Welcome to the U.S. Physical Therapy's Second Quarter 2015 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to Chris Reading, Chief Executive Officer. Please go ahead. .

Thank you, Marie, and good morning, everyone and welcome to U.S. Physical Therapy's second quarter earnings call. With me on the call today is Larry McAfee, our Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; and Jon Bates, our Vice President and Controller.

Before we begin our management discussion and financial review for the quarter as well as the year, I'll ask Jon to please cover our brief disclosure statement.

John, if you would?.

Thanks, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties, and these forward-looking statements are based on the company's current views and assumptions, and the company's actual results can vary materially from those anticipated.

Please see the company's filings with the Securities and Exchange Commission for more information. .

Thank you, Jon. Before Larry reviews the financials in detail, I want to provide some color in the quarter as well as to discuss our actions in response going forward. So for those of you who've had an opportunity to review our second quarter results, you know that we underperformed expectations for the quarter.

For those of you who know us well, you know that that's not something that we accept or enjoy. Let me explain how the quarter unfolded and also what we've done and what we are doing in response. .

For starters, this wasn't a problem that centered around volumes.

Volumes across our large base of clinics is relatively strong throughout the quarter, coming in at 24.4 visits per clinic day, up sequentially from the prior quarter's 22.9 visits per clinic per day, which really follows a seasonal pattern, and as further -- as a further point of reference, up compared to from a very strong Q2 last year, which came in at 23.3 visits per clinic.

So up in comparison more than 1 visit per clinic per day. Along that same line, our same-store volumes were up 2.9% for the quarter. So all in all, our referral as well as our visit volumes haven't been the real issue, while at the same time, we continue to work to make them even better. .

Two primary things hurt us this quarter. First thing that we experienced was an unexpected rate drop late in the quarter. When I say late, the drop primarily surfaced in the May financials, which as you understand, we get those well into June.

As many of you also know, even absent any major external influences, on a month-to-month basis and even a quarter-to-quarter basis, our net rate moves around a little bit. In retrospect, I think we expected to see a bounce back in June, which didn't happen.

Digging in to all of it, there are a few primary reasons for the drop, which I will discuss before going into the details about what we can do about it. .

First, the reasons. They include some regional players moved to a Medicare rule standard, which can affect how patients have to be scheduled and effectively isolated in order to not experience a drop in units per visit. Effectively, they moved to an 8-minute rule standard using Medicare guidelines, not necessarily [indiscernible] reimbursed.

To overcome this, we have to be diligent in our clinics to remind our clinicians of the payer changes until that becomes ingrained and in order to tie [ph] to appropriately isolate those patients so that we are able to bill for and appropriately capture the full reimbursement for the care that we are working so hard to provide to them..

This change involves getting out of an old groove and into a new one and requires more careful, involved and thoughtful patient scheduling as a result..

Me and [ph] many of our facilities will be able to adjust to avoiding unit billing loss, however, individual facilities, particularly our busiest, and especially if those patients can only come at peak times, we've taken, in those circumstances, a little bit of a haircut on a normal treatment or we end up lengthening the time that it takes in order to get all of our one-on-one time-based care delivered.

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Along the same lines for the quarter, we saw a slight increase in the Medicare and Medicaid mix, and as you know, most of this is Medicare, it went from 23.4% to 25.1%, and approximately a 50-basis-point reduction in our work comp percentage to 19.3%.

Historically, when we have identified issues such as these, we are able to work with our affected partnerships in order to make the necessary adjustments. This quarter, these confluence of factors, the small rate change, some rules migration and a small mix change accounted for the drop in net rate for the quarter..

I will point out that as you would expect, we're working on all of these, making sure schedules were possible or adjusted, patients appropriately slotted, units are captured, and marks [ph] to bring new contracts in on the work comp side of things has continued in earnest. .

