UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 20202021
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file numbers: 001-34465
SELECT MEDICAL HOLDINGS CORPORATION
(Exact name of Registrant as specified in its Charter)
| | | | | | | | |
Delaware | | 20-1764048 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA 17055
(Address of Principal Executive Offices and Zip code)
(717) 972-1100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | SEM | New York Stock Exchange |
| | (NYSE) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020,July 31, 2021, Select Medical Holdings Corporation had outstanding 133,970,064134,576,139 shares of common stock.
Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and its subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Select Medical Holdings Corporation
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
| | | | December 31, 2019 | | June 30, 2020 | | December 31, 2020 | | June 30, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current Assets: | Current Assets: | | | | Current Assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 335,882 | | | $ | 509,737 | | Cash and cash equivalents | $ | 577,061 | | | $ | 803,493 | |
Accounts receivable | Accounts receivable | 762,677 | | | 749,245 | | Accounts receivable | 896,763 | | | 931,179 | |
Prepaid income taxes | Prepaid income taxes | 18,585 | | | 9,204 | | Prepaid income taxes | 5,686 | | | 5,417 | |
Other current assets | Other current assets | 95,848 | | | 95,143 | | Other current assets | 114,490 | | | 128,081 | |
Total Current Assets | Total Current Assets | 1,212,992 | | | 1,363,329 | | Total Current Assets | 1,594,000 | | | 1,868,170 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 1,003,986 | | | 1,022,721 | | Operating lease right-of-use assets | 1,032,217 | | | 1,053,331 | |
Property and equipment, net | Property and equipment, net | 998,406 | | | 959,086 | | Property and equipment, net | 943,420 | | | 928,226 | |
Goodwill | Goodwill | 3,391,955 | | | 3,391,196 | | Goodwill | 3,379,014 | | | 3,391,040 | |
Identifiable intangible assets, net | Identifiable intangible assets, net | 409,068 | | | 398,266 | | Identifiable intangible assets, net | 387,541 | | | 380,302 | |
Other assets | Other assets | 323,881 | | | 333,860 | | Other assets | 319,207 | | | 335,310 | |
Total Assets | Total Assets | $ | 7,340,288 | | | $ | 7,468,458 | | Total Assets | $ | 7,655,399 | | | $ | 7,956,379 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Current Liabilities: | Current Liabilities: | | | | Current Liabilities: | | | |
| Current operating lease liabilities | Current operating lease liabilities | $ | 207,950 | | | $ | 216,689 | | Current operating lease liabilities | $ | 220,413 | | | $ | 224,868 | |
Current portion of long-term debt and notes payable | Current portion of long-term debt and notes payable | 25,167 | | | 13,435 | | Current portion of long-term debt and notes payable | 12,621 | | | 11,608 | |
Accounts payable | Accounts payable | 145,731 | | | 142,946 | | Accounts payable | 177,087 | | | 187,736 | |
Accrued payroll | Accrued payroll | 183,754 | | | 125,109 | | Accrued payroll | 224,876 | | | 246,960 | |
Accrued vacation | Accrued vacation | 124,111 | | | 124,624 | | Accrued vacation | 132,811 | | | 146,790 | |
Accrued interest | Accrued interest | 33,853 | | | 29,610 | | Accrued interest | 29,240 | | | 28,938 | |
Accrued other | Accrued other | 191,076 | | | 204,074 | | Accrued other | 228,948 | | | 256,095 | |
Government advances (Note 12) | — | | | 316,992 | | |
Unearned government assistance (Note 12) | — | | | 45,505 | | |
Government advances (Note 15) | | Government advances (Note 15) | 321,807 | | | 251,272 | |
Unearned government assistance (Note 15) | | Unearned government assistance (Note 15) | 82,607 | | | 4,099 | |
| Income taxes payable | Income taxes payable | 2,638 | | | 36,985 | | Income taxes payable | 7,956 | | | 50,662 | |
Total Current Liabilities | Total Current Liabilities | 914,280 | | | 1,255,969 | | Total Current Liabilities | 1,438,366 | | | 1,409,028 | |
Non-current operating lease liabilities | Non-current operating lease liabilities | 852,897 | | | 866,097 | | Non-current operating lease liabilities | 875,367 | | | 893,478 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | 3,419,943 | | | 3,390,417 | | Long-term debt, net of current portion | 3,389,398 | | | 3,386,214 | |
Non-current deferred tax liability | Non-current deferred tax liability | 148,258 | | | 144,697 | | Non-current deferred tax liability | 132,421 | | | 123,559 | |
Other non-current liabilities | Other non-current liabilities | 101,334 | | | 142,861 | | Other non-current liabilities | 168,703 | | | 172,656 | |
Total Liabilities | Total Liabilities | 5,436,712 | | | 5,800,041 | | Total Liabilities | 6,004,255 | | | 5,984,935 | |
Commitments and contingencies (Note 11) | | |
Commitments and contingencies (Note 14) | | Commitments and contingencies (Note 14) | 0 | | 0 |
Redeemable non-controlling interests | Redeemable non-controlling interests | 974,541 | | | 495,987 | | Redeemable non-controlling interests | 398,171 | | | 521,552 | |
Stockholders’ Equity: | Stockholders’ Equity: | | | | Stockholders’ Equity: | | | |
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,970,064 shares issued and outstanding at 2019 and 2020, respectively | 134 | | | 134 | | |
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,850,735 and 135,005,369 shares issued and outstanding at 2020 and 2021, respectively | | Common stock, $0.001 par value, 700,000,000 shares authorized, 134,850,735 and 135,005,369 shares issued and outstanding at 2020 and 2021, respectively | 135 | | | 135 | |
Capital in excess of par | Capital in excess of par | 491,038 | | | 496,785 | | Capital in excess of par | 509,128 | | | 516,172 | |
Retained earnings | Retained earnings | 279,800 | | | 495,964 | | Retained earnings | 553,244 | | | 713,191 | |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | (2,027) | | | 4,727 | |
Total Stockholders’ Equity | Total Stockholders’ Equity | 770,972 | | | 992,883 | | Total Stockholders’ Equity | 1,060,480 | | | 1,234,225 | |
Non-controlling interests | Non-controlling interests | 158,063 | | | 179,547 | | Non-controlling interests | 192,493 | | | 215,667 | |
Total Equity | Total Equity | 929,035 | | | 1,172,430 | | Total Equity | 1,252,973 | | | 1,449,892 | |
Total Liabilities and Equity | Total Liabilities and Equity | $ | 7,340,288 | | | $ | 7,468,458 | | Total Liabilities and Equity | $ | 7,655,399 | | | $ | 7,956,379 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
| | | | | | | | | | | |
| For the Three Months Ended June 30, | | |
| 2019 | | 2020 |
Net operating revenues | $ | 1,361,364 | | | $ | 1,232,718 | |
Costs and expenses: | | | |
Cost of services, exclusive of depreciation and amortization | 1,150,150 | | | 1,082,456 | |
General and administrative | 31,339 | | | 33,461 | |
Depreciation and amortization | 54,993 | | | 52,271 | |
Total costs and expenses | 1,236,482 | | | 1,168,188 | |
Other operating income (Note 12) | — | | | 54,988 | |
Income from operations | 124,882 | | | 119,518 | |
Other income and expense: | | | |
| | | |
Equity in earnings of unconsolidated subsidiaries | 7,394 | | | 8,324 | |
Gain on sale of businesses | — | | | 346 | |
Interest expense | (51,464) | | | (37,366) | |
Income before income taxes | 80,812 | | | 90,822 | |
Income tax expense | 20,826 | | | 23,336 | |
Net income | 59,986 | | | 67,486 | |
Less: Net income attributable to non-controlling interests | 15,170 | | | 15,836 | |
Net income attributable to Select Medical Holdings Corporation | $ | 44,816 | | | $ | 51,650 | |
Earnings per common share (Note 10): | | | |
Basic | $ | 0.33 | | | $ | 0.39 | |
Diluted | $ | 0.33 | | | $ | 0.39 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
| | | For the Six Months Ended June 30, | | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2019 | | 2020 | | 2020 | | 2021 | | 2020 | | 2021 |
Net operating revenues | $ | 2,685,995 | | | $ | 2,647,350 | | |
Revenue | | Revenue | $ | 1,232,718 | | | $ | 1,564,020 | | | $ | 2,647,350 | | | $ | 3,110,483 | |
Costs and expenses: | Costs and expenses: | | | | Costs and expenses: | | | | | | | |
Cost of services, exclusive of depreciation and amortization | Cost of services, exclusive of depreciation and amortization | 2,282,242 | | | 2,282,827 | | Cost of services, exclusive of depreciation and amortization | 1,082,456 | | | 1,291,448 | | | 2,282,827 | | | 2,584,897 | |
General and administrative | General and administrative | 60,016 | | | 67,292 | | General and administrative | 33,461 | | | 35,737 | | | 67,292 | | | 71,140 | |
Depreciation and amortization | Depreciation and amortization | 107,131 | | | 104,023 | | Depreciation and amortization | 52,271 | | | 50,954 | | | 104,023 | | | 100,574 | |
Total costs and expenses | Total costs and expenses | 2,449,389 | | | 2,454,142 | | Total costs and expenses | 1,168,188 | | | 1,378,139 | | | 2,454,142 | | | 2,756,611 | |
Other operating income (Note 12) | — | | | 54,988 | | |
Other operating income | | Other operating income | 54,988 | | | 98,087 | | | 54,988 | | | 132,108 | |
Income from operations | Income from operations | 236,606 | | | 248,196 | | Income from operations | 119,518 | | | 283,968 | | | 248,196 | | | 485,980 | |
Other income and expense: | Other income and expense: | | | | Other income and expense: | | | | |
| Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | 11,760 | | | 10,912 | | Equity in earnings of unconsolidated subsidiaries | 8,324 | | | 11,809 | | | 10,912 | | | 21,728 | |
Gain on sale of businesses | Gain on sale of businesses | 6,532 | | | 7,547 | | Gain on sale of businesses | 346 | | | 0 | | | 7,547 | | | 0 | |
Interest income | | Interest income | 0 | | | 0 | | | 0 | | | 4,749 | |
Interest expense | Interest expense | (102,275) | | | (83,473) | | Interest expense | (37,366) | | | (33,888) | | | (83,473) | | | (68,290) | |
Income before income taxes | Income before income taxes | 152,623 | | | 183,182 | | Income before income taxes | 90,822 | | | 261,889 | | | 183,182 | | | 444,167 | |
Income tax expense | Income tax expense | 39,293 | | | 45,248 | | Income tax expense | 23,336 | | | 65,681 | | | 45,248 | | | 110,745 | |
Net income | Net income | 113,330 | | | 137,934 | | Net income | 67,486 | | | 196,208 | | | 137,934 | | | 333,422 | |
Less: Net income attributable to non-controlling interests | Less: Net income attributable to non-controlling interests | 27,680 | | | 33,159 | | Less: Net income attributable to non-controlling interests | 15,836 | | | 31,314 | | | 33,159 | | | 57,982 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | $ | 85,650 | | | $ | 104,775 | | Net income attributable to Select Medical Holdings Corporation | $ | 51,650 | | | $ | 164,894 | | | $ | 104,775 | | | $ | 275,440 | |
Earnings per common share (Note 10): | | | | |
Basic | $ | 0.63 | | | $ | 0.78 | | |
Diluted | $ | 0.63 | | | $ | 0.78 | | |
Earnings per common share (Note 13): | | Earnings per common share (Note 13): | | | | | | | |
Basic and diluted | | Basic and diluted | $ | 0.39 | | | $ | 1.22 | | | $ | 0.78 | | | $ | 2.04 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2020 | | 2021 | | 2020 | | 2021 |
Net income | $ | 67,486 | | | $ | 196,208 | | | $ | 137,934 | | | $ | 333,422 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Gain (loss) on interest rate cap cash flow hedge | 0 | | | (1,403) | | | 0 | | | 6,748 | |
Reclassification adjustment for (gains) losses included in net income | 0 | | | 6 | | | 0 | | | 6 | |
Net change, net of tax benefit (expense) of $0, $486, $0, and $(2,348) | 0 | | | (1,397) | | | 0 | | | 6,754 | |
| | | | | | | |
Comprehensive income | 67,486 | | | 194,811 | | | 137,934 | | | 340,176 | |
Less: Comprehensive income attributable to non-controlling interests | 15,836 | | | 31,314 | | | 33,159 | | | 57,982 | |
Comprehensive income attributable to Select Medical Holdings Corporation | $ | 51,650 | | | $ | 163,497 | | | $ | 104,775 | | | $ | 282,194 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Changes in Equity and Income
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2020 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Total Stockholders’ Equity | | | | | | | | | | |
| Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2019 | 134,328 | | | $ | 134 | | | $ | 491,038 | | | $ | 279,800 | | | $ | 770,972 | | | $ | 158,063 | | | $ | 929,035 | |
Net income attributable to Select Medical Holdings Corporation | | | | | | | 53,125 | | | 53,125 | | | | | 53,125 | |
Net income attributable to non-controlling interests | | | | | | | | | — | | | 10,067 | | | 10,067 | |
Issuance of restricted stock | 2 | | | 0 | | | 0 | | | | | — | | | | | — | |
Forfeitures of unvested restricted stock | (15) | | | 0 | | | 0 | | | | | — | | | | | — | |
Vesting of restricted stock | | | | | 6,136 | | | | | 6,136 | | | | | 6,136 | |
Repurchase of common shares | (492) | | | 0 | | | (5,350) | | | (3,341) | | | (8,691) | | | | | (8,691) | |
Issuance of non-controlling interests | | | | | | | | | — | | | 1,679 | | | 1,679 | |
Distributions to and purchases of non-controlling interests | | | | | | | (2,726) | | | (2,726) | | | (4,048) | | | (6,774) | |
Redemption adjustment on non-controlling interests | | | | | | | (10,123) | | | (10,123) | | | | | (10,123) | |
