Good morning and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Fourth Quarter and Full-Year 2020 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 questions.

Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or 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 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 2020. As we’ve done in the past three quarters, we have outlined monthly revenue, volume and occupancy statistics in our earnings press release and public filings.

This illustrates the trends in each of our business segments as our operating divisions rebound from the lows we experienced early in the COVID pandemic.

I need to reiterate once again how impressed and pleased we are with our colleagues and clinical staff throughout the country in the face of the continued challenges during the public health emergency.

Our critical illness recovery hospitals continue to run at higher year-over-year occupancy rates growing from 67% in the fourth quarter of 2019 to 71% in the fourth quarter of 2020 generating double-digit growth in patient days for the quarter.

Our rehabilitation hospitals also experienced occupancy growth in the fourth quarter growing from 78% in the fourth quarter of 2019 to 80% in the fourth quarter of 2020. Even as some markets have been slow to rebound to pre-COVID levels.

We continue to see volume improvements from the second quarter lows in both our outpatient rehabilitation and consensus segments.

Both businesses continue to experience negative volume variances in the fourth quarter compared to the same quarter prior year, however Concentra actually had 1.2% increase in year-over-year volume in the month of December.

I also wanted to know that we recorded $36 million in other operating income in the fourth quarter and 90 million for the full-year 2020 related to payments received under provider relief funds.

The adjusted EBITDA results for our critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation segments do not include any recognition of these funds and the Concentra segment included 1.1 million of adjusted EBITDA related to those funds.

Overall, we continue to post strong financial results this fourth quarter growing revenues 6.2%, adjusted EBITDA 28.7%, EPS 137.5%, and adjusted EPS 83.9% versus the same quarter prior year. Excluding the provider relief funds recognized in the fourth quarter, adjusted EBITDA was up 7.7% in the fourth quarter, compared to the same quarter prior year.

Total company revenue for the fourth quarter was $1.46 billion, as I mentioned, a 6.2% increase compared to the same quarter prior year. For the full-year, total company revenue increased 1.4% to $5.53 billion, compared to $5.45 billion in the prior year.

Revenue and our critical illness recovery hospital segment in the fourth quarter increased 18.2% to $538 million, compared to $455 million in the same quarter prior year. Patient days were up 10.1%, compared to the same quarter prior year with over 285,000 patient days.

Revenue per patient day increased 8% to $1,881 per patient day in the fourth quarter, as case mix index was up from 1.26 in Q4 of 2019 to 1.31 in Q4 of 2020.

For the year, revenue in our critical illness recovery hospital segment increased 13.1% to almost $2.1 billion, compared to $1.8 billion in the prior year, driven by both volume and rate increases. Patient days were up 7.1% and revenue per patient day increased 6%, compared to the prior year.

Revenue in our rehabilitation hospital segment in the fourth quarter increased 7.2% to $196 million, compared to $183 million in the same quarter prior year. Patient days were up 2.4% compared to the same quarter prior year, and net revenue per patient day increased 5.8% to $1,839 per day in the fourth quarter.

For the year, revenue in our rehabilitation hospital segment increased 9.5% to almost $735 million, compared to $671 million in the prior year driven by both volume and rate increases. Patient days were up 5% and revenue per patient day increased 6.4%, compared to the prior year.

Revenue on our outpatient rehabilitation segment in the fourth quarter declined 5.3% to $257 million, compared to $272 million in the same quarter prior year. Patient visits were down 5% compared to the same quarter prior year with over 2.1 million visits in the fourth quarter. Our revenue per visit was 103 in the fourth quarter.

For the year, revenue on our outpatient rehab segment declined 12.1% to 920 million, compared to a little over a billion dollars in the prior year. Patient visits were down 12.9%, compared to the prior year. However, we did see quarterly improvement from the shortfalls at the start of the pandemic.

Second quarter volumes were down 39.1%, third quarter 10%, and fourth quarter 5% when compared to the same respective quarters in the prior year. Revenue per visit was $104 for the full-year. Revenue and our Concentra segment for the fourth quarter increased [0.4%] to $399 million compared to $397 million the same quarter prior year.

For the occupational health centers, patient visits were down 4.5% with 2.77 million visits in the fourth quarter. Revenue per visit [in centers] was $122 in both the fourth quarter of this year and prior year. For the year, revenue on our Concentra segment declined 7.8% to $1.5 billion, compared to $1.6 billion in prior year.