On a good news basis, we recently added a number of contracts and new relationships under our fit-to-work banner, including deals with Grainger, Lennox, New York [indiscernible] and Thomas Concrete, which are all national in scope.

Additionally, we have started a national pilot program with a very well known national brand that you would very easily recognize, but we are not able yet to publicly name, but which, along with these other new relationships, should help over time to balance out the rate-related pressures that we face from time to time..

In conjunction with our late-in-the-quarter rate realization, we further dug into our cost structure. And where indicated, in partnerships where we are not in the fighting shape that we need to be in, together with our partners, we made the necessary cost-related adjustments to bring things into a healthier alignment..

Further, on the positive side of the story, as I mentioned earlier, volumes have remained solid. And so far this year, we've closed 3 very nice acquisitions with great and very capable partners.

Our deal flow as well as our detailed ongoing discussions proved to be strong as well right now, and I see no reason to expect that, that will change anytime soon. Additionally, as a positive, our collections and cash flow have been very good despite closing 3 deals.

We have reduced our borrowing slightly so far compared to where we were at the beginning of the year..

So to recap here quickly. We are making or have made staffing as well as other operational adjustments to address the cost and the net rate issue which presented to us in Q2. We believe that our adjusted 2015 guidance captures and reflects those changes.

While volumes are solid and we're continuing to attract very talented partnerships through acquisition, as well we continue to open new de novo clinics with our strongest and most capable partnerships.

Our partners as well as our entire team are focused on continuing to deliver superior service, outcomes and performance to all of our patients as well as our stakeholders. We regret this uncharacteristic stumble in performance, but our team has responded positively and with urgency to make the necessary adjustments..

That concludes my prepared remarks. And at this time, I'll ask Larry to review the financials in detail. Thank you.

Larry?.

Thanks, Chris. First, I'll go over the second quarter results. Net revenue increased 6.5% to $83.3 million, due to an increase in total patient visits of 8.1%, partially offset by a decrease in average net rate per visit of 1.4%. Total clinic operating costs were 74.6% of revenue in the second quarter of 2015 as compared to 72.1% in the 2014 period.

The increase is primarily attributable to operating costs of new clinics opened or acquired in the past 12 months. The gross margin for the second quarter of 2015 was $21.1 million or 25.4% as compared to $21.8 million or $27.9 million a year earlier..

Corporate office costs were 9.1% of revenue for the 2015 second quarter as compared to 9.7% in 2014..

Operating income for the recent quarter was $13.5 million compared to $14.2 million. Net income attributable to common shareholders for the 3 months ended June 30, 2015, was $6.3 million and $6.4 million for the 2014 quarter. Diluted earnings per share from operating results were $0.51 for the 2015 period and $0.53 a year earlier..

Despite the disappointment -- actually, the second quarter of 2015 trails only the second quarter of last year as the best earnings quarter in the 25-year history of the company. Same-store visits increased 2.9%. Same-store revenue increased 1.3% as the average net rate per visit decreased by $1.60. .

I'll now go over the -- quickly go over the 6 months results. Net revenue increased 8.5% due to an increase in total patient visits of 9.3%, partially offset by a decrease in average net revenue per visit of 0.7% to $1-- sorry, to $105.56. .

Total clinic operating costs were 76.3% of revenue in the first half of the year as compared to 74% a year ago. The increase included $6.4 million in operating costs of new clinics..

The gross margin for the first half of 2015 was $38 million or 23.7% as compared to $38.5 million or 26%. Corporate office costs were 9.5% of revenue year-to-date this year as compared to 10% a year ago. Operating income for the first 6 months of '15 were $22.7 million compared to $23.7 million. Net income was $10.5 million compared to $10.7 million.

Diluted earnings per share from operating results were $0.85 for the 2015 period and $0.87 for the 2014 period. .

Same-store visits increased 3.1% for de novo and acquired clinics opened for a year or more, and same-store revenue increased 2.5% as the average net rate per visit decreased by $0.65..