Other | | | | | | | (55) | | | (55) | | | 420 | | | 365 | |
Balance at March 31, 2020 | 133,823 | | | $ | 134 | | | $ | 491,824 | | | $ | 316,680 | | | $ | 808,638 | | | $ | 166,181 | | | $ | 974,819 | |
Net income attributable to Select Medical Holdings Corporation | | | | | | | 51,650 | | | 51,650 | | | | | 51,650 | |
Net income attributable to non-controlling interests | | | | | | | | | — | | | 12,572 | | | 12,572 | |
Issuance of restricted stock | 200 | | | 0 | | | 0 | | | | | — | | | | | — | |
Forfeitures of unvested restricted stock | (7) | | | 0 | | | 0 | | | | | — | | | | | — | |
Vesting of restricted stock | | | | | 6,262 | | | | | 6,262 | | | | | 6,262 | |
Repurchase of common shares | (46) | | | 0 | | | (441) | | | (283) | | | (724) | | | | | (724) | |
Issuance of non-controlling interests | | | | | | | | | — | | | 7 | | | 7 | |
Distributions to and purchases of non-controlling interests | | | | | (65) | | | | | (65) | | | (418) | | | (483) | |
Redemption adjustment on non-controlling interests | | | | | | | 127,916 | | | 127,916 | | | | | 127,916 | |
Other | | | | | (795) | | | 1 | | | (794) | | | 1,205 | | | 411 | |
Balance at June 30, 2020 | 133,970 | | | $ | 134 | | | $ | 496,785 | | | $ | 495,964 | | | $ | 992,883 | | | $ | 179,547 | | | $ | 1,172,430 | |
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| For the Six Months Ended June 30, 2021 |
| | | | | |
| | | Total Stockholders’ Equity | | | | |
| Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2020 | 134,850 | | | $ | 135 | | | $ | 509,128 | | | $ | 553,244 | | | $ | (2,027) | | | $ | 1,060,480 | | | $ | 192,493 | | | $ | 1,252,973 | |
Net income attributable to Select Medical Holdings Corporation | | | | | | | 110,546 | | | | | 110,546 | | | | | 110,546 | |
Net income attributable to non-controlling interests | | | | | | | | | | | — | | | 17,042 | | | 17,042 | |
Issuance of restricted stock | 2 | | | 0 | | | 0 | | | | | | | — | | | | | 0 | |
Forfeitures of unvested restricted stock | (14) | | | 0 | | | 0 | | | | | | | — | | | | | 0 | |
Vesting of restricted stock | | | | | 6,173 | | | | | | | 6,173 | | | | | 6,173 | |
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Non-controlling interests acquired in business combination | | | | | | | | | | | — | | | 8,193 | | | 8,193 | |
Distributions to and purchases of non-controlling interests | | | | | (787) | | | | | | | (787) | | | (13,458) | | | (14,245) | |
Redemption value adjustment on non-controlling interests | | | | | | | (38,405) | | | | | (38,405) | | | | | (38,405) | |
Other comprehensive income | | | | | | | | | 8,151 | | | 8,151 | | | | | 8,151 | |
Other | | | | | (178) | | | (4) | | | | | (182) | | | 371 | | | 189 | |
Balance at March 31, 2021 | 134,838 | | | $ | 135 | | | $ | 514,336 | | | $ | 625,381 | | | $ | 6,124 | | | $ | 1,145,976 | | | $ | 204,641 | | | $ | 1,350,617 | |
Net income attributable to Select Medical Holdings Corporation | | | | | | | 164,894 | | | | | 164,894 | | | | | 164,894 | |
Net income attributable to non-controlling interests | | | | | | | | | | | — | | | 13,241 | | | 13,241 | |
Dividends declared for common stockholders ($0.125 per share) | | | | | | | (16,876) | | | | | (16,876) | | | | | (16,876) | |
Issuance of restricted stock | 211 | | | 0 | | | 0 | | | | | | | — | | | | | 0 | |
Forfeitures of unvested restricted stock | (2) | | | 0 | | | 0 | | | | | | | — | | | | | 0 | |
Vesting of restricted stock | | | | | 6,564 | | | | | | | 6,564 | | | | | 6,564 | |
Repurchase of common shares | (42) | | | 0 | | | (707) | | | (903) | | | | | (1,610) | | | | | (1,610) | |
Issuance of non-controlling interests | | | | | (1,051) | | | | | | | (1,051) | | | 6,739 | | | 5,688 | |
Distributions to and purchases of non-controlling interests | | | | | (2,970) | | | | | | | (2,970) | | | (9,324) | | | (12,294) | |
Redemption value adjustment on non-controlling interests | | | | | | | (59,370) | | | | | (59,370) | | | | | (59,370) | |
Other comprehensive loss | | | | | | | | | (1,397) | | | (1,397) | | | | | (1,397) | |
Other | | | | | 0 | | 65 | | | | | 65 | | | 370 | | | 435 | |
Balance at June 30, 2021 | 135,005 | | | $ | 135 | | | $ | 516,172 | | | $ | 713,191 | | | $ | 4,727 | | | $ | 1,234,225 | | | $ | 215,667 | | | $ | 1,449,892 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Changes in Equity and Income
(unaudited)
(in thousands)
| | | For the Six Months Ended June 30, 2019 | | | For the Six Months Ended June 30, 2020 |
| | | | Total Stockholders’ Equity | | | | | | | | Total Stockholders’ Equity | | | | |
| | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity | | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2018 | 135,266 | | | $ | 135 | | | $ | 482,556 | | | $ | 320,351 | | | $ | 803,042 | | | $ | 113,198 | | | $ | 916,240 | | |
Balance at December 31, 2019 | | Balance at December 31, 2019 | 134,328 | | | $ | 134 | | | $ | 491,038 | | | $ | 279,800 | | | $ | 0 | | | $ | 770,972 | | | $ | 158,063 | | | $ | 929,035 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | | 40,834 | | | 40,834 | | | 40,834 | | Net income attributable to Select Medical Holdings Corporation | | 53,125 | | | 53,125 | | | 53,125 | |
Net income attributable to non-controlling interests | Net income attributable to non-controlling interests | | — | | | 4,810 | | | 4,810 | | Net income attributable to non-controlling interests | | — | | | 10,067 | | | 10,067 | |
Issuance of restricted stock | Issuance of restricted stock | 21 | | | 0 | | | 0 | | | — | | | — | | Issuance of restricted stock | 2 | | | 0 | | | 0 | | | — | | | 0 | |
Forfeitures of unvested restricted stock | Forfeitures of unvested restricted stock | (24) | | | 0 | | | 0 | | | — | | | — | | Forfeitures of unvested restricted stock | (15) | | | 0 | | | 0 | | | — | | | 0 | |
Vesting of restricted stock | Vesting of restricted stock | | 5,488 | | | 5,488 | | | 5,488 | | Vesting of restricted stock | | 6,136 | | | 6,136 | | | 6,136 | |
Repurchase of common shares | | Repurchase of common shares | (492) | | | 0 | | | (5,350) | | | (3,341) | | | (8,691) | | | (8,691) | |
Issuance of non-controlling interests | Issuance of non-controlling interests | | — | | | 6,837 | | | 6,837 | | Issuance of non-controlling interests | | — | | | 1,679 | | | 1,679 | |
Distributions to and purchases of non-controlling interests | Distributions to and purchases of non-controlling interests | | 259 | | | 259 | | | (2,739) | | | (2,480) | | Distributions to and purchases of non-controlling interests | | (2,726) | | | (2,726) | | | (4,048) | | | (6,774) | |
Redemption adjustment on non-controlling interests | | (47,470) | | | (47,470) | | | (47,470) | | |
Redemption value adjustment on non-controlling interests | | Redemption value adjustment on non-controlling interests | | (10,123) | | | (10,123) | | | (10,123) | |
Other | Other | | (122) | | | (122) | | | 413 | | | 291 | | Other | | (55) | | | (55) | | | 420 | | | 365 | |
Balance at March 31, 2019 | 135,263 | | | $ | 135 | | | $ | 488,303 | | | $ | 313,593 | | | $ | 802,031 | | | $ | 122,519 | | | $ | 924,550 | | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | 133,823 | | | $ | 134 | | | $ | 491,824 | | | $ | 316,680 | | | $ | 0 | | | $ | 808,638 | | | $ | 166,181 | | | $ | 974,819 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | | 44,816 | | | 44,816 | | | 44,816 | | Net income attributable to Select Medical Holdings Corporation | | 51,650 | | | 51,650 | | | 51,650 | |
Net income attributable to non-controlling interests | Net income attributable to non-controlling interests | | — | | | 3,663 | | | 3,663 | | Net income attributable to non-controlling interests | | — | | | 12,572 | | | 12,572 | |
Issuance of restricted stock | Issuance of restricted stock | 187 | | | 0 | | | 0 | | | — | | | — | | Issuance of restricted stock | 200 | | | 0 | | | 0 | | | — | | | 0 | |
Forfeitures of unvested restricted stock | | Forfeitures of unvested restricted stock | (7) | | | 0 | | | 0 | | | — | | | 0 | |
Vesting of restricted stock | Vesting of restricted stock | | 5,591 | | | 5,591 | | | 5,591 | | Vesting of restricted stock | | 6,262 | | | 6,262 | | | 6,262 | |
Repurchase of common shares | Repurchase of common shares | (936) | | | 0 | | | (8,164) | | | (5,456) | | | (13,620) | | | (13,620) | | Repurchase of common shares | (46) | | | 0 | | | (441) | | | (283) | | | (724) | | | (724) | |
Exercise of stock options | 50 | | | 0 | | | 459 | | | 459 | | | 459 | | |
| Issuance of non-controlling interests | Issuance of non-controlling interests | | 6,366 | | | 6,366 | | | 24,761 | | | 31,127 | | Issuance of non-controlling interests | | 0 | | 0 | | | 7 | | | 7 | |
Distributions to and purchases of non-controlling interests | Distributions to and purchases of non-controlling interests | | 14 | | | 14 | | | (1,430) | | | (1,416) | | Distributions to and purchases of non-controlling interests | | (65) | | | (65) | | | (418) | | | (483) | |
Redemption adjustment on non-controlling interests | | 270 | | | 270 | | | 270 | | |
Redemption value adjustment on non-controlling interests | | Redemption value adjustment on non-controlling interests | | 127,916 | | | 127,916 | | | 127,916 | |
Other | Other | | 82 | | | 82 | | | 428 | | | 510 | | Other | | (795) | | | 1 | | | (794) | | | 1,205 | | | 411 | |
Balance at June 30, 2019 | 134,564 | | | $ | 135 | | | $ | 492,569 | | | $ | 353,305 | | | $ | 846,009 | | | $ | 149,941 | | | $ | 995,950 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 133,970 | | | $ | 134 | | | $ | 496,785 | | | $ | 495,964 | | | $ | 0 | | | $ | 992,883 | | | $ | 179,547 | | | $ | 1,172,430 | |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
| | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2020 | | 2021 |
Operating activities | | | |
Net income | $ | 137,934 | | | $ | 333,422 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Distributions from unconsolidated subsidiaries | 11,223 | | | 19,384 | |
Depreciation and amortization | 104,023 | | | 100,574 | |
Provision for expected credit losses | 253 | | | 212 | |
Equity in earnings of unconsolidated subsidiaries | (10,912) | | | (21,728) | |
| | | |
Loss (gain) on sale or disposal of assets and businesses | (7,881) | | | 494 | |
Stock compensation expense | 13,866 | | | 13,808 | |
Amortization of debt discount, premium and issuance costs | 1,093 | | | 1,095 | |
Deferred income taxes | (3,416) | | | (8,323) | |
Changes in operating assets and liabilities, net of effects of business combinations: | | | |
Accounts receivable | 13,179 | | | (31,751) | |
Other current assets | 713 | | | (12,856) | |
Other assets | 11,504 | | | (11,984) | |
Accounts payable | 4,251 | | | 18,881 | |
Accrued expenses | 4,028 | | | 71,034 | |
Government advances | 316,992 | | | (73,703) | |
Unearned government assistance | 45,505 | | | (78,509) | |
| | | |
Income taxes | 43,743 | | | 42,976 | |
Net cash provided by operating activities | 686,098 | | | 363,026 | |
Investing activities | | | |
Business combinations, net of cash acquired | (6,961) | | | (10,081) | |
Purchases of property and equipment | (71,253) | | | (76,442) | |
Investment in businesses | (14,749) | | | (11,185) | |
Proceeds from sale of assets and businesses | 12,401 | | | 9,463 | |
Net cash used in investing activities | (80,562) | | | (88,245) | |
Financing activities | | | |
Borrowings on revolving facilities | 470,000 | | | 0 | |
Payments on revolving facilities | (470,000) | | | 0 | |
| | | |
Payments on term loans | (39,843) | | | 0 | |
| | | |
| | | |
| | | |
Borrowings of other debt | 31,487 | | | 8,915 | |
Principal payments on other debt | (35,733) | | | (15,314) | |
Dividends paid to common stockholders | 0 | | | (16,876) | |
Repurchase of common stock | (9,415) | | | (1,610) | |
| | | |
| | | |
Proceeds from issuance of non-controlling interests | 1,686 | | | 5,688 | |
Distributions to and purchases of non-controlling interests | (13,660) | | | (29,152) | |
Purchase of membership interests of Concentra Group Holdings Parent | (366,203) | | | 0 | |
Net cash used in financing activities | (431,681) | | | (48,349) | |
Net increase in cash and cash equivalents | 173,855 | | | 226,432 | |
Cash and cash equivalents at beginning of period | 335,882 | | | 577,061 | |
Cash and cash equivalents at end of period | $ | 509,737 | | | $ | 803,493 | |
Supplemental Information | | | |
Cash paid for interest | $ | 86,124 | | | $ | 66,955 | |
Cash paid for taxes | 4,920 | | | 76,094 | |
| | | | | | | | | | | |
| For the Six Months Ended June 30, | | |
| 2019 | | 2020 |
Operating activities | | | |
Net income | $ | 113,330 | | | $ | 137,934 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Distributions from unconsolidated subsidiaries | 11,148 | | | 11,223 | |
Depreciation and amortization | 107,131 | | | 104,023 | |
Provision for expected credit losses | 1,958 | | | 253 | |
Equity in earnings of unconsolidated subsidiaries | (11,760) | | | (10,912) | |
| | | |
Gain on sale of assets and businesses | (6,354) | | | (7,881) | |
Stock compensation expense | 12,613 | | | 13,866 | |
Amortization of debt discount, premium and issuance costs | 6,326 | | | 1,093 | |
Deferred income taxes | (6,290) | | | (3,416) | |
Changes in operating assets and liabilities, net of effects of business combinations: | | | |
Accounts receivable | (85,873) | | | 13,179 | |