For the occupational health centers, patient visits were down 11.9%, compared to prior year. Revenue per visit in the centers was [$122] for the year, compared to $122 in the prior year. Total company adjusted EBITDA for the fourth quarter was up 28.7% to $221 million, compared to $171.9 million in the same quarter prior year.

Our consolidated adjusted EBITDA margin was up with [15.2%] margin for the fourth quarter, compared to 12.5% in the same quarter prior year. As I mentioned, the adjusted EBITDA results in the fourth quarter included $36.2 million grant income recognized from the Provider Relief Fund.

For the full-year, total company adjusted EBITDA increased 12.6% to $800.6 million, compared to $710.9 million in the prior year. Our consolidated adjusted EBITDA margin was 14.5% for the year, compared to 13% in the prior year. Adjusted EBITDA results for the full-year included 90 million of grant income from the Provider Relief Funds.

Our critical illness recovery hospital segment adjusted EBITDA for the fourth quarter increased 24.5% to $75.3 million, compared to 60.5 million in the same quarter prior year. Adjusted EBITDA margin for the segment was 14% in the fourth quarter, compared to 13.3% in the same quarter prior year.

For the full-year critical illness recovery hospital segments, adjusted EBITDA increased 34.4% to $342.4 million, compared to 254.9 million in the prior year. Adjusted EBITDA margin for this segment was 16.5% for the full-year, compared to 13.9% in the prior year.

Adjusted EBITDA and margin improvement for the year was driven by increases in revenue, which were offset in part by increased expenses as a result of COVID. Our rehabilitation hospital segment adjusted EBITDA for the fourth quarter declined 2.1% to $42.4 million, compared to 43.9 million in the same quarter prior year.

Adjusted EBITDA margin for rehabilitation hospital segment was 21.6% in the fourth quarter, compared to 23.7 in the same quarter prior year. For the full-year, rehabilitation hospital segment adjusted EBITDA increased 12.8% to $153.2 million, compared to $135.9 million in the prior year.

Adjusted EBITDA margin for the segment was 20.9 million for the full-year, compared to [20.2%] in the prior year.

Adjusted EBITDA margin and margin improvement for the year was driven by improvement in the hospitals we opened in 2019 as well as increases in revenue from some of our existing hospitals which were offset in part by increased expenses as a result of COVID.

Our outpatient rehabilitation segment adjusted EBITDA for the fourth quarter was $27.7 million, compared to 40.2 million in the same quarter prior year. Adjusted EBITDA margin was 10.8% in the fourth quarter, compared to 14.8% in the same quarter prior year.

Adjusted EBITDA margin decline continued to be adversely affected by volume declines related to COVID. For the full-year, outpatient rehab segment adjusted EBITDA was $79.2 million, compared to 151.8 million in the prior year. Adjusted EBITDA margin was 8.6% for the full-year, compared to 14.5% in the prior year.

Adjusted EBITDA and margin were impacted by volume declines related to COVID beginning in March. Our Concentra adjusted EBITDA for the fourth quarter increased 22.9% to $69.4 million, compared to 56.5 million in the same quarter prior year. Adjusted EBITDA margin was 17.4% in the fourth quarter, compared to 14.2% in the same quarter prior year.

While we continue to experience volume shortfalls in our centers, we’ve made reductions were possible in our operating expenses and increased COVID testing services, which drove improvements in both adjusted EBITDA and margin in the quarter, compared to the same quarter prior year.

For the full-year, Concentra adjusted EBITDA declined to $252.9 million, compared to $276.5 million in the prior year. Adjusted EBITDA margin was 16.8% for the full-year compared to 17% in the prior year.

Adjusted EBITDA margin were impacted by volume declines related to COVID beginning in March, which we were able to partially offset by reducing our operating expenses and increasing our [indiscernible] services related to COVID.

Earnings per fully diluted share were $0.57 for the fourth quarter growing 137.5% over the same quarter prior year earnings per share up $0.24. Adjusted earnings per share were $0.31 in the fourth quarter of 2019, which excluded the loss on requirement of debt and related tax effects.