As Chris alluded to, during the quarter, the company produced excellent cash flow with record receivables collections. The average A/R days outstanding stood at 38 days as of June 30. Year-to-date, our total debt has only increased by $7.3 million, despite having completed 3 acquisitions for a total consideration of $16.4 million..

Adjusted EBITDA for the trailing 12 months ended June 30 increased approximately 11% to $47 million. Debt to adjusted EBITDA stood at less than 1 at June 30..

In the release, we announced that the third quarter dividend of $0.15 per share will be paid on September 4 to shareholders of record as of August 18. Also in the release, we tweaked our earnings guidance.

We currently expect the company's earnings from continuing operations for the year 2015 to be in the range of $21.7 million to $22.7 million of net income, and $1.75 to $1.83 in diluted earnings per share. This is a reduction on the upper end of EPS by 1.6% and on the lower end by 2.8%. .

Thank you, Larry. So with those prepared comments and the financial review, operator, we'd like to go ahead and open it up for questions. .

[Operator Instructions] Our first question comes from the line of Brooks O'Neil of Dougherty & Company. .

It's Dougherty & Company. But it sounds like you guys are both sick at the same time.

Is that true?.

No. No, I'm healthy, fit as a fiddle. .

All right. I was just checking. I want to make sure you guys are going to be working your butts off to get this thing fixed. .

Yes. The team sent you stuff. The team's responded nicely. Like I said, from time to time, our rate moves around a little bit. This one caught us by surprise and we got a little bit late before the quarter -- we could do a whole lot about it. But as you might expect, we've been working hard and we'll continue to do that. .

If you think -- I mean, I see you have adjusted the guidance for the year a little bit.

Do you think it will be what, a quarter or 2? Or do you think it's longer than that before the rate could bounce back?.

Yes. I'm going to answer and then let Larry give his opinion. I said for a while, I thought this would be a fairly neutral-rate year and that's what we expected, really, for the year, as the year began and even as this last quarter began. This is a little bit of a surprise. We don't expect that we're in a rate-up environment.

So I think if we can offset this, we'll have to see. I don't know yet. It certainly has to do with our ability to change the mix a little bit and make some other changes. And we'll just have to see, I don't know. I mean, to be able to have a long-term prediction on the rate for me right now is a little bit more difficult.

But we've been steady for a long period of time and I think we'll get steady again. Exactly where we level out, I'm not sure yet. .

I get that. I didn't want to cut you off Larry.

Did you want to say anything on that topic?.

Yes. I mean it was -- as Chris has alluded to, our rate moves up and down a little bit. We're talking about 1% or 2%. What was interesting is -- my biggest fear was the, "Oh my gosh, we're looking at our across-the-board rate reductions with a number of large payers." When we got into the detail, that wasn't the case.

There were partnerships that's rate -- that their net rates went down a little bit in May and then they were back up in June. There were others that were fine in April and May and then they were down in June. There were select partnerships where some of these 8-minute and other rules we implemented, but again, it wasn't across the board.

Also, I'll be honest with you, and Chris can -- Glenn can speak to it better. There were some operational issues that we just didn't capture units the way we should or we took our eye off the ball and our mix changed a little. A little less workers' comp, or a little more Medicare is going to bring your net rate down. .

Sure.

Could you guys refresh my memory? Were there any significant changes proposed in the Medicare fee schedule that was released a little while ago for your -- for things you guys do?.

No.

Glenn, do you want to touch on that?.

Yes. The Medicare legislation that came out in April basically kept the Medicare rates flat to where it was. It eliminated the -- any reduction from a Medicare standpoint. But it kept in place the PQRS, $3,700 manual [ph] review, but there was no rate reduction. And there'll actually be about a 0.5% increase a couple of years from now.

But through the end of this year, there's no negative impact from Medicare. .