Other current assets | (9,236) | | | 713 | |
Other assets | (939) | | | 11,504 | |
Accounts payable | 2,670 | | | 4,251 | |
Accrued expenses | (18,156) | | | 4,028 | |
Government advances | — | | | 316,992 | |
Unearned government assistance | — | | | 45,505 | |
| | | |
Income taxes | 16,346 | | | 43,743 | |
Net cash provided by operating activities | 132,914 | | | 686,098 | |
Investing activities | | | |
Business combinations, net of cash acquired | (86,062) | | | (6,961) | |
Purchases of property and equipment | (89,285) | | | (71,253) | |
Investment in businesses | (52,257) | | | (14,749) | |
Proceeds from sale of assets and businesses | 125 | | | 12,401 | |
Net cash used in investing activities | (227,479) | | | (80,562) | |
Financing activities | | | |
Borrowings on revolving facilities | 635,000 | | | 470,000 | |
Payments on revolving facilities | (460,000) | | | (470,000) | |
| | | |
Payments on term loans | (132,685) | | | (39,843) | |
| | | |
| | | |
| | | |
Borrowings of other debt | 14,230 | | | 31,487 | |
Principal payments on other debt | (12,680) | | | (35,733) | |
Repurchase of common stock | (13,620) | | | (9,415) | |
Proceeds from exercise of stock options | 459 | | | — | |
Increase in overdrafts | 2,176 | | | — | |
Proceeds from issuance of non-controlling interests | 18,288 | | | 1,686 | |
Distributions to and purchases of non-controlling interests | (7,745) | | | (13,660) | |
Purchase of membership interests of Concentra Group Holdings Parent (Note 4) | — | | | (366,203) | |
Net cash provided by (used in) financing activities | 43,423 | | | (431,681) | |
Net increase (decrease) in cash and cash equivalents | (51,142) | | | 173,855 | |
Cash and cash equivalents at beginning of period | 175,178 | | | 335,882 | |
Cash and cash equivalents at end of period | $ | 124,036 | | | $ | 509,737 | |
Supplemental Information | | | |
Cash paid for interest | $ | 97,909 | | | $ | 86,124 | |
Cash paid for taxes | 29,241 | | | 4,920 | |
Operating lease right-of-use assets obtained in exchange for lease liabilities, excluding adoption impact of ASC Topic 842 at January 1, 2019 | 66,977 | | | 132,125 | |
| | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of June 30, 2020,2021, and for the three and six month periods ended June 30, 20192020 and 2020,2021, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim reporting and the accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to the consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.
The results of operations for the three and six months ended June 30, 2020,2021, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2020.2021. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019,2020, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2020.25, 2021.
2. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues, and expenses during the reporting period.expenses. Actual results could differ from those estimates.
Recently AdoptedRecent Accounting Pronouncements
FinancialConvertible Instruments and Contracts on an Entity’s Own Equity
On January 1,In August 2020, the Company adoptedFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,2020-06, FinancialDebt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326)and Contracts in an Entity’s Own Equity. , which replacedThe ASU simplifies the incurred loss approachaccounting for recognizing credit losses oncertain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an expected loss approach. The expected loss approach is subject to management judgments using assessmentsentity’s own equity. As part of incurred credit losses, assessments of current conditions, and forecasts using reasonable and supportable assumptions. The standard was requiredthis update, convertible instruments are to be appliedincluded in diluted earnings per share using the if-converted method, rather than the treasury stock method. Further, contracts which can be settled in cash or shares, excluding liability-classified share-based payment awards, are to be included in diluted earnings per share on an if-converted basis if the effect is dilutive, regardless of whether the entity or the counterparty can choose between cash and share settlement. The share-settlement presumption may not be rebutted based on past experience or a stated policy. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The Company plans to adopt this pronouncement as of January 1, 2022. The use of either the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.or fully retrospective method of transition is permitted.
The Company’s primary financial instrument subject toUnder the standard is its accounts receivable derived from contracts with patients. Historically,terms of the Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, certain members of Concentra Group Holdings Parent have put rights that obligate the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and,purchase certain of such members’ equity interests in Concentra Group Holdings Parent when exercised. The Company can elect to pay the purchase price for those equity interests in cash or in shares of Holdings’ common stock. Under ASU 2020-06, the Company is no longer able to rebut the share-settlement presumption based on its experience, believes the risk of material defaults is low. The Company experienced credit losses of $1.1 million for the year ended December 31, 2017, credit loss recoveries of $0.1 million for the year ended December 31, 2018, and credit losses of $3.0 million for the year ended December 31, 2019. The Company’s historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are typically paid for by highly-solvent, creditworthy payors such as Medicare, other governmental programs, and highly-regulated commercial insurers, on behalfpast experience. Accordingly, if any of the patient. Theput rights provided for under the Amended and Restated Limited Liability Company believes it has moderate credit risk related to defaultsAgreement of Concentra Group Holdings Parent are outstanding upon adoption of ASU 2020-06, the shares which are potentially issuable will be included in diluted earnings per share, on self-pay amounts in accounts receivable; however, these amounts represented less than 1.0% of the Company’s accounts receivable at January 1, 2020.
In estimating the Company’s expected credit losses under Topic 326,an if-converted basis. At this time, the Company considerscannot reasonably estimate the impact that the adoption of ASU 2020-06 will have on its incurred loss experience and adjusts for known and expected events and other circumstances, identified using periodic assessments implemented by the Company, which management believes are relevant in assessing the collectability of its accounts receivable. Because of the infrequent and insignificant nature of the Company’s historical credit losses, forecasts of expected credit losses are generally unnecessary. Expected credit losses are recognized by the Company through an allowance for credit losses and related credit loss expense.financial statements.
As of January 1, 2020, the Company completed its expected credit loss assessment for its financial instruments subject to Topic 326. The Company’s estimate of expected credit losses as of January 1, 2020, resulted in 0 adjustments to the allowance for credit losses and 0 cumulative-effect adjustment to retained earnings on the adoption date of the standard.
3. Credit Risk Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and accounts receivables.receivable. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to its critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, insurance coverage is verified prior to the patient’s visit. Within the Company’s Concentra centers, insurance coverage is verified or an authorization is received from the patient’s employer prior to the patient’s visit.
Because of the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion, patient accounts receivable which are due from the Medicare program represent the Company’s only significant concentration of credit risk. Approximately 15%18% and 13%15% of the Company’s accounts receivable is due from Medicare at December 31, 2019,2020, and June 30, 2020,2021, respectively.
4. Redeemable Non-Controlling Interests
The ownership interests held by outside parties in subsidiaries, which include limited liability companies and limited partnerships, controlled by the Company are classified as non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values.values, after the attribution of net income or loss.
On January 1, 2020, Select acquired approximately 17.2%The Company’s redeemable non-controlling interests are comprised primarily of the outstandingvoting membership interests owned by outside members of Concentra Group Holdings Parent, on a fully diluted basis from Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), Dignity Health Holding Corporation (“DHHC”), and certain other sellerseach of which have put rights with respect to their interests in exchange for an aggregate purchase price of approximately $338.4 million. On February 1, 2020, Select acquired an additional 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and certain other sellers in exchange for an aggregate purchase price of approximately $27.8 million. These purchases were in lieu of, and are considered to be, the exercise of the first put right provided to certain equity holders under the terms of the Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, dated as of February 1, 2018, as amended (the “Concentra LLC Agreement”).
Following these purchases, Select owns approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding Class A membership interests of Concentra Group Holdings Parent.
The changes in redeemable non-controlling interests arewere as follows (in thousands):follows:
| | | | | | | | | | | | | Six Months Ended June 30, |
| | Six Months Ended June 30, | | | 2020 | | 2021 |
| | 2019 | | 2020 | | (in thousands) |
Balance as of January 1 | Balance as of January 1 | $ | 780,488 | | | $ | 974,541 | | Balance as of January 1 | $ | 974,541 | | | $ | 398,171 | |
Net income attributable to redeemable non-controlling interests | Net income attributable to redeemable non-controlling interests | 7,700 | | | 7,256 | | Net income attributable to redeemable non-controlling interests | 7,256 | | | 9,626 | |
| Distributions to and purchases of redeemable non-controlling interests | Distributions to and purchases of redeemable non-controlling interests | (2,771) | | | (5,687) | | Distributions to and purchases of redeemable non-controlling interests | (5,687) | | | (614) | |
Purchase of membership interests of Concentra Group Holdings Parent | Purchase of membership interests of Concentra Group Holdings Parent | — | | | (366,203) | | Purchase of membership interests of Concentra Group Holdings Parent | (366,203) | | | 0 | |
Redemption adjustment on redeemable non-controlling interests | 47,470 | | | 10,123 | | |
Redemption value adjustment on redeemable non-controlling interests | | Redemption value adjustment on redeemable non-controlling interests | 10,123 | | | 38,405 | |
Other | Other | 354 | | | 347 | | Other | 347 | | | 343 | |
Balance as of March 31 | Balance as of March 31 | $ | 833,241 | | | $ | 620,377 | | Balance as of March 31 | $ | 620,377 | | | $ | 445,931 | |
Net income attributable to redeemable non-controlling interests | Net income attributable to redeemable non-controlling interests | 11,507 | | | 3,264 | | Net income attributable to redeemable non-controlling interests | 3,264 | | | 18,073 | |
Distributions to and purchases of redeemable non-controlling interests | Distributions to and purchases of redeemable non-controlling interests | (395) | | | (30) | | Distributions to and purchases of redeemable non-controlling interests | (30) | | | (1,987) | |
Redemption adjustment on redeemable non-controlling interests | (270) | | | (127,916) | | |
Redemption value adjustment on redeemable non-controlling interests | | Redemption value adjustment on redeemable non-controlling interests | (127,916) | | | 59,370 | |
Other | Other | 339 | | | 292 | | Other | 292 | | | 165 | |
Balance as of June 30 | Balance as of June 30 | $ | 844,422 | | | $ | 495,987 | | Balance as of June 30 | $ | 495,987 | | | $ | 521,552 | |
|
5. Variable Interest Entities
Concentra does not own many of its medical practices, as certainCertain states prohibit the “corporate practice of medicine,” which restricts business corporationsthe Company from practicing medicine through the direct employment ofowning medical practices which directly employ physicians orand from exercising control over medical decisions by physicians. In these states, Concentra typicallythe Company enters into long-term management agreements with professional corporations or associationsmedical practices that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in Concentra’s occupational health centers.
services. The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the abilityCompany to direct the transfer of ownership of the professional corporation or associationmedical practices to a new licensed physicianphysicians at any time. Based on the provisions of the management agreements, the medical practices are variable interest entities for which the Company is the primary beneficiary.