For the full-year, earnings per fully diluted share increased over 75% to $1.93, compared to $1.10 per share in the prior year. Adjusted earnings per fully diluted share increased 52.4% to $1.89 for the full-year, compared to $1.24 in the prior year.

Adjusted earnings per share excludes the non-operating gains and the related tax effects in 2020 and 2019 exclude the loss on retirement of debt and related costs and non-operating gains, and their related tax effects.

At this point, I'll turn over to Martin Jackson for some additional financial details, and then we'll open the call up for questions..

Thanks Bob and good morning, everyone. For the fourth quarter, our operating expenses, which include our cost of services in general, and administrative expense, were $1.3 billion and 87.8% of revenue. For the same quarter prior year, operating expense were $1.2 billion and [80%] of revenue.

For the full-year, our operating expenses were [$4.85 billion], and 87.6% of revenue, compared to $4.77 billion and 87.5% of revenue in the prior year. Cost of services were $1.25 billion for the fourth quarter. This compares to $1.18 billion in the same quarter prior year.

As a percent of revenue, cost of services were 85.4% for the fourth quarter, compared to 85.5% in the same quarter per year. For the full-year, cost of services were $4.71 billion. This compares to $4.64 billion in the prior year. As a percent of revenue, cost of services were 85.2% for the full-year compared to 85.1% in the prior year.

G&A expenses were $35.2 million in the fourth quarter as compared to $34.1 million in the same quarter prior year. G&A as a percent of revenue was 2.4% in the fourth quarter, compared to 2.5% in the same quarter prior year. For the full-year, G&A expense was $138 million, compared to $128.5 million in the prior year.

G&A as a percent of revenue was 2.5% for the full-year, compared to 2.4% in the prior year. As Bob mentioned, total adjusted EBITDA was $221.3 million and the adjusted EBITDA margin was 15.2% for the fourth quarter. This compares to total adjusted EBITDA of $171.9 million and adjusted an EBITDA margin of 12.5% in the same quarter prior year.

For the full-year, total adjusted EBITDA was $800.6 million and the adjusted EBITDA margin was 14.5%. This compares to total adjusted EBITDA of $710.9 million and adjusted EBITDA margin of 13% in the prior year. Depreciation and amortization was $51.5 million in the fourth quarter. This compares to $52.5 million in the same quarter prior year.

For the full-year depreciation and amortization was $205.7 million, compared to $212.6 million in the prior year. We generated $9.8 million in equity and earnings of been consolidated subsidiaries during the fourth quarter. This compares to $6.3 million in the same quarter prior year. For the full-year, equity and earnings was $29.4 million.

It compares to $25 million in the prior year. We also had a non-operating loss of $303,000 in the fourth quarter of this year, and losses on retirement of debt of $19.4 million in the fourth quarter of 2019. For the full-year, we had non-operating gains of $12.4 million.

In 2019, we had non-operating gains of $6.5 million, as well as losses on retirement of debt of $38.1 million. Interest expense was $35.5 million in the fourth quarter. This compares to $44 million in the same quarter prior year. For the full-year, interest expense was $153 million. This compares to $200.6 million in the prior year.

The reduction in interest expense is the result of both refinancing activities we completed in the second half of 2019, and a reduction in the LIBOR rates in the current interest rate environment. We recorded income tax expense of $35.1 million in the fourth quarter this year, which represents an effective tax rate of 25.5%.

This compares to income tax expense of $11.6 million in an effective rate of 21% in the same quarter prior year. For the full-year, we reported income tax expense of $111.9 million, which represents an effective tax rate of 24.5%, compared to income tax expense of $63.7 million and an effective tax rate of 24.1% in the prior year.

Net income attributable to non-controlling interest was $24.9 million in the fourth quarter. This compares to $11.6 million in the same quarter prior year. For the full-year, net income attributable to non-controlling interests were $85.6 million. This compares to $52.6 million in the prior year.

Net income attributable to Select Medical Holdings was 77.3 million in the fourth quarter and fully diluted earnings per share were $0.57. Net income attributable to Select Medical Holdings was $259 million for the full-year and fully diluted earnings per share was a $1.93.

Excluding the non-operating gains and the related tax affects, our adjusted earnings per share was $1.89 for the full-year. At the end of the year, we had $3.4 billion of debt outstanding and $577 million of cash on the balance sheet.