Cool. And then lastly, I know I ask you this all the time and I know you're reluctant to talk about it, but you've been active with acquisitions over the last 12, 18, 24 months.

Can you just comment on what you're seeing out there and what your appetite is?.

Sure. Yes. Thank you for not making me use the pipeline word. But yes, it's an active market right now. I mean, we're seeing people come to market across a variety of different sizes. We're seeing people engage with brokers. We're having good conversations that we initiate. We're having good conversations with broker-led opportunities.

And I think we're going to do -- I think we're going to do okay. It's going to be an active environment, I would predict, for a while. I think the market is punishing smaller providers and less well-resourced providers. And we're looking at a fall implementation of the new ICD rollout for diagnostic codes.

That's going to be involved, and for smaller [ph] providers, it's just one more thing. And so I think we'll continue to see consolidation in our industry. I think we're at the beginning of it. And I think it's going to be here with us for a while, and I think we're pretty well positioned to deal with that. .

Our next question comes from the line of Larry Solow of CJS Securities. .

Just a follow-up on the acquisition question. Any material change in pricing or prices have -- I guess over time, they have gone up a little bit I know. But in general, are they still sort of hanging in there? Or what's the... .

Yes, I think we're trying to look at all these deals. But from your perspective, from our perspective, over the last year or so, pricing dropped probably 1 turn on the average-sized deal compared to where it was. And I haven't seen -- really, I don't think we've seen any change in that.

And we've seen more buyers in the market, but to be honest, there's some differentiation between and among the buyers in terms of how deals get done and how things get handled afterwards. And so that has helped sort some things out for sellers. And so I think it's pretty steady right now. But we've got good cash flow and we're not afraid to deploy it.

And we're not going to lose a deal over 0.25 point. But so far, I don't think we've had to materially change what it is that we've been doing. .

Okay. And just back to the question on when you might see revenue per patient recover, or perhaps it's hard to predict that or maybe it doesn't recover right away.

You guided -- it sort of looks like you took out I guess $0.03 to $0.05, right? You don't really guide quarterly, but I imagine the miss in the quarter was probably at least that, if not a little more.

So I'm just trying to connect the dots because basically you are assuming that in the back half, if you don't get improvement on the revenue, on the rates, you will have enough cost-cutting to offset that.

Is that the way to look at it?.

Yes. We get a -- that range you see is what I would say a conservative scenario or a less conservative -- or wouldn't even describe it as aggressive. And we assumed a lower rate but, as Chris has spoken to, there are things we can do about the rate. And then we looked at what costs we needed to take out.

This isn't the first time we've been through this and we were able to come out of it, honestly, very successfully before. So it's just a matter of implementation and follow-up. .

And would you -- I mean, I get the -- I guess you make cost cuts where you think you need to make them, but would it be more focused on places where there -- just this rate decline has occurred, or perhaps -- it seems to me that maybe some of these newer acquisitions, there's probably always room for cost-cutting or potentially cost-cutting being that they weren't under your roof and now they are.

What do you sort of look for cost cuts? Is it across the board or do you focus on particular areas?.

I would say it's not across the board. It's where we're a little out of shape. It doesn't necessarily concentrate in new deals because we price those things in. And if there are efficiencies to gain in new deals, that happens over a long period of time. It's not something that we go in with a big scalpel and hack away.

That's just not our style on how we do things. But we did have some partnerships get a little out of shape in the quarter and we had to make some changes, and those weren't related to the effect in those partnerships. And so I think we've gotten the majority of those done and behind us and early in the start of the third quarter, for the most part.

And we'll see what the rate does. The rates are a little bit harder to predict, because on a day-to-day basis, we don't have complete optics in terms of how all these pieces, parts come together in total, but we think we'll be able to mitigate the rates somewhat.

And we think we've taken the necessary adjustments with respect to the cost side, largely out at this point, so... .

Our next question comes from the line of Brian Tanquilut of Jefferies. .