TheAs of December 31, 2020 and June 30, 2021, the total assets of Concentra’sthe Company’s variable interest entities whichwere $208.4 million and $242.3 million, respectively, and are principally comprised principally of accounts receivable, were $178.4 million and $153.2 million atreceivable. As of December 31, 2019,2020 and June 30, 2020, respectively. The2021, the total liabilities of Concentra’sthese variable interest entities whichwere $55.1 million and $58.8 million, respectively, and are principally comprised principally of accounts payable and accrued expenses, andexpenses. The Company’s variable interest entities have obligations payable for services received under the aforementioned management agreements were $176.7of $151.8 million and $151.9$182.1 million atas of December 31, 2019,2020 and June 30, 2020, respectively.2021, respectively; these intercompany balances are eliminated in consolidation.
6. Leases
The Company has operating and finance leases for its facilities. The Company leases its corporate office space from related parties.
The Company’s total lease cost was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2021 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Operating lease cost | $ | 69,367 | | | $ | 1,787 | | | $ | 71,154 | | | $ | 70,739 | | | $ | 1,798 | | | $ | 72,537 | |
Finance lease cost: | | | | | | | | | | | |
Amortization of right-of-use assets | 69 | | | 0 | | | 69 | | | 105 | | | 0 | | | 105 | |
Interest on lease liabilities | 231 | | | 0 | | | 231 | | | 254 | | | 0 | | | 254 | |
| | | | | | | | | | | |
Variable lease cost | 11,780 | | | 112 | | | 11,892 | | | 13,086 | | | 141 | | | 13,227 | |
Sublease income | (2,621) | | | 0 | | | (2,621) | | | (2,229) | | | 0 | | | (2,229) | |
Total lease cost | $ | 78,826 | | | $ | 1,899 | | | $ | 80,725 | | | $ | 81,955 | | | $ | 1,939 | | | $ | 83,894 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2021 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Operating lease cost | $ | 139,159 | | | $ | 3,520 | | | $ | 142,679 | | | $ | 140,853 | | | $ | 3,597 | | | $ | 144,450 | |
Finance lease cost: | | | | | | | | | | | |
Amortization of right-of-use assets | 131 | | | 0 | | | 131 | | | 140 | | | 0 | | | 140 | |
Interest on lease liabilities | 487 | | | 0 | | | 487 | | | 505 | | | 0 | | | 505 | |
| | | | | | | | | | | |
Variable lease cost | 24,012 | | | 268 | | | 24,280 | | | 26,095 | | | 144 | | | 26,239 | |
Sublease income | (5,176) | | | 0 | | | (5,176) | | | (4,463) | | | 0 | | | (4,463) | |
Total lease cost | $ | 158,613 | | | $ | 3,788 | | | $ | 162,401 | | | $ | 163,130 | | | $ | 3,741 | | | $ | 166,871 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2020 | | 2021 |
| (in thousands) |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | $ | 140,300 | | | $ | 145,652 | |
Operating cash flows for finance leases | 487 | | | 505 | |
Financing cash flows for finance leases | 89 | | | 145 | |
Right-of-use assets obtained in exchange for lease liabilities: | | | |
Operating leases | $ | 132,125 | | | $ | 138,606 | |
Finance leases | 989 | | | 138 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | June 30, 2021 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Operating Leases | | | | | | | | | | | |
Operating lease right-of-use assets | $ | 1,002,151 | | | $ | 30,066 | | | $ | 1,032,217 | | | $ | 1,026,058 | | | $ | 27,273 | | | $ | 1,053,331 | |
| | | | | | | | | | | |
Current operating lease liabilities | $ | 214,377 | | | $ | 6,036 | | | $ | 220,413 | | | $ | 218,723 | | | $ | 6,145 | | | $ | 224,868 | |
Non-current operating lease liabilities | 848,215 | | | 27,152 | | | 875,367 | | | 869,421 | | | 24,057 | | | 893,478 | |
Total operating lease liabilities | $ | 1,062,592 | | | $ | 33,188 | | | $ | 1,095,780 | | | $ | 1,088,144 | | | $ | 30,202 | | | $ | 1,118,346 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | June 30, 2021 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Finance Leases | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Property and equipment, net | $ | 5,644 | | | $ | 0 | | | $ | 5,644 | | | $ | 5,711 | | | $ | 0 | | | $ | 5,711 | |
| | | | | | | | | | | |
Current portion of long-term debt and notes payable | $ | 663 | | | $ | 0 | | | $ | 663 | | | $ | 638 | | | $ | 0 | | | $ | 638 | |
Long-term debt, net of current portion | 13,491 | | | 0 | | | 13,491 | | | 13,509 | | | 0 | | | 13,509 | |
Total finance lease liabilities | $ | 14,154 | | | $ | 0 | | | $ | 14,154 | | | $ | 14,147 | | | $ | 0 | | | $ | 14,147 | |
The weighted average remaining lease terms and discount rates were as follows:
| | | | | | | | | | | |
| December 31, 2020 | | June 30, 2021 |
Weighted average remaining lease term (in years): | | | |
Operating leases | 7.8 | | 7.8 |
Finance leases | 31.2 | | 30.6 |
Weighted average discount rate: | | | |
Operating leases | 5.6 | % | | 5.5 | % |
Finance leases | 7.2 | % | | 7.2 | % |
As of June 30, 2021, maturities of lease liabilities were approximately as follows:
| | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | |
| (in thousands) | | |
2021 (remainder of year) | $ | 143,539 | | | $ | 790 | | | |
2022 | 258,011 | | | 1,699 | | | |
2023 | 211,514 | | | 1,710 | | | |
2024 | 172,183 | | | 1,381 | | | |
2025 | 138,429 | | | 1,205 | | | |
Thereafter | 533,811 | | | 29,019 | | | |
Total undiscounted cash flows | 1,457,487 | | | 35,804 | | | |
Less: Imputed interest | 339,141 | | | 21,657 | | | |
Total discounted lease liabilities | $ | 1,118,346 | | | $ | 14,147 | | | |
6.7. Intangible Assets
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the six months ended June 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Total |
| (in thousands) | | | | | | | | |
Balance as of December 31, 2019 | $ | 1,078,804 | | | $ | 430,900 | | | $ | 649,763 | | | $ | 1,232,488 | | | $ | 3,391,955 | |
Acquired | — | | | — | | | 728 | | | 4,567 | | | 5,295 | |
Sold | — | | | — | | | (6,034) | | | — | | | (6,034) | |
Measurement period adjustment | — | | | — | | | — | | | (20) | | | (20) | |
Balance as of June 30, 2020 | $ | 1,078,804 | | | $ | 430,900 | | | $ | 644,457 | | | $ | 1,237,035 | | | $ | 3,391,196 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Total |
| (in thousands) |
Balance as of December 31, 2020 | $ | 1,084,761 | | | $ | 432,753 | | | $ | 646,433 | | | $ | 1,215,067 | | | $ | 3,379,014 | |
Acquisition of businesses | 0 | | | 9,402 | | | 1,436 | | | 1,188 | | | 12,026 | |
| | | | | | | | | |
| | | | | | | | | |
Balance as of June 30, 2021 | $ | 1,084,761 | | | $ | 442,155 | | | $ | 647,869 | | | $ | 1,216,255 | | | $ | 3,391,040 | |
Identifiable Intangible Assets
The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | June 30, 2020 | | | | |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in thousands) | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Trademarks | | $ | 166,698 | | | $ | — | | | $ | 166,698 | | | $ | 166,698 | | | $ | — | | | $ | 166,698 | |
Certificates of need | | 17,157 | | | — | | | 17,157 | | | 18,410 | | | — | | | 18,410 | |
Accreditations | | 1,874 | | | — | | | 1,874 | | | 1,874 | | | — | | | 1,874 | |
Finite-lived intangible assets: | | | | | | | | | | | | |
Trademarks | | 5,000 | | | (5,000) | | | — | | | 5,000 | | | (5,000) | | | — | |
Customer relationships | | 287,373 | | | (87,346) | | | 200,027 | | | 288,963 | | | (100,300) | | | 188,663 | |
Non-compete agreements | | 32,114 | | | (8,802) | | | 23,312 | | | 32,883 | | | (10,262) | | | 22,621 | |
Total identifiable intangible assets | | $ | 510,216 | | | $ | (101,148) | | | $ | 409,068 | | | $ | 513,828 | | | $ | (115,562) | | | $ | 398,266 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | June 30, 2021 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in thousands) |
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Trademarks | | $ | 166,698 | | | $ | — | | | $ | 166,698 | | | $ | 166,698 | | | $ | — | | | $ | 166,698 | |
Certificates of need | | 18,392 | | | — | | | 18,392 | | | 18,413 | | | — | | | 18,413 | |
Accreditations | | 1,874 | | | — | | | 1,874 | | | 1,874 | | | — | | | 1,874 | |
Finite-lived intangible assets: | | | | | | | | | | | | |
Trademarks | | 5,000 | | | (5,000) | | | 0 | | | 5,000 | | | (5,000) | | | 0 | |
Customer relationships | | 291,923 | | | (113,346) | | | 178,577 | | | 298,514 | | | (126,843) | | | 171,671 | |
Non-compete agreements | | 33,771 | | | (11,771) | | | 22,000 | | | 35,011 | | | (13,365) | | | 21,646 | |
Total identifiable intangible assets | | $ | 517,658 | | | $ | (130,117) | | | $ | 387,541 | | | $ | 525,510 | | | $ | (145,208) | | | $ | 380,302 | |
The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At June 30, 2020,2021, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 6.78.2 years, respectively.
The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $8.9$6.9 million and $6.9$7.3 million for the three months ended June 30, 20192020 and 2020,2021, respectively. Amortization expense was $16.0$13.8 million and $13.8$14.4 million for the six months ended June 30, 20192020 and 2020,2021, respectively.
7.8. Long-Term Debt and Notes Payable
As of June 30, 2020,2021, the Company’s long-term debt and notes payable were as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | Fair Value |
| | Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | Fair Value | | (in thousands) |
Select 6.250% senior notes | Select 6.250% senior notes | $ | 1,225,000 | | | $ | 36,890 | | | $ | (18,455) | | | $ | 1,243,435 | | | | $ | 1,238,353 | | Select 6.250% senior notes | $ | 1,225,000 | | | $ | 30,722 | | | $ | (15,463) | | | $ | 1,240,259 | | | | $ | 1,304,625 | |
Select credit facilities: | Select credit facilities: | | | | | | | | | | | Select credit facilities: | | | | | | | | | | |
| Select term loan | Select term loan | 2,103,437 | | | (9,404) | | | (10,251) | | | 2,083,782 | | | | 1,987,748 | | Select term loan | 2,103,437 | | | (7,398) | | | (8,064) | | | 2,087,975 | | | | 2,077,144 | |
Other debt, including finance leases | Other debt, including finance leases | 76,984 | | | — | | | (349) | | | 76,635 | | | | 76,635 | | Other debt, including finance leases | 69,846 | | | 0 | | | (258) | | | 69,588 | | | | 69,588 | |
Total debt | Total debt | $ | 3,405,421 | | | $ | 27,486 | | | $ | (29,055) | | | $ | 3,403,852 | | | | $ | 3,302,736 | | Total debt | $ | 3,398,283 | | | $ | 23,324 | | | $ | (23,785) | | | $ | 3,397,822 | | | | $ | 3,451,357 | |
Principal maturities of the Company’s long-term debt and notes payable were approximately as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total | | (in thousands) |
Select 6.250% senior notes | Select 6.250% senior notes | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,225,000 | | | $ | 1,225,000 | | Select 6.250% senior notes | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,225,000 | | | $ | 1,225,000 | |
Select credit facilities: | Select credit facilities: | | | | | | | | | | | | | | Select credit facilities: | | | | | | | | | | | | | |
| Select term loan | Select term loan | — | | | — | | | — | | | 4,757 | | | 11,150 | | | 2,087,530 | | | 2,103,437 | | Select term loan | 0 | | | 0 | | | 4,757 | | | 11,150 | | | 2,087,530 | | | 0 | | | 2,103,437 | |
Other debt, including finance leases | Other debt, including finance leases | 8,745 | | | 8,510 | | | 3,583 | | | 20,715 | | | 23,532 | | | 11,899 | | | 76,984 | | Other debt, including finance leases | 9,441 | | | 4,035 | | | 20,754 | | | 23,717 | | | 334 | | | 11,565 | | | 69,846 | |
Total debt | Total debt | $ | 8,745 | | | $ | 8,510 | | | $ | 3,583 | | | $ | 25,472 | | | $ | 34,682 | | | $ | 3,324,429 | | | $ | 3,405,421 | | Total debt | $ | 9,441 | | | $ | 4,035 | | | $ | 25,511 | | | $ | 34,867 | | | $ | 2,087,864 | | | $ | 1,236,565 | | | $ | 3,398,283 | |
As of December 31, 2019,2020, the Company’s long-term debt and notes payable were as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | Fair Value |
| | Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | Fair Value | | (in thousands) |
Select 6.250% senior notes | Select 6.250% senior notes | $ | 1,225,000 | | | $ | 39,988 | | | $ | (19,944) | | | $ | 1,245,044 | | | | $ | 1,322,020 | | Select 6.250% senior notes | $ | 1,225,000 | | | $ | 33,773 | | | $ | (16,953) | | | $ | 1,241,820 | | | | $ | 1,316,875 | |
Select credit facilities: | Select credit facilities: | | | | | | | | | | | Select credit facilities: | | | | | | | | | | |
| Select term loan | Select term loan | 2,143,280 | | | (10,411) | | | (11,348) | | | 2,121,521 | | | | 2,145,959 | | Select term loan | 2,103,437 | | | (8,393) | | | (9,149) | | | 2,085,895 | | | | 2,082,403 | |
Other debt, including finance leases | Other debt, including finance leases | 78,941 | | | — | | | (396) | | | 78,545 | | | | 78,545 | | Other debt, including finance leases | 74,606 | | | 0 | | | (302) | | | 74,304 | | | | 74,304 | |
Total debt | Total debt | $ | 3,447,221 | | | $ | 29,577 | | | $ | (31,688) | | | $ | 3,445,110 | | | | $ | 3,546,524 | | Total debt | $ | 3,403,043 | | | $ | 25,380 | | | $ | (26,404) | | | $ | 3,402,019 | | | | $ | 3,473,582 | |
Excess Cash Flow PaymentSelect Credit Facilities
In February 2020,On June 2, 2021, Select made a principal prepayment of approximately $39.8 million associated with its term loans in accordance with the provision inentered into Amendment No. 5 to its senior secured credit agreement dated March 6, 2017 (together with any borrowings thereunder, the(the “Select credit facilities”agreement”) that requires mandatory prepaymentswhich, among other things, increased the aggregate commitments available under its revolving credit facility (the “Select revolving facility”) from $450.0 million to $650.0 million, including a $125.0 million sublimit for the issuance of term loans asstandby letters of credit.