Our debt balance at the end of the quarter included $2.1 billion in term loans, $1.2 billion and 6.250% senior notes, and $74 million of other miscellaneous debt. We ended the year with net leverage for a senior secured credit agreement of 3.48 times. For the fourth quarter, operating activities provided $207.4 million of cash flow.

This includes an additional unearned government assistance of $15.7 million in the quarter. Investing activities used 53.2 million of cash in the quarter. This included $40.9 million in purchases of property and equipment, and $12.3 million in acquisition and investment activities during the quarter.

Financing activities used $217 million of cash in the fourth quarter. This included $210.2 million to repurchase the membership interest in Concentra. For the full-year, operating activities provided $1 billion of cash flow. This included $318.1 million in Medicare advances and $82.6 million in unearned government assistance.

In addition, we deferred approximately $106.2 million in payroll taxes related to the CARES Act. Investing activities used $115.4 million of cash for the full-year. This included $146.4 million in purchases of property and equipment and $52.2 million in acquisition and investment activity for the year.

These were offset in part by $83.3 million in proceeds from assets and business sales during the year. Financing activities use $671.5 million of cash for the full-year. This includes $576.4 million to repurchase membership interest in Concentra. Select now owns close to 80% of the voting interest in Concentra.

The joint venture partners continue to have the right to put the balance of their initial membership interest to Select in 2022 with Select retaining the right to call any remaining membership interest outstanding in 2022. Our total available liquidity at the end of the year was almost $1.1 billion.

This includes $577 million of cash and close to $500 million in revolver availability under the Select and Concentra credit agreements. Our earnings press release also included our business outlook for Calendar Year 2021, as well as a three-year compounded annual growth rate targets for 2021 through 2023.

Our business outlook for the full-year 2021 includes expected revenue in the range of $5.65 billion to $5.85 billion, expected adjusted EBITDA in the range of $840 million to $880 million, expected fully diluted earnings per share to be in the range of $2.26 to $2.48.

For the three years 2021 to 2023 we are targeting compounded annual growth rates for revenue in the range of 4% to 6%, adjusted EBITDA of 7% to 8% and earnings per fully diluted share of 17% to 20%. This concludes our prepared remarks, and at this time we would like to turn it back over to the operator to open the call for questions..

Sure. [Operator Instructions] Your first question comes from Justin Bowers from Deutsche Bank. Your line is open..

Thank you, and good morning everyone and congratulations on the execution this year and laying out the three-year targets.

I think that will be well received, but as we think about those, with the segments is – how are you thinking about the segments, is there any, so in other words, is growth, kind of uniform across those segments or is one segment of the portfolio growing more than the other, just at a high level, and then also, how much of that is organic and de novo’s versus M&A just at a high level?.

Thanks Justin. I’ll start at a high level, the way we're thinking about the business and our execution results for this year. The way we're thinking about it is, we believe that the success that we've had in our inpatient segments both the critical illness recovery hospitals and inpatient rehab can sustain itself.

So, the results that we saw last year will continue throughout this year. And on the Concentra and the outpatient segment, we see those recovering and growing to pre-COVID levels. So that kind of gives you the sense of, at a very high level of how we see the business and the growth continuing. I'll let Marty add to that. .

Yeah, Justin, it's – if you take a look at the positive and negative variances between our business segments, critical illness, recovery hospitals, and inpatient rehab, they really did a terrific job from 2019 to 2020, growing EBITDA by close to $105 million.

And as Bob mentioned, you know, because of some of the governmental shutdowns that we had on the outpatient side, we saw negative variances in the $96 million. We expect that $96 million to come back, and we expect all of our business lines to grow from that base..

Got it. Understood. And then, you know, as I kind of look at my model, and how much cash the business throws off, you know, you guys are going to be accumulating a lot of – generating a lot of cash over the next few years.

You know, even net of the Concentra remaining interest, which you'll be able to fund so does the growth algorithm contemplate additional M&A and then just with respect to 2021, there's, you know, some moving parts with, you know, some of the deferrals, etcetera, etcetera.

Can you just help us think about, you know, what you're thinking about for cash from operations this year?.

I’ll let Martin talk about cash from operations, but I'll say that what you can expect from M&A, we would say that it's incremental.