Chris, just going back to the rate issue. You mentioned the 8-minute rule and a few other things. If you don't mind just giving us a little more color on that and also that part where you said that it's the regional plans.

Can you give us a little more granularity? Because it seems more widespread and more sporadic, like it hits -- it hit you in different sides at different times.

So I guess the broader question is, is this more of an industry thing? Or is this industry pressure finally catching up with you guys, where they went after the smaller guys first in the last few years and now they're going after the bigger fish?.

Yes. No, no. I don't think it's a big fish, small fish thing. These plans, they don't honestly -- Brian, they don't differentiate between large and small providers.

We may be able to negotiate a higher rate, but when they look at things like a Medicare standard, not a Medicare rate, but it's a Medicare rule standard, and so it has to do with how you have to isolate that patient if you want to capture the charges that -- and the care that you're providing.

The 8-minute rule and things like that, when they do that, they do it across the board. They don't differentiate or negotiate one payer or one provider to the next. I don't know if -- we're not seeing anything that's systemic.

But from time to time -- and this is one of those times, and we haven't had it in a while -- when we do see some changes occur, and at the beginning of the year or later into this year, we've seen some of those. And a few of those hit some of our concentrated areas, Tennessee being one, and so we're adjusting with that.

We're feeling it out a little bit right now. We're making the adjustments. I don't see us, from an industry perspective, we're still a very low-cost provider that gets patients better, back to their life, avoiding many times, surgery and disabilities that are associated with that and time off work and all of those things. We do that very efficiently.

So I don't think that we're like, for instance, the altec [ph] business was years ago, where it was a huge profit opportunity and they got knocked back hard. I don't see that. I just think this is kind of a normal ebb and flow, and we're just having to adjust even on a little bit more acute basis than we used to. .

This went across the board. And as you know, we have 42 states, most of our contracts are local or statewide. We do have a few regional. We don't have that many national contracts. So it just -- it ebbed a little bit.

Honestly, if you look at the biggest dollar differential year-over-year, if your Medicare or Medicaid goes up by 0.8%, from 23.4% to 25.1%, and your workers' comp goes from 19.8% to 19.3%, do those sound like tiny mix changes? You're talking about one of your lowest payers and your highest payer, and that's enough to move the needle over $1. .

Yes, that makes sense. Although, Larry, actually to follow-up on that point, if you run the math on it, let's just say we had rates that were flat to last quarter, the shortfall in the top line would have been $1 million, running it through your volume. And yet the impact there, the shortfall on the EBITDA line is obviously much larger.

But to me it seems like it's really in the cost side that was the bigger issue. So -- and Chris, I... .

It was both. It was actually about $0.04 for the rate, and probably as much for the cost side, so... .

Right. And you guys have always been good at controlling costs.

So what exactly changed this quarter, where sequentially your salaries went up by $1.5 million?.

Yes. I hate to say it, but I think we were busy. We were coming off a very slow winter and we picked up a lot. We got much busier. We had a few large partnerships, one of our newly acquired large partnerships. We did some expansions, did some hiring. Those things took a little bit longer than expected.

And to be honest, maybe we took our eyes off the ball just ever so slightly and we got a little bit out of shape, and it is uncharacteristic and we don't like it. But we made those adjustments, and they're painful. We don't like to have to do that. Nobody likes it. And but it's done for the most part. I think it's been done. It's not enjoyable.

And it's not something we want to go through very often. I mean we haven't had to do it very often, since we've been at the company. But we did get a little out of shape in this quarter. I can't tell you exactly why because we've been very busy, working on lots of things.

Maybe that had something to do with it and maybe we had been in shape so long we thought we just had it on auto, but we got it dialed back in and it's not taken for granted. I mean, you can't, it's important. .

Appreciate that color, Chris. And then last one, you've talked about being able to move patients around with the scheduling.