Concentra-JPM Revolving Facility
On June 2, 2021, Concentra Inc. terminated its obligations under its first lien credit agreement (the “Concentra-JPM first lien credit agreement”). The Concentra-JPM first lien credit agreement provided for commitments of $100.0 million under a result of annual excess cash flow, as defined in the Selectrevolving credit facilities.facility (the “Concentra-JPM revolving facility”), which was set to mature on March 1, 2022.
Fair Value
9. Interest Rate Cap
The Company considersis subject to market risk exposure arising from changes in interest rates on the inputsSelect term loan, which bears interest at a variable interest rate. The Company’s objective in using an interest rate derivative is to mitigate its exposure to increases in interest rates. The interest rate cap limits the Company’s exposure to increases in the valuation processreference rate to 1.0% on $2.0 billion of principal outstanding under the Select term loan. The interest rate cap became effective March 31, 2021 for the monthly periods from and including April 30, 2021 through September 30, 2024. The Company will pay a premium for the interest rate cap over the term of the agreement. The annual premium is equal to 0.0916% of the notional amount.
The interest rate cap has been designated as a cash flow hedge and is highly effective at offsetting the changes in cash outflows when the reference rate exceeds 1.0%. Changes in the fair value of the interest rate cap, net of tax, are recognized in other comprehensive income and are reclassified out of accumulated other comprehensive income (“AOCI”) and into interest expense when the hedged interest obligations affect earnings.
The following table outlines the changes in AOCI:
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2020 | | 2021 |
| | (in thousands) |
Balance as of January 1 | | $ | 0 | | | $ | (2,027) | |
Gain on interest rate cap cash flow hedge | | 0 | | | 8,151 | |
| | | | |
Balance as of March 31 | | $ | 0 | | | $ | 6,124 | |
Loss on interest rate cap cash flow hedge | | 0 | | | (1,403) | |
Amounts reclassified from AOCI | | 0 | | | 6 | |
Balance as of June 30 | | $ | 0 | | | $ | 4,727 | |
| | | | |
| | | | |
| | | | |
The estimated pre-tax losses expected to be Level 2reclassified from AOCI into interest expense within the next twelve months are approximately $0.2 million.
Refer to Note 10 – Fair Value of Financial Instruments for information on the fair value of the Company’s interest rate cap contract and its balance sheet classification.
10. Fair Value of Financial Instruments
Financial instruments which are measured at fair value, or for which a fair value is disclosed, are classified in the fair value hierarchy, for its 6.250% senior notes due August 15, 2026 (the “senior notes”) andas outlined below, on the Select credit facilities. Level 2basis of the observability of the inputs used in the fair value hierarchy is defined asmeasurement:
•Level 1 – inputs that are observable for the asset or liability, either directly or indirectly, which includesbased upon quoted prices for identical assetsinstruments in active markets.
•Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or liabilitiessimilar instruments in markets that are not active.active, and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data.
•Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the instrument.
The Company’s interest rate cap contract is recorded at its fair value on a recurring basis. The fair value of the interest rate cap contract is based upon a model-derived valuation using observable market inputs, such as interest rates and interest rate volatility, and the strike price.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Instrument | | Balance Sheet Classification | | Level | | December 31, 2020 | | June 30, 2021 |
Asset: | | | | | | (in thousands) |
Interest rate cap contract, non-current portion | | Other assets | | Level 2 | | $ | 0 | | | $ | 8,776 | |
Liability: | | | | | | | | |
Interest rate cap contract, current portion | | Accrued other | | Level 2 | | $ | 1,339 | | | $ | 1,948 | |
Interest rate cap contract, non-current portion | | Other non-current liabilities | | Level 2 | | 1,392 | | | 0 | |
The Company does not measure its indebtedness at fair value in its condensed consolidated balance sheets. The fair value of the Select credit facilities wasis based on quoted market prices for this debt in the syndicated loan market. The fair value of the senior notes wasis based on quoted market prices. The carrying amountvalue of the Company’s other debt, principally short-term notes payable,as disclosed in Note 8 – Long-Term Debt and Notes Payable, approximates fair value.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2020 | | June 30, 2021 |
Financial Instrument | | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | (in thousands) |
Select 6.250% senior notes | | Level 2 | | $ | 1,241,820 | | | $ | 1,316,875 | | | $ | 1,240,259 | | | $ | 1,304,625 | |
Select credit facilities: | | | | | | | | | | |
| | | | | | | | | | |
Select term loan | | Level 2 | | 2,085,895 | | | 2,082,403 | | | 2,087,975 | | | 2,077,144 | |
| | | | | | | | | | |
| | | | | | | | | | |
The Company’s other financial instruments, which primarily consist of cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value because of the short-term maturities of these instruments.
8.11. Segment Information
The Company’s reportable segments includeconsist of the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services with non-consolidating subsidiaries. For the three and six months ended June 30, 2020, theThe Company’s other activities also include other operating income related to the recognition of payments received under the Provider Relief Fund for losses of revenue and health care related expenses and loss of revenue attributable to the coronavirus disease 2019 (“COVID-19”). Refer to Note 1215 – CARES Act for further information.
The Company evaluates the performance of theits segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, gain (loss) on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.
The following tables summarize selected financial data for the Company’s reportable segments.
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2020 | | 2019 | | 2020 | | 2020 | | 2021 | | 2020 | | 2021 |
| | (in thousands) | | | (in thousands) |
Net operating revenues: | | | | | | | | |
Revenue: | | Revenue: | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | $ | 461,143 | | | $ | 519,626 | | | $ | 918,677 | | | $ | 1,020,147 | | Critical illness recovery hospital | $ | 519,626 | | | $ | 544,059 | | | $ | 1,020,147 | | | $ | 1,138,931 | |
Rehabilitation hospital | Rehabilitation hospital | 160,374 | | | 168,667 | | | 314,932 | | | 350,686 | | Rehabilitation hospital | 168,667 | | | 212,666 | | | 350,686 | | | 420,470 | |
Outpatient rehabilitation | Outpatient rehabilitation | 261,891 | | | 167,138 | | | 508,796 | | | 422,387 | | Outpatient rehabilitation | 167,138 | | | 280,409 | | | 422,387 | | | 532,370 | |
Concentra | Concentra | 413,451 | | | 312,338 | | | 809,772 | | | 710,873 | | Concentra | 312,338 | | | 456,372 | | | 710,873 | | | 879,212 | |
Other | Other | 64,505 | | | 64,949 | | | 133,818 | | | 143,257 | | Other | 64,949 | | | 70,514 | | | 143,257 | | | 139,500 | |
Total Company | Total Company | $ | 1,361,364 | | | $ | 1,232,718 | | | $ | 2,685,995 | | | $ | 2,647,350 | | Total Company | $ | 1,232,718 | | | $ | 1,564,020 | | | $ | 2,647,350 | | | $ | 3,110,483 | |
Adjusted EBITDA: | Adjusted EBITDA: | | | | | | | | Adjusted EBITDA: | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | $ | 64,138 | | | $ | 89,743 | | | $ | 137,136 | | | $ | 178,313 | | Critical illness recovery hospital | $ | 89,743 | | | $ | 72,904 | | | $ | 178,313 | | | $ | 186,176 | |
Rehabilitation hospital | Rehabilitation hospital | 29,968 | | | 27,605 | | | 55,765 | | | 66,174 | | Rehabilitation hospital | 27,605 | | | 50,768 | | | 66,174 | | | 101,302 | |
Outpatient rehabilitation | Outpatient rehabilitation | 42,584 | | | (6,282) | | | 71,575 | | | 20,840 | | Outpatient rehabilitation | (6,282) | | | 45,633 | | | 20,840 | | | 71,962 | |
Concentra | Concentra | 76,087 | | | 41,497 | | | 142,345 | | | 102,963 | | Concentra | 41,497 | | | 137,060 | | | 102,963 | | | 219,075 | |
Other | Other | (26,544) | | | 26,189 | | | (50,471) | | | (2,205) | | Other | 26,189 | | | 35,656 | | | (2,205) | | | 21,847 | |
Total Company | Total Company | $ | 186,233 | | | $ | 178,752 | | | $ | 356,350 | | | $ | 366,085 | | Total Company | $ | 178,752 | | | $ | 342,021 | | | $ | 366,085 | | | $ | 600,362 | |
Total assets: | Total assets: | | | | | | | | Total assets: | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | $ | 2,119,574 | | | $ | 2,115,294 | | | $ | 2,119,574 | | | $ | 2,115,294 | | Critical illness recovery hospital | $ | 2,115,294 | | | $ | 2,187,181 | | | $ | 2,115,294 | | | $ | 2,187,181 | |
Rehabilitation hospital | Rehabilitation hospital | 1,107,852 | | | 1,135,206 | | | 1,107,852 | | | 1,135,206 | | Rehabilitation hospital | 1,135,206 | | | 1,186,886 | | | 1,135,206 | | | 1,186,886 | |
Outpatient rehabilitation | Outpatient rehabilitation | 1,265,487 | | | 1,267,308 | | | 1,265,487 | | | 1,267,308 | | Outpatient rehabilitation | 1,267,308 | | | 1,333,661 | | | 1,267,308 | | | 1,333,661 | |
Concentra | Concentra | 2,447,387 | | | 2,351,974 | | | 2,447,387 | | | 2,351,974 | | Concentra | 2,351,974 | | | 2,518,369 | | | 2,351,974 | | | 2,518,369 | |
Other | Other | 166,640 | | | 598,676 | | | 166,640 | | | 598,676 | | Other | 598,676 | | | 730,282 | | | 598,676 | | | 730,282 | |
Total Company | Total Company | $ | 7,106,940 | | | $ | 7,468,458 | | | $ | 7,106,940 | | | $ | 7,468,458 | | Total Company | $ | 7,468,458 | | | $ | 7,956,379 | | | $ | 7,468,458 | | | $ | 7,956,379 | |
Purchases of property and equipment: | Purchases of property and equipment: | | | | | | | | Purchases of property and equipment: | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | $ | 14,488 | | | $ | 14,970 | | | $ | 24,648 | | | $ | 23,935 | | Critical illness recovery hospital | $ | 14,970 | | | $ | 16,499 | | | $ | 23,935 | | | $ | 30,884 | |
Rehabilitation hospital | Rehabilitation hospital | 5,356 | | | 1,923 | | | 18,539 | | | 5,248 | | Rehabilitation hospital | 1,923 | | | 3,257 | | | 5,248 | | | 3,922 | |
Outpatient rehabilitation | Outpatient rehabilitation | 6,705 | | | 6,593 | | | 15,745 | | | 14,977 | | Outpatient rehabilitation | 6,593 | | | 7,448 | | | 14,977 | | | 14,783 | |
Concentra | Concentra | 12,240 | | | 6,820 | | | 27,938 | | | 22,406 | | Concentra | 6,820 | | | 7,591 | | | 22,406 | | | 20,271 | |
Other | Other | 1,423 | | | 1,739 | | | 2,415 | | | 4,687 | | Other | 1,739 | | | 1,928 | | | 4,687 | | | 6,582 | |
Total Company | Total Company | $ | 40,212 | | | $ | 32,045 | | | $ | 89,285 | | | $ | 71,253 | | Total Company | $ | 32,045 | | | $ | 36,723 | | | $ | 71,253 | | | $ | 76,442 | |
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
| | | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2020 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Adjusted EBITDA | Adjusted EBITDA | $ | 64,138 | | | $ | 29,968 | | | $ | 42,584 | | | $ | 76,087 | | | $ | (26,544) | | | | Adjusted EBITDA | $ | 89,743 | | | $ | 27,605 | | | $ | (6,282) | | | $ | 41,497 | | | $ | 26,189 | | | |
Depreciation and amortization | Depreciation and amortization | (14,495) | | | (6,696) | | | (6,991) | | | (24,479) | | | (2,332) | | | | Depreciation and amortization | (13,892) | | | (6,907) | | | (7,194) | | | (21,857) | | | (2,421) | | | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | (767) | | | (5,591) | | | | Stock compensation expense | 0 | | | 0 | | | 0 | | | (701) | | | (6,262) | | | |