I mean, we don't – I wouldn't expect any huge deals, big deals in the current year, but you can expect in each of our segments that we'll be doing de novo development, and some small M&A, certainly on the consensus side, outpatient side, even the critical wellness side. And then more de novo growth in the inpatient rehab side.

So that's how we think about the incremental new business growth between development acquisition de novo..

Yeah, Justin, when you take a look at three years out, you know, the way we've developed the model is very little in terms of acquisitions, as Bob said. You know, we continue to do small acquisitions on the outpatient side, but those are really three times to four times LTM EBITDA.

And again, very little [doubt there], it's really taking a look at same store growth, as well as the pipeline that we have in all of our business lines. So, when we take a look at that we're very comfortable when, you know, when we took a look at putting these numbers out for the next three years.

And I think the other point that you mentioned, as far as generating substantial free cash flow, you know, [indiscernible] I mean, Select should be generating somewhere in the neighborhood of $450 million to $500 million of free cash flow [year]..

Yeah. Got it. So, yeah, I mean, that extra cash is, I mean, there's, you know it sounds like most of the growth is organic de novo’s and then there's, you know upside from capital deployment there. So, alright, thanks so much. I’ll hop back in queue..

Thanks..

Your next question comes from Frank Morgan from RBC Capital Markets. Your line is open..

Good morning and congratulations.

Yeah, I'd like to dig a little bit deeper into this impressive growth that you put up here at the top line growth really in the [CCR], the critical care units and I'm just curious, when you break down the components there between the [indiscernible] that looks like you had pretty strong link to stay growth and then obviously the acuity that you talked about the case mix growing there.

I'm just curious, any one of those components that you think or are all those components sustainable or as we think about the year ahead would it be more likely to be driven from, you know, one of these areas? And then when I think about admissions, I also think about just any evidence so far early into the first quarter in terms of how those admission trends or patient day trends or – are going so far? That’ll be my first question..

Yeah, Frank, this is Marty. With regards to, you know, all four business segments, we expect to see nice growth from all of those. With regards to, you know the critical illness recovery hospitals, as well as the inpatient rehab. You know, as you know, I think we ended the year at 71% occupancy rate on the critical illness recovery hospital.

For year to date, including January, and where we are today, in February, the occupancy rate for critical illness recovery hospitals is running about 75%. So, about four points ahead of where we were at the end of last year, and actually on a year-over-year basis, we were at 70% in Q1 of 2020. So, you know, that bodes well for us.

And then if you take a look at the inpatient rehab, inpatient rehab were averaging January and February about 83%, which is about [three, four points] ahead of where we were the end of 2020. So, all that bodes well for the future for us..

And you [feel comfortable], so it sounds like you know occupancy is up a lot, do you think the intensity, the case mix would be able to stay at that level? And is there any concern that may be linked [that stays] do come back down? I think I had calculated that link to stay up maybe over 28 days or so, but what about on that area, any concerns there?.

Yeah, the issue for us, Frank, and we've been talking about this for – Bob, and I have been talking about this for a couple of years. And that is the educational process that we go with our referral sources. And what's happened is with the pandemic, you know, it's accelerated that education process.

So, you know, in many cases, our referral sources, in particular, the tertiary hospitals were hesitant to send some of the more clinically complex patients to us. And what we've seen, and what they have seen is that we can handle those patients.

And we think that that's, you know, when I just talked about the occupancy, I think that's a good sign that they're continuing to send us those patients. We think that we can continue to do that..

Got you. And then I guess, maybe on the EBITDA side, obviously very impressive in the critical care part of the business. You got 24% EBITDA growth and 18% revenue growth. Not so much on the [ERP side].

So, I just wonder, Is there anything that you would call out there where you still have great top line growth in the [ERP side], but didn’t get as much EBITDA leverage with that, was that because of maybe startups or was there any other factor? I think you mentioned you had a couple of your markets where the earth didn't recover.

So, any color around that I would appreciate it. .

Frank we did have. In [North Jersey], we did have some issues as it relates to COVID where [indiscernible] really where we thought it should be. We think that we should recover there. I think the other thing is when we saw it both in the critical illness recovery hospitals, as well as the [ERPs], you saw labor costs higher than they normally are.