Do you have the systems in place to basically discriminate patients based on their coverage to be able to adjust their scheduling? Like would the nurse or -- I'm sorry, the PT or the scheduler at the clinic know that this patient is part of a much lower-paying health plan and we should put them in a not-so-ideal time spot?.

Well, it's not exactly that, Brian. So we're not -- we don't have a clear system where if you pay us more, you get a prime spot, if you pay us less, you [indiscernible]. It's not that. But it's really on the 8-minute rule basis, where it's [indiscernible] plan.

We need some -- we need a bigger block of time with you to be able to -- the treatment doesn't differ, but we need to be able to isolate you so that we can capture the units for all the treatment that we're providing.

So on an individual basis, those facilities, they might be a local payer, adopt an 8-minute rule standard, they've got to be on top of that and we make sure that they're on top of it. But if not, it's attention to detail and it's a verification [ph] in the scheduling and it's ongoing training and getting people in a new groove.

And it just has to be paid attention on a clinic-by-clinic basis. It varies clinic-by-clinic depending on who these payers are. .

This went across the board. Again, it happened in our largest state in terms of number of locations, Tennessee. But it doesn't mean it's a sweeping trend across the industry. .

That would have been my last question, but you just made me think of something, Larry.

I mean, are there changes going on at STAR relative to regional management? Or just anything going on with STAR specifically that impacted that business this quarter?.

No, nothing that impacted it negatively. In fact, we've done some things there that I think over time have demonstrated a positive impact. We've actually added to our original 7 partner group, 7 new partners. And when I say new, they're not new to STAR, they've been there for a long period of time.

They really are regional folks who are very committed, who are in the clinics, seeing patients. The majority of our regional STAR partners who are still there are in a more administrative capacity, if not seeing patients every day. These are folks who are in the clinic and are neck deep in this. We've seen some good things.

And so this change and this impact in Tennessee and whatever impact we felt at STAR wasn't because we lost somebody or a number of people. That hasn't happened, and it's not because we're not resourced. It's just because of the acuteness of the -- and the timing of the change. And when we -- honestly, when we recognized it and jumped on it, so... .

Our next question comes from the line of Mitra Ramgopal of Sidoti. .

Yes. Just going back on the acquisition front.

Given the rate changes you're seeing, does that impact your strategy at all going forward as you look at potential candidates in your payer mix?.

Yes, a little bit, it does. It does in a way that maybe is a little different than you expect, but we are looking -- and this is a continuous process.

We're looking for places where we think that the rates can be stable over a long period of time, where they have a good, diversified portfolio, so that if you have a payer that makes a change, that it's not the bulk of the business.

Maybe one exception to that is if somebody has a little higher work comp, that's a good thing, and we also look for that. Conversely, we're looking into not being in places where it's just beat up and the rate is extraordinarily low. So -- but that really isn't a change for us over the period.

It may be that as things progress -- and things aren't changing acutely, as Larry said, in the market. We're not seeing any global things on a local basis. An area my see some hiccups, we're seeing that in California, in other places, and other places where you may see it go backwards a little bit.

So it's really not an across-the-board environment and we adjust accordingly. But honestly, the low-rate changes that we experience around the block, those typically aren't enough to swing interest one way or the other on a deal. So the areas we've been focused on are the areas we continue to work hard to deliver deals in. .

Yes, I mean we look at -- when we look at acquisitions, obviously, rate is important, but you want to look at their growth opportunity and then their productivity. I mean, it's not uncommon for us to do an acquisition and their visits per day per therapist is less than 10. You can have the rate go down $2, $3.

If you get the productivity up from 10 to 11, that's a 10% increase. .

Right, right. No, very helpful. Also I know you've talked about kind of looking at the cost side of things. If you could remind us where you are as it relates to your sales force right now, the coverage.

And do you feel the need that you have to expand there?.

Yes, this is Glenn. I mean on the sales force side, we made no reductions there. We continue to grow sales reps in markets where it's appropriate to do so. We currently have 88 total sales reps covering about 371 locations in the company.