Income (loss) from operations | Income (loss) from operations | $ | 49,643 | | | $ | 23,272 | | | $ | 35,593 | | | $ | 50,841 | | | $ | (34,467) | | | $ | 124,882 | | Income (loss) from operations | $ | 75,851 | | | $ | 20,698 | | | $ | (13,476) | | | $ | 18,939 | | | $ | 17,506 | | | $ | 119,518 | |
| Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | | | | | | | | | 7,394 | | Equity in earnings of unconsolidated subsidiaries | | | | | | | | | 8,324 | |
Gain on sale of businesses | | Gain on sale of businesses | | 346 | |
| Interest expense | Interest expense | | | | | | | | | (51,464) | | Interest expense | | | | | | | | | (37,366) | |
Income before income taxes | Income before income taxes | | | | | | | | | $ | 80,812 | | Income before income taxes | | | | | | | | | $ | 90,822 | |
| | | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2021 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Adjusted EBITDA | Adjusted EBITDA | $ | 89,743 | | | $ | 27,605 | | | $ | (6,282) | | | $ | 41,497 | | | $ | 26,189 | | | | Adjusted EBITDA | $ | 72,904 | | | $ | 50,768 | | | $ | 45,633 | | | $ | 137,060 | | | $ | 35,656 | | | |
Depreciation and amortization | Depreciation and amortization | (13,892) | | | (6,907) | | | (7,194) | | | (21,857) | | | (2,421) | | | | Depreciation and amortization | (12,936) | | | (6,939) | | | (7,345) | | | (21,230) | | | (2,504) | | | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | (701) | | | (6,262) | | | | Stock compensation expense | 0 | | | 0 | | | 0 | | | (535) | | | (6,564) | | | |
Income (loss) from operations | Income (loss) from operations | $ | 75,851 | | | $ | 20,698 | | | $ | (13,476) | | | $ | 18,939 | | | $ | 17,506 | | | $ | 119,518 | | Income (loss) from operations | $ | 59,968 | | | $ | 43,829 | | | $ | 38,288 | | | $ | 115,295 | | | $ | 26,588 | | | $ | 283,968 | |
| Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | | | | | | | | | 8,324 | | Equity in earnings of unconsolidated subsidiaries | | | | | | | | | 11,809 | |
Gain on sale of business | | 346 | | |
| Interest expense | Interest expense | | | | | | | | | (37,366) | | Interest expense | | | | | | | | | (33,888) | |
Income before income taxes | Income before income taxes | | | | | | | | | $ | 90,822 | | Income before income taxes | | | | | | | | | $ | 261,889 | |
| | | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2020 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Adjusted EBITDA | Adjusted EBITDA | $ | 137,136 | | | $ | 55,765 | | | $ | 71,575 | | | $ | 142,345 | | | $ | (50,471) | | | | Adjusted EBITDA | $ | 178,313 | | | $ | 66,174 | | | $ | 20,840 | | | $ | 102,963 | | | $ | (2,205) | | | |
Depreciation and amortization | Depreciation and amortization | (25,946) | | | (13,098) | | | (14,023) | | | (49,383) | | | (4,681) | | | | Depreciation and amortization | (26,228) | | | (13,794) | | | (14,412) | | | (44,744) | | | (4,845) | | | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | (1,534) | | | (11,079) | | | | Stock compensation expense | 0 | | | 0 | | | 0 | | | (1,468) | | | (12,398) | | | |
Income (loss) from operations | Income (loss) from operations | $ | 111,190 | | | $ | 42,667 | | | $ | 57,552 | | | $ | 91,428 | | | $ | (66,231) | | | $ | 236,606 | | Income (loss) from operations | $ | 152,085 | | | $ | 52,380 | | | $ | 6,428 | | | $ | 56,751 | | | $ | (19,448) | | | $ | 248,196 | |
| Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | | | | | | | | | 11,760 | | Equity in earnings of unconsolidated subsidiaries | | | | | | | | | 10,912 | |
Gain on sale of businesses | Gain on sale of businesses | | 6,532 | | Gain on sale of businesses | | 7,547 | |
| Interest expense | Interest expense | | | | | | | | | (102,275) | | Interest expense | | | | | | | | | (83,473) | |
Income before income taxes | Income before income taxes | | | | | | | | | $ | 152,623 | | Income before income taxes | | | | | | | | | $ | 183,182 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | | | | | | | | | | |
Adjusted EBITDA | $ | 178,313 | | | $ | 66,174 | | | $ | 20,840 | | | $ | 102,963 | | | $ | (2,205) | | | |
Depreciation and amortization | (26,228) | | | (13,794) | | | (14,412) | | | (44,744) | | | (4,845) | | | |
Stock compensation expense | — | | | — | | | — | | | (1,468) | | | (12,398) | | | |
Income (loss) from operations | $ | 152,085 | | | $ | 52,380 | | | $ | 6,428 | | | $ | 56,751 | | | $ | (19,448) | | | $ | 248,196 | |
| | | | | | | | | | | |
Equity in earnings of unconsolidated subsidiaries | | | | | | | | | | | 10,912 | |
Gain on sale of businesses | | | | | | | | | | | 7,547 | |
Interest expense | | | | | | | | | | | (83,473) | |
Income before income taxes | | | | | | | | | | | $ | 183,182 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 186,176 | | | $ | 101,302 | | | $ | 71,962 | | | $ | 219,075 | | | $ | 21,847 | | | |
Depreciation and amortization | (25,986) | | | (13,999) | | | (14,536) | | | (41,128) | | | (4,925) | | | |
Stock compensation expense | 0 | | | 0 | | | 0 | | | (1,071) | | | (12,737) | | | |
Income (loss) from operations | $ | 160,190 | | | $ | 87,303 | | | $ | 57,426 | | | $ | 176,876 | | | $ | 4,185 | | | $ | 485,980 | |
| | | | | | | | | | | |
Equity in earnings of unconsolidated subsidiaries | | | | | | | | | | | 21,728 | |
| | | | | | | | | | | |
Interest income | | | | | | | | | | | 4,749 | |
Interest expense | | | | | | | | | | | (68,290) | |
Income before income taxes | | | | | | | | | | | $ | 444,167 | |
9.12. Revenue from Contracts with Customers
Net operating revenues consist primarily of revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenuesrevenue for the three and six months ended June 30, 20192020 and 2020:2021:
| | | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2020 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Patient service revenues: | | |
Patient service revenue: | | Patient service revenue: | |
Medicare | Medicare | $ | 223,688 | | | $ | 77,260 | | | $ | 43,869 | | | $ | 474 | | | $ | — | | | $ | 345,291 | | Medicare | $ | 215,508 | | | $ | 71,510 | | | $ | 20,049 | | | $ | 257 | | | $ | 0 | | | $ | 307,324 | |
Non-Medicare | Non-Medicare | 234,616 | | | 73,972 | | | 198,241 | | | 410,277 | | | — | | | 917,106 | | Non-Medicare | 301,065 | | | 87,697 | | | 135,103 | | | 309,467 | | | 0 | | | 833,332 | |
Total patient services revenues | Total patient services revenues | 458,304 | | | 151,232 | | | 242,110 | | | 410,751 | | | — | | | 1,262,397 | | Total patient services revenues | 516,573 | | | 159,207 | | | 155,152 | | | 309,724 | | | 0 | | | 1,140,656 | |
Other revenues | 2,839 | | | 9,142 | | | 19,781 | | | 2,700 | | | 64,505 | | | 98,967 | | |
Total net operating revenues | $ | 461,143 | | | $ | 160,374 | | | $ | 261,891 | | | $ | 413,451 | | | $ | 64,505 | | | $ | 1,361,364 | | |
Other revenue | | Other revenue | 3,053 | | | 9,460 | | | 11,986 | | | 2,614 | | | 64,949 | | | 92,062 | |
Total revenue | | Total revenue | $ | 519,626 | | | $ | 168,667 | | | $ | 167,138 | | | $ | 312,338 | | | $ | 64,949 | | | $ | 1,232,718 | |
| | | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2021 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Patient service revenues: | | |
Patient service revenue: | | Patient service revenue: | |
Medicare | Medicare | $ | 215,508 | | | $ | 71,510 | | | $ | 20,049 | | | $ | 257 | | | $ | — | | | $ | 307,324 | | Medicare | $ | 201,198 | | | $ | 103,865 | | | $ | 45,291 | | | $ | 295 | | | $ | 0 | | | $ | 350,649 | |
Non-Medicare | Non-Medicare | 301,065 | | | 87,697 | | | 135,103 | | | 309,467 | | | — | | | 833,332 | | Non-Medicare | 340,929 | | | 98,443 | | | 217,893 | | | 454,125 | | | 0 | | | 1,111,390 | |
Total patient services revenues | Total patient services revenues | 516,573 | | | 159,207 | | | 155,152 | | | 309,724 | | | — | | | 1,140,656 | | Total patient services revenues | 542,127 | | | 202,308 | | | 263,184 | | | 454,420 | | | 0 | | | 1,462,039 | |
Other revenues | 3,053 | | | 9,460 | | | 11,986 | | | 2,614 | | | 64,949 | | | 92,062 | | |
Total net operating revenues | $ | 519,626 | | | $ | 168,667 | | | $ | 167,138 | | | $ | 312,338 | | | $ | 64,949 | | | $ | 1,232,718 | | |
Other revenue | | Other revenue | 1,932 | | | 10,358 | | | 17,225 | | | 1,952 | | | 70,514 | | | 101,981 | |
Total revenue | | Total revenue | $ | 544,059 | | | $ | 212,666 | | | $ | 280,409 | | | $ | 456,372 | | | $ | 70,514 | | | $ | 1,564,020 | |
| | | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2020 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Patient service revenues: | | |
Patient service revenue: | | Patient service revenue: | |
Medicare | Medicare | $ | 461,857 | | | $ | 151,839 | | | $ | 84,147 | | | $ | 1,029 | | | $ | — | | | $ | 698,872 | | Medicare | $ | 457,017 | | | $ | 162,262 | | | $ | 60,881 | | | $ | 729 | | | $ | 0 | | | $ | 680,889 | |
Non-Medicare | Non-Medicare | 451,575 | | | 144,614 | | | 386,155 | | | 803,513 | | | — | | | 1,785,857 | | Non-Medicare | 557,012 | | | 169,133 | | | 331,993 | | | 704,500 | | | 0 | | | 1,762,638 | |
Total patient services revenues | Total patient services revenues | 913,432 | | | 296,453 | | | 470,302 | | | 804,542 | | | — | | | 2,484,729 | | Total patient services revenues | 1,014,029 | | | 331,395 | | | 392,874 | | | 705,229 | | | 0 | | | 2,443,527 | |
Other revenues | 5,245 | | | 18,479 | | | 38,494 | | | 5,230 | | | 133,818 | | | 201,266 | | |
Total net operating revenues | $ | 918,677 | | | $ | 314,932 | | | $ | 508,796 | | | $ | 809,772 | | | $ | 133,818 | | | $ | 2,685,995 | | |
Other revenue | | Other revenue | 6,118 | | | 19,291 | | | 29,513 | | | 5,644 | | | 143,257 | | | 203,823 | |
Total revenue | | Total revenue | $ | 1,020,147 | | | $ | 350,686 | | | $ | 422,387 | | | $ | 710,873 | | | $ | 143,257 | | | $ | 2,647,350 | |
| | | Six Months Ended June 30, 2020 | | | Six Months Ended June 30, 2021 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Patient service revenues: | | |
Patient service revenue: | | Patient service revenue: | |
Medicare | Medicare | $ | 457,017 | | | $ | 162,262 | | | $ | 60,881 | | | $ | 729 | | | $ | — | | | $ | 680,889 | | Medicare | $ | 433,338 | | | $ | 206,240 | | | $ | 81,582 | | | $ | 525 | | | $ | 0 | | | $ | 721,685 | |
Non-Medicare | Non-Medicare | 557,012 | | | 169,133 | | | 331,993 | | | 704,500 | | | — | | | 1,762,638 | | Non-Medicare | 702,081 | | | 193,785 | | | 418,712 | | | 874,779 | | | 0 | | | 2,189,357 | |
Total patient services revenues | Total patient services revenues | 1,014,029 | | | 331,395 | | | 392,874 | | | 705,229 | | | — | | | 2,443,527 | | Total patient services revenues | 1,135,419 | | | 400,025 | | | 500,294 | | | 875,304 | | | 0 | | | 2,911,042 | |
Other revenues | 6,118 | | | 19,291 | | | 29,513 | | | 5,644 | | | 143,257 | | | 203,823 | | |
Total net operating revenues | $ | 1,020,147 | | | $ | 350,686 | | | $ | 422,387 | | | $ | 710,873 | | | $ | 143,257 | | | $ | 2,647,350 | | |
Other revenue | | Other revenue | 3,512 | | | 20,445 | | | 32,076 | | | 3,908 | | | 139,500 | | | 199,441 | |
Total revenue | | Total revenue | $ | 1,138,931 | | | $ | 420,470 | | | $ | 532,370 | | | $ | 879,212 | | | $ | 139,500 | | | $ | 3,110,483 | |
10.13. Earnings per Share
The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is as follows:
(i)Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were 0 dividends declared or contractual dividends paid for the three and six months ended June 30, 20192020 and 2020.2021.