And, you know, what we saw was a nice volume increases from Q3 to Q4. Some of those additional costs were over time for some of our clinical staff. And then in addition to that, we had agency costs that were abnormally high. And actually we've seen that mitigate in Q1. So, we saw agency hourly rates are much higher than we normally see.

And as I said, that's – we've seen that go down. But those are the two major impacts that we saw. .

Got you. Last one on Concentra, 23% growth on the flat revenue, I think you called out better expense management.

Is there anything else that you would call out there? I mean, does the drug testing, did that have any kind of outsized effect on you and how do you feel about the sustainability on that part of the business and I’ll hop back in the queue? Thanks..

Well, we feel good about Concentra’s returned to even enhanced profitability just as employment and as the economy ramps up, and the expense management was mentioned. And the testing, the only comment, I would make, Frank to your question was, the testing was not so much drug testing, but it was COVID-testing.

So, it is a testimony to the platform, and that the market share that Concentra has, you know, with its platform across the entire United States and being literally I think the only nationwide occupational medicine provider that we are able to accommodate some very large employers for services that they need uniformly across their business, that maybe involves testing for their employees.

Like, as you recall, during the pandemic, many employers who had essential workers were doing testing, temperature testing and other testing at their workplace, and Concentra was able to accommodate many of those large employer clients that we have.

So, we think that some of that will not continue, but on the other hand, as the economy opens up, it'll be a more return to the more traditional business that they have, as we think that injuries will naturally go up.

So, we'll get a return of the volume on injury, even if testing may abate, although, at least as far as the – I can see right now, testing is still going on and perhaps we may have some opportunities, even of doing some vaccinations for some of our large employer clients..

Okay, thank you very much. Congratulations..

Your next question comes from Kevin Fischbeck from Bank of America. Your line is open..

Great, thanks.

You know, it sounds like you guys are pretty optimistic that the progress in the critical illness recovery business will be sustainable even as COVID drops, just wanted to kind of drill down, I guess I understand the concept of you guys saying that the past year has been, you know, kind of accelerating that view from hospitals that you can not only take a lot of different types of patients, and maybe even take them earlier than they would have thought you could.

Has this been more about deepening relationships with existing referral sources, or have you actually expanded the referral source, you know, that you're getting volumes from because of COVID over the past year?.

Kevin, I would say that the specific answer to your question is both. I think as we look at the critical illness recovery hospitals, certainly COVID was able to bring them to the – their capabilities to the forefront with many acute hospitals that had a lot of demand on their ICUs, and the requirement to decompress those ICUs.

So, we were really able to show showcase our capabilities with those referral sources. So, I think that we were able to get more referrals from existing referral sources and at the same time, expand referral sources. And I think that is really why you saw the increase of our occupancies patient days.

We do believe that those relationships and the ability to garner more business, from all of those referral sources will continue. As we've been able to, as I mentioned, showcase our clinical capabilities, and have – those referral sources have an appreciation of the types of patients that we can take and take care of safely..

Okay, that's helpful.

And I guess when we think about your multi-year guidance, are you guys looking for EBITDA to come in to grow faster than your overall revenue growth? Is there some segments in particular that you would point to as having, you know, maybe the most opportunity for margin expansion over the next couple of years?.

Kevin, I mean, we think that critical illness will continue to, you know, as you saw there was a nice growth from 13. I think we were 13.5% that grew to 16.5% on a year-over-year basis. And, as we've shown is through increasing occupancy rates that has a significant benefit on leveraging the margin.

And we think – as we've shown, you know we just talked about, you know, where we are in the first quarter. I mean, we expect that will have a significant benefit to us, as far as margin is concerned, you know, going from 71% occupancy to 75%..

If you look at growth, even though our smallest division, we believe that the growth rate in our inpatient rehab will be very strong, and we also I'm very bullish on the prospects, the growth prospects of EBITDA for Concentra. That business has consolidated wealth from the U.S. HealthWorks, consolidated our positions. We’ve done tuck-in acquisitions.

They've refined their operational strategy. So, I think that the Concentra business also is a strong grower and outpatient can return to the, kind of EBITDA levels that they had pre-pandemic and we have opportunities there for de novo growth and tuck-in. So, I feel pretty bullish about the growth across all four of our business segments..

All right, that’s great. And then I guess maybe last question.