We're continuing to focus on our marketing programs, both internally with our partners and directors and with our sales reps. So we continue to look for good same-store growth going forward. .

Yes, Mitra. Where -- I could tell you, the majority -- let me stop and think here for a minute. The majority of the companies that we're in discussions with on a deal-front basis on an acquisition basis, I hate to say acquisition because we really do these partnerships and so we're not buying people out in total.

But just to be clear, on the deal-front side, the majority of these companies don't have the kind of sales initiatives that we have. And so in a lot of cases that we do a deal, we talk about it upfront before the deal is closed and then soon thereafter we're adding sales as part of the go-forward strategy.

So these deals definitely help us in a number of ways, as Larry pointed out, not just rate, because we may do a deal that may be a little bit less than our rate, may be a little bit more, and that makes moving our rate in aggregate a little bit for Q2 [ph].

But we've got good opportunity going forward to continue to grow their base, and these are very capable people. So when we can add resources over and above what they have historically, they usually make good use of it. .

Okay. And Larry, just finally, I don't know if you have the payer mix for the quarter handy. .

Yes, I got it. So commercial insurance was 49.8%, worker's comp 19.3%, Medicare and Medicaid combined 25.1%, other 5.8%. .

Our next question comes from the line of Dana Hambly of Stephens. .

If you can just describe how big the change was, or what were these regions -- how were they billing or how were they paying before relative to moving to the Medicare 8-minute rule?.

Yes, so it's just -- it's basically a more rigorous supervision requirement, where you have to have patients isolated. In terms of how you bill, you bill the same units the same way. You can deliver care relatively the same way. You just have to isolate patients a little bit more efficiently and effectively.

But in terms of what the bills look like and how they pay, they pay the same when you're able to realize your unit changes a little bit based upon the rules, if that makes sense. .

And guys, I'm really concerned that when I read the analyst reports this afternoon, you're going to talk about the industry as going to some Medicare 8-minute rule. This was an incident. It was isolated. Now it happened to happen to our largest partnership, but I mean this is not something that happened in 42 states. .

No, that's fair. I think that it's a legitimate concern.

How much advanced notice did you get on this change?.

Yes, we don't get a lot of notice necessarily. And in some cases, the notice comes to the facility in a local contract and then we get it downstream. So when we get in Houston maybe a little bit different than we get it locally.

And I can't honestly, Dana, I can't speak to exactly through these contracts when we heard and when we realized, I'm just not sure. .

Okay. All right. And Larry, to your point, this is commercial doing this, it's not widespread. You don't -- you're not hearing this happening anywhere else. But I mean do you take this as a -- can you go to other regions and say, "Hey, listen this happened in this region, but this is how we need to be prepared if it happens in other regions?".

Larry, if I can, let me jump in. In terms of being prepared, again, there really isn't anything we would do differently on the care side to really capture the issue [ph]. On the care side, there really isn't anything you can do differently to prepare.

Once it happens, you have to respond and you have -- but everybody knows how to respond because they deal with Medicare. So everybody understands what that's like. It's very clear. When you have another payer that's a commercial payer and historically seen as a commercial payer that makes a change.

If you've got a 1 rock [ph] and go to a different rock [ph], you have to stay in the right rock [ph], and it's got to be uniform and you got to do it quickly or you lose opportunity. And in terms of preparation, other than being appropriately staffed on a continuous basis, there really isn't a lot of preparation that you can do, honestly. .

Also, I would -- and I don't know who all's on the call, so the investors or maybe just the analysts are familiar. If you go back and look over the last 10 years, not every year has a rate gone up, nor does it always go up quarter-over-quarter.

And in fact, we've had record earnings years in 7 of the last 8 years, despite the fact, in some years, our net rate goes down from the year before. So I mean this is a disappointment. It was not a disaster. It's the second most profitable quarter in the history of company, and we dealt with these issues before and we will deal with them again. .