(ii)The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period.
(iii)The net income allocated to each security is then divided by the weighted average number of outstanding shares for the period to determine the EPS for each security considered in the two-class method.
The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating securities outstanding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Basic EPS | | | | Diluted EPS | | | |
| | Three Months Ended June 30, | | | | Three Months Ended June 30, | | | |
| | 2019 | | 2020 | | 2019 | | 2020 | |
| | (in thousands) | | | | | | | |
Net income | | $ | 59,986 | | | $ | 67,486 | | | $ | 59,986 | | | $ | 67,486 | | |
Less: net income attributable to non-controlling interests | | 15,170 | | | 15,836 | | | 15,170 | | | 15,836 | | |
Net income attributable to the Company | | 44,816 | | | 51,650 | | | 44,816 | | | 51,650 | | |
Less: net income attributable to participating securities | | 1,484 | | | 1,778 | | | 1,484 | | | 1,778 | | |
Net income attributable to common shares | | $ | 43,332 | | | $ | 49,872 | | | $ | 43,332 | | | $ | 49,872 | | |
| | | Basic EPS | | | Diluted EPS | | | | Basic and Diluted EPS | | Basic and Diluted EPS | |
| | Six Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2019 | | 2020 | | 2019 | | 2020 | | | 2020 | | 2021 | | 2020 | | 2021 | |
| | (in thousands) | | | | (in thousands) | |
Net income | Net income | | $ | 113,330 | | | $ | 137,934 | | | $ | 113,330 | | | $ | 137,934 | | | Net income | | $ | 67,486 | | | $ | 196,208 | | | $ | 137,934 | | | $ | 333,422 | | |
Less: net income attributable to non-controlling interests | Less: net income attributable to non-controlling interests | | 27,680 | | | 33,159 | | | 27,680 | | | 33,159 | | | Less: net income attributable to non-controlling interests | | 15,836 | | | 31,314 | | | 33,159 | | | 57,982 | | |
Net income attributable to the Company | Net income attributable to the Company | | 85,650 | | | 104,775 | | | 85,650 | | | 104,775 | | | Net income attributable to the Company | | 51,650 | | | 164,894 | | | 104,775 | | | 275,440 | | |
Less: net income attributable to participating securities | | 2,827 | | | 3,596 | | | 2,826 | | | 3,596 | | | |
Net income attributable to common shares | | $ | 82,823 | | | $ | 101,179 | | | $ | 82,824 | | | $ | 101,179 | | | |
Less: Distributed and undistributed income attributable to participating securities | | Less: Distributed and undistributed income attributable to participating securities | | 1,778 | | | 5,560 | | | 3,596 | | | 9,250 | | |
Distributed and undistributed income attributable to common shares | | Distributed and undistributed income attributable to common shares | | $ | 49,872 | | | $ | 159,334 | | | $ | 101,179 | | | $ | 266,190 | | |
The following tables set forth the computation of EPS under the two-class method:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, |
| | Three Months Ended June 30, 2019 | | | 2020 | | 2021 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | Net Income Allocation | | Shares(1) | | Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS |
| | (in thousands, except for per share amounts) | | | (in thousands, except for per share amounts) |
Common shares | Common shares | | $ | 43,332 | | | 130,525 | | | $ | 0.33 | | | | $ | 43,332 | | | 130,562 | | | $ | 0.33 | | Common shares | | $ | 49,872 | | | 129,319 | | | $ | 0.39 | | | | $ | 159,334 | | | 130,396 | | | $ | 1.22 | |
Participating securities | Participating securities | | 1,484 | | | 4,471 | | | $ | 0.33 | | | | 1,484 | | | 4,471 | | | $ | 0.33 | | Participating securities | | 1,778 | | | 4,610 | | | 0.39 | | | | 5,560 | | | 4,550 | | | 1.22 | |
Total Company | Total Company | | $ | 44,816 | | | | $ | 44,816 | | | Total Company | | $ | 51,650 | | | | $ | 164,894 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | | | | | | | | | | | |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) | | | | | | | | | | | |
Common shares | | $ | 49,872 | | | 129,319 | | | $ | 0.39 | | | | $ | 49,872 | | | 129,319 | | | $ | 0.39 | |
Participating securities | | 1,778 | | | 4,610 | | | $ | 0.39 | | | | 1,778 | | | 4,610 | | | $ | 0.39 | |
Total Company | | $ | 51,650 | | | | | | | | $ | 51,650 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | | | | | | | | | |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) | | | | | | | | | | | |
Common shares | | $ | 82,823 | | | 130,672 | | | $ | 0.63 | | | | $ | 82,824 | | | 130,711 | | | $ | 0.63 | |
Participating securities | | 2,827 | | | 4,460 | | | $ | 0.63 | | | | 2,826 | | | 4,460 | | | $ | 0.63 | |
Total Company | | $ | 85,650 | | | | | | | | $ | 85,650 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, |
| | Six Months Ended June 30, 2020 | | | 2020 | | 2021 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | Net Income Allocation | | Shares(1) | | Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS |
| | (in thousands, except for per share amounts) | | | (in thousands, except for per share amounts) |
Common shares | Common shares | | $ | 101,179 | | | 129,479 | | | $ | 0.78 | | | | $ | 101,179 | | | 129,479 | | | $ | 0.78 | | Common shares | | $ | 101,179 | | | 129,479 | | | $ | 0.78 | | | | $ | 266,190 | | | 130,362 | | | $ | 2.04 | |
Participating securities | Participating securities | | 3,596 | | | 4,602 | | | $ | 0.78 | | | | 3,596 | | | 4,602 | | | $ | 0.78 | | Participating securities | | 3,596 | | | 4,602 | | | 0.78 | | | | 9,250 | | | 4,530 | | | 2.04 | |
Total Company | Total Company | | $ | 104,775 | | | | $ | 104,775 | | | Total Company | | $ | 104,775 | | | | $ | 275,440 | | |
(1) Represents the weighted average share count outstanding during the period.
14. Commitments and Contingencies
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $37.0 million for professional malpractice liability insurance and $40.0 million.million for general liability insurance. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has designed a separate insurance program that responds to the risks of the specific joint venture. Theventures. Most of the Company’s joint ventures are insured under a master program with an annual aggregate limit of up to $80.0 million, subject to a sublimit aggregate ranging from $23.0 million to $33.0 million for each specificmost joint venture.ventures. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff-relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH-Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena.On In May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The U.S. Attorney’s Office indicated that the subpoena was issued in connection with a qui tam lawsuit. The Company produced documents in response to the subpoena and fully cooperated with this investigation. In July 2021, the Company entered into a settlement agreement with the United States government, the plaintiff-relator who filed the qui tam lawsuit, and the purchaser of the Company’s contract therapy division in March 2016. In satisfaction of its indemnity obligations under the purchase agreement signed in March 2016, the Company agreed to make payments related to the settlement that will not exceed the amount of a liability accrued, and a non-operating loss incurred, during the nine months ended September 30, 2020. Such payments, in the aggregate, are immaterial to the Company’s financial statements. In the settlement agreement, the government and the plaintiff-relator released the Company from liability for all conduct alleged in the complaint, and the Company admitted no liability or wrongdoing.
Oklahoma City Subpoena. On August 24, 2020, the Company and Select Specialty Hospital – Oklahoma City, Inc. (“SSH–Oklahoma City”) received Civil Investigative Demands from the U.S. Attorney’s Office for the Western District of Oklahoma seeking responses to interrogatories and the production of various documents principally relating to the documentation, billing and reviews of medical services furnished to patients at SSH-Oklahoma City. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company has producedis producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
Ann Arbor ComplaintNew Jersey Litigation. .On May 12,In December 2020, the United States District Court for the Eastern District of MichiganNew Jersey unsealed a qui tam Complaintscomplaint in United States of America and State of MichiganNew Jersey ex rel. Neal ElkinKeith A. DiLello, Sr. v. SelectHackensack Meridian Health, Jersey Shore University Medical Holdings Corp., SelectCenter, Ocean Medical Center, Seaview Orthopaedics, Shrewsbury Surgery Center, Kessler Rehabilitation, Dr. Halambros Demetriades, Dr. Theodore Kutzan, Dr. Adam Myers, Dr. Hoan-Vu Nguyen, Dr. Frederick De Paola, ABC Corporations 1-10, and Select Specialty Hospital – Ann Arbor, Inc. (“SSH-Ann Arbor”), No. 12-cv-13984. An initial ComplaintJohn/Jane Does 1-10, Case 3:20-cv-02949-FLW-ZNQ. The complaint was filed under seal in September 2012March 2020 and a First Amended Complaint was filed under seal in September 2019. Both Complaints were unsealed after the United States and State of Michigan filed a Notice of ElectionNew Jersey declined to Decline Interventionintervene in May 2020.the case. In the First Amended Complaint,complaint, the plaintiff-relator, a physician formerly practicing at SSH-Ann Arbor,an automobile accident victim and former patient of the defendant providers, alleges that they routinely billed both personal injury protection (“PIP”) carriers and CMS. He alleges that they violated federal and state law by billing CMS when other insurance is available and failing to return payment to CMS after payment was made by the defendants had a policy to keep respiratory patients on ventilators longer than medically necessary in order to increase reimbursement, and that, after he complainedPIP carriers. In March 2021, defendant Kessler Rehabilitation waived service of this practice, SSH-Ann Arbor retaliated by refusing to assign new patients to him.process of the complaint. The First Amended Complaint has not yet been served on the defendants. If the plaintiff-relator serves the First Amended Complaint and pursues this action, the Company intends to vigorously defend this action; however,action, but at this time the Company is unable to predict the timing and outcome of this matter.
Medicare Dual-Eligible Litigation
The Company’s critical illness recovery hospitals have pursued claims against CMS involving denied Medicare bad debt reimbursement for copayments and deductibles of dual-eligible Medicaid beneficiaries for cost reporting periods ending in 2005 through 2010. A U.S. District Court ruled in favor of the Company and ordered CMS to determine and pay the Medicare bad debt reimbursement plus interest and, in February 2021, the Company received reimbursement proceeds of $17.9 million plus accrued interest of $4.7 million. These amounts were recognized as other operating income and interest income, respectively, during the six months ended June 30, 2021.
12.15. CARES Act
Provider Relief Funds
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. TheSince the enactment of the CARES Act, provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations forCompany’s consolidated subsidiaries have received approximately $208.4 million of payments from the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund,Fund. The Company is able to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19. These health care related expenses could include costs associated with constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce and trainings.
The Company’s consolidated subsidiariesuse payments received approximately $100.5 million of payments under the Provider Relief Fund for “health care related expenses or lost revenues that are attributable to coronavirus.” The Provider Relief Fund payments must first be applied against health care related expenses attributable to COVID-19. Provider Relief Fund payments not fully expended on healthcare related expenses attributable to COVID-19 are then applied to lost revenues. The provisions of the Provider Relief Fund payments permit a parent organization to allocate all or a portion of its general and targeted distributions among its subsidiaries which are eligible health care providers.
Since the CARES Act was enacted, the Department of Health and Human Services (“HHS”) has issued a series of post-payment notices of reporting requirements and other guidance which, in some instances, have significantly altered the terms and conditions surrounding the Provider Relief Fund payments. Additionally, certain provisions and reporting requirements associated with the Provider Relief Fund payments were signed into law as part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (“CRRSA Act”) on December 27, 2020. On June 11, 2021, HHS released an updated post-payment notice of reporting requirements and new and modified responses to its Frequently Asked Questions regarding the Provider Relief Fund payments. Among other things, HHS updated the period of time in which recipients must use the Provider Relief Fund payments. Under the revised guidance, the deadlines for utilizing the payments are based on the date in which the payments were received, rather than requiring all payments be used by June 30, 2020. 2021. The deadlines to use the Provider Relief Fund payments are now as follows: (i) payments received between April 10, 2020 and June 30, 2020 must have been used by June 30, 2021, (ii) payments received between July 1, 2020 and December 31, 2020 must be used by December 31, 2021, (iii) payments received between January 1, 2021 and June 30, 2021 must be used by June 30, 2022, and (iv) payments received between July 1, 2021 and December 31, 2021 must be used by December 31, 2022.