You mentioned a little bit about labor costs being high, I guess particularly the [ERPs segment] in Q4 is starting to moderate I guess, what is your view on labor costs kind of going forward? It seems like a lot of providers think that they will see some moderation in labor expenses, but the nurse staffing companies seem to think that labor markets remain tight for quite some time on, you know, nurse burnout, et cetera.

So, I guess, how are you thinking about the trends there over the next couple of years on labor? Thanks..

Kevin, one of the things with where we have been with occupancy rate is any time we had increases in patients, what we had to do in many cases is go out to agency. If we see that occupancy rate climb and stabilize, we will have full time employees there which will bring the labor cost down..

I think the other thing that – and you point out Kevin, and you may have a better insight, because of all the different companies staffing companies that you talk to, I mean, trying to project, kind of overall where the labor is going to go, I think is difficult, you know, for us, historically, in times of full employment, labor costs, particularly on the nursing side are tough for us in periods of where the economy is growing robustly.

On the other hand, if you have a downturn in the economy, the pressure on our type of staff and nurses tends to abate a bit. So, I think that the direction of the overall economy and unemployment return to work will also on a systemic level will have some impact, and that I think is harder to predict right now.

But you know, the key for us is as much retention because that will help bring down the temporary staffing costs..

Excellent, thank you..

Your next question comes from Bill Sutherland from The Benchmark Company. Your line is open..

Thanks and good morning guys. Most of my questions have been asked.

One little particular one I was looking at the change in facilities for rehab and for critical illness was the new facility and rehab consolidated and the critical illness was that – what happened there?.

Yeah.

There was one hospital maybe that we had which we work with a non-consolidating sub, and there was always a plan at some point in that relationship, once we hit certain benchmarks in terms of quality and performance that select wood in order toward the over 50% to 51% ownership, and then that would trigger from an accounting standpoint for us to consolidate.

So, if it was, so it's not a big mover, other than on the accounting front, but a good catch on that..

I was just curious, and I know you've got plans for growth.

At this point, you probably don't want to really signal too much, but have you got anything that you've announced for rehab, for instance, in 2021?.

Well, the last announcement that we made was the joint venture with Rush in Chicago, which I think is a very big deal, a premier system in a major metropolitan market for us. We don't – generally we don't talk about any deals until they are signed, but I can say that in terms of our pipeline for new joint ventures, probably never been stronger.

And that's a combination of potentially new partners that we're working with to sign and some growth, significant growth with existing partners.

So the company has gotten to a point where [our stable] of joint venture partners with very large systems, I think one of the things that's not well appreciated outside the company is the opportunity that we have to grow with existing partners. And we see that accelerating, and that's not just in one segment.

So, where we have a joint venture for inpatient rehab, for example, we may be working with adding a critical illness recovery hospital to that joint venture or one that’s started with rehab that then add outpatient to the joint venture.

So, we're seeing that inside our existing joint ventures and with our existing partners, and we're still seeing a really strong pipeline with for new partners..

Great.

One little additional color I was interested in looking into this year for critical illness is I know, the case mix was very strong and 2020, and when the case mix begins to change in terms of fewer COVID discharges, I mean, is it overall probably going to stay at this level or is that – or is, I mean, I'm just kind of getting a feel for directionally what's going to happen with case mix? Thanks..

Well, we would like to see that case mix index stay high, I mean, a couple of factors. One is, I think most experts believe that we will still have COVID with us for some time. It may go down with the vaccine, but we think about COVID on a being seasonal, almost potentially, like the flu, which is normally has an increase in our business.

But number two, we look at the relationships we have with the ICUs of acute care hospitals in the markets of our critical illness recovery hospitals. And we e believe that their recognition of our ability to handle the more highly acute patient, the higher case mix index, patient will continue.

So, even if it's not COVID patients, we believe that through COVID we've expanded our – the perception of those referral sources of our capabilities, so that we hope to be able to continue to get their high acuity patients, even if they're not COVID.

And we've known for some time and Martin and I have talked about it that those patients exist, and it's just a question of the education and the trust in the physicians in those ICUs move those patients, whether they be transplant patients or trauma patients or other multi-system problem patients to be able to move up to the – to our critical illness recovery hospitals.

So, we do believe that that can continue..