Okay. No, I think that's fair and that's helpful. So if you kind of net-net, tough quarter, some changes, no big structural changes to the industry. You guys have been through reimbursement pressures before and you're optimistic you'll get through this patch as well.

Is that fair?.

That's a great summary, actually. It's like my prepared comments. .

[Operator Instructions] Our next question comes from the line of Michael Petusky of Barrington Research. .

I just wanted to make absolutely sure, maybe you mentioned this earlier and I just missed it, but I wanted to make sure.

So are you saying that it was -- the issue was just limited to the STAR facilities in Tennessee, or primarily that was the biggest chunk of the impacted partnerships?.

Larry, you want to... .

Yes, I would say it bounced around. I mean STAR is the one we used as the example because that was a slight structural change with the 8-minute rule. But there are other groups where their net rates were up, some were down. In this quarter, the portfolio overall was down slightly.

But I mean, again, my concern is, "Oh my god, are we seeing Aetna make rate cuts across the country?" No, we're in I don't know how many Aetna plans. No, that wasn't the case. I mean it was just -- some quarters in the portfolio, you get a better rule [ph] than you do with others. .

Okay.

So I mean, if we're writing about this, STAR was an issue and one that was noteworthy, but there were other impacted partnerships and facilities?.

Right. In the quarter, we'll have some partnerships where the rate will go up, and in others, the rate will go down. And again, the mix, just that slight mix change between Medicare and workers' comp was a pretty good chunk of this. .

Right. So I guess -- I was just going to say, so I guess you guys kind of really became sensitive to this in May and in June, and you had some time to try to respond.

I'm just wondering, is there any feedback that you're getting in terms -- particularly in terms of the affected partnerships in terms of what you're seeing so far in -- through July?.

Yes, well, just to be clear, I mean, we began to realize this in June. In May, we thought, honestly, it was a bit of an aberration, turned out not to be. June, the rate was a little bit low as well. We realized the June rate when June financials came out in July.

But in terms of the response, the regional team, Glenn's team and the regional folks have done a really good job working with our partners. We made the majority of the changes that we needed to make. Operationally, we've always got to keep our finger on the pulse. There is ebb and flow and things happen in individual partnerships.

People go on leave and somebody leaves [indiscernible] on a fairly routine basis. But I'm really pleased with the team's response and their attention to detail. And I guess [ph], my hope and expectation, really, my expectation and my belief is that, that will continue.

But the majority of that work got done really -- and Larry, wouldn't you say post-Q2... .

Well, June and July. We've identified that March and April are very busy months. Once we got the April financials in May, we could see that some partnerships were letting their cost creep faster than their revenue growth, irrespective of the net rate.

And so at that point, we start looking at costs and then we got hit with the lower rate, which we didn't realize until June because it started May. And I'd say the cuts were made in June and July. .

Okay. All right, great. And then Larry, you had said that the new earnings guidance, you characterized this as, I think, conservative and then you said it assumes a lower rate.

I mean, can you give a little help on -- the lower rate that you're assuming, is that fairly consistent with what you guys saw in Q2 going forward? Or any help you can give there?.

Well, it was a lower rate than we used in our budget. Let me see here. Let me look at what it was last month or for the quarter. Actually, the rate we used in our forecast was slightly better than what we had in the quarter. .

At this time, I'm showing no further questions. I'll now turn the floor back over to management for any additional or closing remarks. .

Okay, everybody. Listen, we know it's been a long call and we gave a lot of detail. We appreciate all your very thoughtful questions. We're available to answer further questions. Larry is in the office. I am out of the office, but I'm reachable on my cell. Patty [ph] can connect you if you need to talk to me directly.

And we appreciate your thoughtful comments and questions as well as your support. So have a great day and I'm sure we'll talk soon. .

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect..