally, in our earnings press release, we reaffirmed our business outlook for calendar year 2019 provided earlier this year. We expect net revenue to be in the range of $5.2 billion to $5.4 billion. Adjusted EBITDA is expected to be in the range of $660 million to $700 million.

And fully diluted earnings per share is expected to be in the range of $0.97 to $1.13 [in 2019]. This concludes our prepared remarks, and at this time, I would like to turn it back over to the operator to open up the call for questions..

Thank you. [Operator Instructions] Our first question is from Frank Morgan with RBC Capital Markets. Your line is open..

Good morning.

Thanks for the clarification there and the LTACH volumes when you pulled out those divestitures, but I’m curious 1.7% growth, which is effectively like a same-store, if I understood you correctly, so just wanted to get a little more color on how you see growth going into the year, and maybe talk a little bit about what’s implied in your guidance there? So, I guess a two-part question, how is the uptake in those local markets growing with patient criteria and the ability to attract those patients and then what’s the implied growth in your guidance with regard to the LTACH segment?.

Thanks for the question Frank. The guidance moving forward is, we’ve assumed we have 96 LTACH’s and we will continue to have 96 LTACH’s through all of 2019. There is no – we did not increase any LTACH’s during 2019..

In terms of what our prospect is Frank in terms of how we’re going, I think that, you know when you have as many hospitals as we do across as many states and local communities, I think we’re generally pleased. I mean we have some hospitals that are just doing phenomenally well, and are at the very high-end of our expectations.

And then, we obviously have a group that because of the nuances of the local market driving the senses to back-up to pre-criteria levels is going to take a little bit more time, there’s a little bit more difficult. So, I think the biggest takeaway I can give you is that it’s not even across our portfolio of critical illness hospitals.

It’s [decidedly] uneven and when we have some hospitals that are doing phenomenally well and some of our hospitals that were great are just now good and some of the ones that we were struggling with are doing much better.

So, it’s a little bit uneven, but we're still pretty optimistic that the portfolio of hospitals that we have is the right one and that over time we will be able to drive the occupancies back up to pre-criteria levels..

Got you.

And Marty, I think you called out, in terms of your discussion about margins, some other operating expense line items it was one of the factors and the margin pressure there, could you give us any color there?.

Yes, Frank. Actually, I think with the volume decline I think the operators did a very good job controlling expenses. If you take a look at expenses on a year-over-year basis they were up about 1.4% or $5 million for the quarter. You know, the issue was really the line [indiscernible].

Got you.

And I'm guessing the other operating expenses are probably more semi-fixed, so you probably couldn't change those as much, but, okay since we’re talking about the guidance, just any other guidance general assumptions that you’re baking in there whether its timing of openings of LTACH’s or start-up losses in tax rate? And then, just on Concentra, I think I know this, but I just want to hear you say it, in terms of any seasonality you see in that business on a sequential basis? Thanks, I’ll hop of..

Yes. Let me address your last question first and that is the seasonality associated with Concentra. I mean Concentra in the fourth quarter is always a down quarter for them. And you can go back over the years and you will see that, you know, first, second quarter margins are north of – since we’ve had it north of 15%.

And you will always see in that fourth quarter drop. So, we should make sure that all the analyst kind of built that into their model moving forward. Frank, remind me of the first question you asked..

Yes, just some more general assumptions around your guidance in areas like openings, maybe timing of openings, and now start-up losses you expect, and assume tax rate in the year. That’s it..

Yes, the tax rate, we anticipate it’s about 25% for the year. Openings, we do not anticipate any openings on the LTACH side.

And with regards to the in-patient rehab, we should have one hospital opening, our Dignity Hospital should be opening in second quarter of the year and then Shands, which is the University of Florida will be opening by the end of this quarter..

In implied startup losses, you know you are about 900,000 in this [perfect quarter]?.

Yes. There is going to probably be for those hospitals. I would anticipate, you know somewhere in the neighborhood of $2 million to $3 million of startup losses per hospital..

Okay, thanks, I’ll hop back in the queue..

Thank you. Our next question is from Peter Costa with Wells Fargo Securities. Your line is open..

Good morning Bob and Marty. So many things going well.

The only thing that has been a little slower seems to be the improvement in the LTACHs and you did get the occupancy up 1% year-over-year, but how much of more can you do in a year? Is it going to be something that’s going to be 1% per year or you think you can do better than that and what is it that’s holding you back in those markets that you talked about being a little bit slower, is it competition or is it an education process of either the clinical staff or the administrators?.

Pete, thanks for the question. I think you hit the nail in the head. It really is an educational process. Remember that as you go after these compliant patients, the compliant patients are actually in the short-term acute care hospitals. And it’s really just modifying their historical discharging patterns.