Right. Okay. Thanks for taking the questions, guys..

Your next question comes from AJ Rice from Credit Suisse. Your line is open..

Hi, everybody.

Maybe just a couple quick ones here, going back to the question on labor, are you experiencing much of a pressure from staff out on quarantine, as the vaccination rate for your clinicians goes up, do you think you could see some easing there?.

We are not AJ. I mean, we're – I think what is really driving, you know, the use of agencies is really the increased patient days as opposed to, you know nurses or clinicians not being available because of COVID..

Okay, all right. No problem.

On the 2021 guidance, what did you assume for the public health emergency and how much does that help you if that gets extended would be a question?.

Well what happens in an extension of public health emergency, we do get a continued hold on sequestration, which has some effect AJ, but it’s not material. So, I would say, incremental, maybe $8 million, $9 million through an extension. So, I mean, it's not material. .

I understood you got some help in critical illness hospitals, they all tax because of they were making everything, you know, the site neutral payment, part of the reimbursement goes away, I guess or is that not the case, is that part significant for you?.

That part is insignificant for us.

If you look at our case mix – if you look at the case mix index, would suggest the high acuity patients, the vast, vast majority of our patients are coming from ICUs and will continue to be eligible patients, and we have not had any meaningful admissions of site neutral patients that are getting higher reimbursement.

And so quite honestly, in kind of a regulatory world, we're not even advocating for an increased extension of that part of it..

Okay.

And then, just lastly, I don't think it's come up, this IRF demonstration project is selected to go in the place next year, have you guys looked at that? Do you have any early read whether the [Biden administration] is going to continue to go forward with that, are they looking at that, and any thoughts on it to speak of?.

Yeah, the American Hospital Association, the other trade groups have weighed in heavily on that. We oppose it, not so much because of any concern about our [ERPs] meeting the [indiscernible] criteria, we just think that there is enough in reserves, enough regulatory [oversight] in play and in place through audits and disallowance.

It's really just not necessary. And it's kind of a slippery slope to put that kind of pre-admission protocols in place for inpatient providers. This is something that was used initially with durable medical equipment, and we don't think that it's appropriate for rehab.

So, we oppose it, but mainly because we think that there are a lot of other mechanisms in place to guard against any inappropriate admissions to the rehab hospitals.

And so, we think that if that does go into play, it's going to be an additional burden on us in some markets where they do the demonstration, but we don't expect it to have a negative effect on the business or the patients that [weren’t there]..

Okay.

And no read about whether the new administration is even committed to following through on that or now it's too early?.

Do not know. I think it’s a good question and they’re putting in place, all the new heads of CMS and we just don't know at this point where their priorities are going to be.

If you can recall AJ, back in the Obama administration, most of the efforts through CMS were really on the Accountable Care Organization and getting more people enrolled in that, really more on the insurance and coverage side. And so, we just don't know, but we are monitoring it..

Okay. All right. Thanks a lot..

[Operator Instructions] Your next question comes from Frank Morgan from RBC Capital Markets. Your line is open..

Thanks. One quick follow up on the guidance, I'm curious could – is there any considerations we should take into account with regard to the cadence of the earnings for the year, we'd had providers, you know, have unusual cadences implied in their guidance this year.

So, is there any just kind of high level way we should think about that? Is it – would it be sort of a normal type of cadence, is there anything special that happens early in the year? Is it back-end loaded because of a ramp up, any considerations there? And just one other one is a clarification.

There is no incremental type of relief built into that 2021 guidance. That's it. Thanks..

Yeah, Frank. It's Martin. There is – based on the guidance that we provided, there's about $20 million to $35 million of [CARE dollars] in that guidance. And as you know, the CARES Act, it goes through June 30. And so, any of the incremental cost that you may incur during January through June, you will be able to utilize.

So that guidance does include that..

In terms of cadence on the quarterly now, we probably won't give you any guidance on this at this point. We would just continue to update. We’ll give you the next update in May with first quarter. [Indiscernible] Frank.

We're not going to give you the quarterly splits we gave you in the year, and the out year now, you know, you got to go back and do your model..

[Indiscernible] Thank you..

There's no further question this time. You may continue..

Okay, thank you, operator. Thanks everyone for your participation and your questions, and we'll look forward to updating you again next quarter..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..