Our people continue to do a great job I think educating our referral sources and that’s just going to take time. So, I think in terms of occupancy rate increases, I think the 1% a year is probably a good assumption..

Yes, I would say that it would be definitely not competition as a general statement.

I mean, with the change over to the new criteria, which as you know we’re taking the LTACH compliant patients exclusively, the high acuity of these patients and the fact that they are coming out of the intensive care units of general acute care hospitals just makes the process in some markets slower, you know you have to demonstrate that you have the clinical wherewithal to take care of some really involved acute patients and in most of markets, we know we have all those relationships and the transition of patients is very smooth.

In others, we have work to do.

We get some group of those patients and others we have to work harder through education and providing the clinical programs that enabled physicians and discharge planners to feel very comfortable that it’s a good safe environment for their high acuity patients, and so that’s the process and in many of our hospitals we’re there and we have a cohort that we still keep working on..

And is it educating the clinical staff more or is it educating the administrators to get the referrals?.

I think for these patients it’s more of the clinical staff..

In spite of the employee cost on the critical illness recovery hospitals as being one of the contributors to the weakness, how much of that is just raises, you know pay raises versus having more staff on board, trying to get ready for more patient volume?.

Pete, it really is a question of the annual increases to the staff..

Yes. It’s more of the former. The latter that you mentioned is, really been and done. And we’ve prepared for that going into criteria. So, it’s very much the former. I mean, this is just a – the critical illness hospitals is just a difficult venue for clinicians to work.

Taking care of this population of patients it’s very tough work and it’s hard to recruit into that area. It’s hard to retain in an area in a time when there is nursing shortages. So, it’s very competitive for staff out there and I think that that’s what’s driving it..

And do you think that’s getting worse or getting better as we go forward?.

I would say the same although it is different depending on the geography and depending on the market that you’re in, but I don’t think we see it getting worse. I think we see it kind of, I don’t know that we would characterize it as getting better at this point, but certainly probably not getting worse..

Thanks. Appreciate the time..

Thank you. Our next question is from A.J. Rice with Credit Suisse. Your line open..

Hi, thanks. First of all, let me ask about the Concentra U.S.

HealthWorks business as you anniversary that, I think in the first quarter of this year, what is sort of the combined organic growth that you would look for that business to generate on the top line if [you don’t mind]?.

Yes, A.J. as – I think you’ve got it correctly that the acquisition took place February 1 of last year. So, first quarter you will see a little bit of – you will see January of 2019 really be that – we won’t anniversary, I guess. What I’m trying to see is, we won’t anniversary until the second quarter because it was acquired in February 1 of 2018.

The topline organic growth that we see is probably in the 2% to 3% range..

Okay.

When I look at – I guess also for this year in your guidance, you will have one quarter of this new care tool that the IRF business is going to have to be impacted by, I know it’s not a huge business in your overall mix, but I wondered are you assuming sort of status quo with that transition or is that a headwind, how would you describe what your view is on that at this point?.

We’re assuming status quo. We are not anticipating it as a headwind..

Okay. And then on the interest expense guidance, I guess in the fourth quarter are running about 50.5 million of interest as mentioned in your prior remarks Marty and you’ve got to think of a guidance of 200 million.

I know there is various things going on in there, but I wondered, how much of your debt at this point I know you mentioned the tranches, I don’t know if you’ve got any of that hedged, assuming you probably do, how much of your debt is floating rate or what are you assuming about that and then is there any assumption about the ability to call or refinance anything that might impact the interest calculation to go behind that 200 million?.

A.J. we are good with the 200 million. The expectation is that, we will pay down some debt over the next year. With regards to what the composition of our debt is, we have our senior notes at 6.375% which are fixed in the balance of our debt is floating.

In our guidance, we assumed that LIBOR would be in that 2.75, we are going on one-month LIBOR we assume it will be 2.75% to 3%..

I might just slip one last one in.

You mentioned the Panama City situation in your prepared remarks, was that immaterial consolidated results or was that a drag in the fourth quarter in any way and will it be a drag in the early part of 2019?.

It was certainly a drag in the fourth quarter. The Panama City on an annualized basis on EBITDA does around $5 million. And I think we incurred a loss in the fourth quarter of about $700,000, $800,000..

I mean, assuming that persists for 2019 or are you assuming that at some point you get up and running?.

Yes. We don’t think the Panama City will come back on board probably until the fourth quarter of 2019..

Alright, thanks a lot..

Thanks, A.J..

Thank you. Our next question is from Patrick Feeley with Barclays. Your line is open..

Hi, good morning, everyone. Just a follow-up on that question.

Do you expect any insurance recoveries for Panama City to come in?.

Yes, we do. I mean under the business interruption, portion of our insurance policy, we expect that to come in play. We probably won't realize that, again until the third or fourth quarter of 2019..

Okay. And just my other question on the outpatient rehab side. First on some of the issues in Physio you experienced in the past.

Can you just give us an update on where you stand with replacing some of those therapists you lost post-acquisition? Has that stabilized by now? And the other question – I'll let you answer that and come back with the follow-up..

Sure. The Physio integration, we think that the – our operators have done a great job, and you can see that in the past couple of quarters. You can see the improvement that's been made, and for all intents and purposes, yes, the Physio has been fully integrated and we're comfortable with where we are right now..

Great. And the other question on the outpatient rehab. The other revenue bucket, while it's not terribly material, it's been up pretty materially 20% or so.

Can you just comment on what's driving that? What's in that bucket? Is that primarily management fee revenue from the non-consolidated JVs driving that? Just any color there? And how to think about that for 2019? Thanks..

Yes, there is – you're absolutely right. That is going up as we continue to do more JVs and some of those JVs are non-consolidating. There's two primary components that are in that. That is as you pointed out the management fees, but there is also a line item called – we do a labor pass-through.

And both of those categories as we can – as – actually we did the Banner and the Ohio health deal, and also the Baylor. Those are all non-consolidating for us. So that's why you see the big increase on that line item..

Got it. Thanks very much..

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

Great. Thanks. I wanted to go back to the LTACH margins. I guess, you guys closed four sites year-over-year.

I would have thought that might have helped boost the margin profile for some of their underperforming sites? Many of the margins were down year-over-year, I don't know if there is any other color you can provide there?.

Yes, Kevin. The four hospitals that we closed those were hospitals where the lease was coming up and when you take a look at the marketplaces there wasn't – when we take a look at five years out, we thought that there just wasn't a sufficient EBITDA increases to continue the five-year lease.

All four of – I think at least three of those four were actually generating positive EBITDA. But it was moderate EBITDA..

Yes, so but I guess still that we're probably implied that your margins were benefited year-over-year by not having them in the same-store number, or in the consolidated number, I should say?.

Yes, it's – if we want to talk basis points, I'll have to get back to you on that. I don't – it's immaterial actually..

Okay. And then, I guess your margins were down year-over-year even though on a same-store basis, you were growing volumes 1.7% and you said that going forward you expect 1% to be the right number as a starting point.

And if the labor environment is not getting better, does your guidance assume that LTACH margins were down again in 2019?.

I want to make sure, we're talking about the same thing. The 1% that we were talking about was 1% occupancy rate, right? So, I want to make sure that the percentages that we're talking about are – it's an apples-to-apples comparison..

Okay.

But I guess in this quarter your occupancy was up at 1%, right?.

Yes..

And that’s what you are talking about going forward and I guess, I'm just trying to figure out if – it sounds like, you're saying you expect similar volume growth in the future is what you saw here, similar wage growth as you saw here? And obviously margins were down, so I just was trying to understand if you're assuming the margin will be down in 2019 or if this somewhat offset on rates or something else, costs?.

Well I think if you like at the – well the rate was up in the fourth quarter the rate was up $26, what was down was Case Mix Index. And Case Mix Index represents about a $26 differential. We think we should be in that 1.25 to 1.26 range. We're at 1.22. That comes back to 1.25, 1.26, we'll be fine..

Okay. And then I guess with – on the IRF side, the margins were down even though the startup losses were down. I guess I think if you take out the startup losses and EBITDA, wouldn't have grown at all, it actually would've been down a little bit. So, what is the – is something going on there to which we think....

Well, I think Bob had mentioned we had an impact from the California Rehab Institute where the Medicare rate was down. We had an Interim Medicare rate in Q4 of 2017 that was – because of the startup nature of that hospital that – the rate actually in – Q4 of 2018 was lower than what it was in 2017.

So, that had a negative impact, as well as two hospitals we had. We had some softness in volume. And that really – the two hospitals that were same store..

And how do we think about that California rate dynamic? Is that something that was – still going to be a headwind year-over-year for the next couple of quarters or was that just a onetime thing in Q4 and the comps are normal going forward?.

Yes. No, we're – it was the fourth quarter rate impact. So, we will be fine going forward..

Okay. Alright, great. Thank you..

Thanks..

Thank you. And that does conclude our Q&A session for today. I’d like to turn the call back over to Mr. Robert Ortenzio for any further remarks..

Thank you everybody for joining us and we look forward to updating you again next quarter..

Ladies and gentlemen, thank you participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone, have a great day..