Under the Company’s accounting policy, it will recognize these payments are recognized as other operating income when it is probable that it has complied with the terms and conditions of the funds. Other operating income will be recognizedpayments. The Company evaluated its eligibility to utilize certain Provider Relief Fund payments and whether those payments were used in accordance with the terms and conditions set forth within the CRRSA Act and by HHS as of June 30, 2021. The Company’s assessment of uncertainties surrounding its ability to utilize certain of its Provider Relief Fund payments, including its ability to allocate general distributions among the Company’s subsidiaries, was updated for additional information obtained during the period. Based on this updated assessment, the Company incurs a lossbelieves it is probable that it has complied with the terms and conditions associated with the Provider Relief Fund payments as of revenues or health care related expenses attributable to COVID-19. ForJune 30, 2021. During the three and six months ended June 30, 2020,2021, the Company has recognizeddetermined that it was eligible to recognize approximately $55.0$98.0 million and $114.1 million, respectively, of Provider Relief Fund payments as other operating income on the accompanying condensed consolidated statement of operations. The remainingCompany recognized $55.0 million of other operating income during both the three and six months ended June 30, 2020.
As of June 30, 2021, $4.1 million of Provider Relief Fund payments of approximately $45.5 millionhave not yet been utilized by the Company in accordance with the regulations promulgated by HHS and the CRRSA Act and are recorded within “unearnedreported as unearned government assistance”assistance on the accompanying condensed consolidated balance sheet andsheet. Of this amount, $1.7 million will be recognized as other operating income in future periods whenrepaid to the Company incurs additional lost revenues or health care related expenses attributable to COVID-19. There is uncertainty regarding whether allgovernment because the payments receivedcould not be utilized by the Company’s consolidated subsidiaries will be recognized as other operating income in future periods; such fundsdeadlines specified by HHS. The remaining Provider Relief Fund payments may need to be repaid to the governmentextent they cannot be utilized in accordance with the terms and conditions set forth within the CRRSA Act and by HHS. Further changes to the extentregulations surrounding the Provider Relief Fund payments or amended interpretations of existing guidance may change the Company’s assessment of whether it is probable that is has complied with the terms of conditions of the Provider Relief Fund payments. These changes may result in the Company being unable to recognize additional Provider Relief Fund payments received exceed lost revenues and health care related expenses attributable to COVID-19.as other operating income or the reversal of amounts previously recognized.
Medicare Accelerated and Advance Payments Program
In accordance with the CARES Act, CMS temporarily expanded its current Accelerated and Advance Payment Program for Medicare providers. Under this program, qualified healthcare providers could receive advanced or accelerated payments from CMS. The Company’s consolidated subsidiaries received approximately $317.0$325.0 million of advancedadvance payments under this program. CMS’s Accelerated and Advance Payment Program, which was temporarily expanded by the CARES Act. Repayment of the advance payments begins one year from the issuance date of the payment. After that first year, the Medicare program automatically recoups 25.0% of the Medicare payments otherwise owed to the provider or supplier for eleven months. At the end of the eleven-month period, recoupment increases to 50.0% for another six months. Any amounts that remain unpaid after 29 months are subject to a 4.0% interest rate.
The Company received the majority of theseits advance payments were received in April 2020. Amounts receivedAccordingly, CMS began recouping a portion of the Medicare payments due to the Company beginning in April 2021. CMS recouped $73.7 million of Medicare payments during the three and six months ended June 30, 2021. The remaining amounts owed to CMS under the Accelerated and Advance Payment Program are reflected in “government advances”as government advances on the accompanying condensed consolidated balance sheet.sheets.
For
16. Subsequent Event
On August 4, 2021, the Company’s critical illness recovery hospitals and rehabilitation hospitals, repaymentboard of amounts received underdirectors declared a cash dividend of $0.125 per share. The dividend will be payable on or about August 30, 2021 to stockholders of record as of the Accelerated and Advance Payment Program are due 210 days after the advanced payment was issued. Failure to repay the advanced payments when due results in interest chargesclose of business on the outstanding balance owed. CMS has the ability to recoup the advanced payments through future Medicare claims billed by the Company’s hospitals, beginning 121 days after the advanced payment was issued.
Employer Payroll Tax Deferral
In April 2020, the Company began deferring payment on its share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is able to defer half of its share of payroll taxes owed until December 31, 2021, with the remaining half due on December 31, 2022. As of June 30, 2020, the Company deferred approximately $33.1 million of payroll taxes. These amounts are reflected in “other non-current liabilities” on the accompanying condensed consolidated balance sheet.
13. Income TaxesAugust 18, 2021.
The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax law related to net operating losses and the deductibility of interest expense and depreciation. ASC 740,
Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred income taxes and decreasing its current income taxes payable by approximately $15.5 million and resulted from a correction to allow for bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and the provision for an increase in the amounts allowed for interest expense deductions for tax years beginning January 1, 2019. The legislation related to net operating losses did not impact the Company’s deferred tax balances.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, including the potential impact of the COVID-19 pandemic on those financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
•developments related to the COVID-19 pandemic including, but not limited to, the duration and severity of the pandemic, additional measures taken by government authorities and the private sector to limit the spread of COVID-19, and further legislative and regulatory actions which impact healthcare providers, including actions that may impact the Medicare program;
•changes in government reimbursement for our services and/or new payment policies may result in a reduction in net operating revenues,revenue, an increase in costs, and a reduction in profitability;
•the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenuesrevenue and profitability to decline;
•the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenuesrevenue and profitability to decline;
•a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
•acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;
•our plans and expectations related to our acquisitions and our ability to realize anticipated synergies;
•private third-party payors for our services may adopt payment policies that could limit our future net operating revenuesrevenue and profitability;
•the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenuesrevenue and profitability;
•shortages in qualified nurses, therapists, physicians, or other licensed providers, or the inability to attract or retain healthcare professionals due to the heightened risk of infection related to the COVID-19 pandemic, could increase our operating costs significantly or limit our ability to staff our facilities;
•competition may limit our ability to grow and result in a decrease in our net operating revenuesrevenue and profitability;
•the loss of key members of our management team could significantly disrupt our operations;
•the effect of claims asserted against us could subject us to substantial uninsured liabilities;
•a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and
•other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20192020 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020,2021, as such risk factors may be updated from time to time in our periodic filings with the SEC, including the risk factors discussed in Item 1A. Risk Factors on this Form 10-Q.SEC.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Overview
We began operations in 1997 and, based on number of facilities, are one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. As of June 30, 2020,2021, we had operations in 4746 states and the District of Columbia. We operated 10199 critical illness recovery hospitals in 28 states, 2930 rehabilitation hospitals in 12 states, and 1,7571,833 outpatient rehabilitation clinics in 3738 states and the District of Columbia. Concentra, a joint venture subsidiary, operated 522518 occupational health centers in 41 states as of June 30, 2020.2021. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics (“CBOCs”).worksites.
Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had net operating revenuesrevenue of $2,647.4$3,110.5 million for the six months ended June 30, 2020.2021. Of this total, we earned approximately 39%37% of our net operating revenuesrevenue from our critical illness recovery hospital segment, approximately 13%14% from our rehabilitation hospital segment, approximately 16%17% from our outpatient rehabilitation segment, and approximately 27%28% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of occupational health centers that provide workers’ compensation injury care, physical therapy, and consumer health services as well as onsite clinics located at employer worksites that deliver occupational medicine services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.
Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.
We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, gain (loss) on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The table below reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA:
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2020 | | 2019 | | 2020 | | | 2020 | | 2021 | | 2020 | | 2021 |
| | | (in thousands) | | | | (in thousands) |
Net income | Net income | | $ | 59,986 | | | $ | 67,486 | | | $ | 113,330 | | | $ | 137,934 | | Net income | | $ | 67,486 | | | $ | 196,208 | | | $ | 137,934 | | | $ | 333,422 | |
Income tax expense | Income tax expense | | 20,826 | | | 23,336 | | | 39,293 | | | 45,248 | | Income tax expense | | 23,336 | | | 65,681 | | | 45,248 | | | 110,745 | |
Interest expense | Interest expense | | 51,464 | | | 37,366 | | | 102,275 | | | 83,473 | | Interest expense | | 37,366 | | | 33,888 | | | 83,473 | | | 68,290 | |
Interest income | | Interest income | | — | | | — | | | — | | | (4,749) | |
Gain on sale of businesses | Gain on sale of businesses | | — | | | (346) | | | (6,532) | | | (7,547) | | Gain on sale of businesses | | (346) | | | — | | | (7,547) | | | — | |
Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | | (7,394) | | | (8,324) | | | (11,760) | | | (10,912) | | Equity in earnings of unconsolidated subsidiaries | | (8,324) | | | (11,809) | | | (10,912) | | | (21,728) | |
| Income from operations | Income from operations | | 124,882 | | | 119,518 | | | 236,606 | | | 248,196 | | Income from operations | | 119,518 | | | 283,968 | | | 248,196 | | | 485,980 | |
Stock compensation expense: | Stock compensation expense: | | | | | | | | | Stock compensation expense: | | | | | | | | |
Included in general and administrative | Included in general and administrative | | 4,796 | | | 5,451 | | | 9,544 | | | 10,888 | | Included in general and administrative | | 5,451 | | | 5,620 | | | 10,888 | | | 11,080 | |
Included in cost of services | Included in cost of services | | 1,562 | | | 1,512 | | | 3,069 | | | 2,978 | | Included in cost of services | | 1,512 | | | 1,479 | | | 2,978 | | | 2,728 | |
Depreciation and amortization | Depreciation and amortization | | 54,993 | | | 52,271 | | | 107,131 | | | 104,023 | | Depreciation and amortization | | 52,271 | | | 50,954 | | | 104,023 | | | 100,574 | |
Adjusted EBITDA | Adjusted EBITDA | | $ | 186,233 | | | $ | 178,752 | | | $ | 356,350 | | | $ | 366,085 | | Adjusted EBITDA | | $ | 178,752 | | | $ | 342,021 | | | $ | 366,085 | | | $ | 600,362 | |
Effects of the COVID-19 Pandemic on our Results of Operations
The continuing implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. We have provided net operating revenues and certain operating statistics to assist readers in understanding how the COVID-19 pandemic impacted each of our segments during the threeThree and six months endedSix Months Ended June 30, 2020. Please refer to our risk factors discussed2020 and 2021
Beginning in Item 1A. “Risk Factors” of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, for further discussion.
Critical Illness Recovery Hospital Segment. Our critical illness recovery hospitals are a key component of the inpatient hospital continuum of care. Both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements, which apply to our critical illness recovery hospitals, in order to facilitate the transfer of patients from general acute care hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. COVID-19 has become more prevalent in certain markets that we serve; as a result, our critical illness recovery hospitals have admitted patients with COVID-19 and we have faced the challenging task of treating those patients while also taking measures to protect our patients and staff members who do not have COVID-19. The pandemic has caused, and will continue to cause, disruptions in our critical illness recovery hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary increases orstate governments placed significant restrictions on admissions, the incurrence of additional costs, staff illnesses,businesses and the increased use of contract clinical labor.
The following table shows the trend in net operating revenues and patient day volume for each of the periods presented, as well as the number of critical illness recovery hospitals we operated at the end of each period.
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
2020 | | | | | | | | | | | | | | | | |
Critical illness recovery hospital | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 163,238 | | | $ | 165,375 | | | $ | 171,908 | | | $ | 171,445 | | | $ | 178,223 | | | $ | 169,958 | | | $ | 519,626 | | | $ | 1,020,147 | |
Patient days | | 90,783 | | | 87,844 | | | 91,831 | | | 90,710 | | | 95,191 | | | 90,988 | | | 276,889 | | | 547,347 | |
Occupancy rate | | 69 | % | | 72 | % | | 70 | % | | 71 | % | | 72 | % | | 71 | % | | 72 | % | | 71 | % |
Number of hospitals owned | | 100 | | 100 | | 100 | | 100 | | 100 | | 100 | | 100 | | 100 |
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2019 | | | | | | | | | | | | | | | | |
Critical illness recovery hospital | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 149,799 | | | $ | 145,586 | | | $ | 162,149 | | | $ | 156,231 | | | $ | 156,422 | | | $ | 148,490 | | | $ | 461,143 | | | $ | 918,677 | |
Patient days | | 86,238 | | | 80,806 | | | 91,085 | | | 88,357 | | | 89,350 | | | 85,153 | | | 262,860 | | | 520,989 | |
Occupancy rate | | 69 | % | | 71 | % | | 73 | % | | 70 | % | | 69 | % | | 68 | % | | 69 | % | | 70 | % |
Number of hospitals owned | | 96 | | | 96 | | | 96 | | | 99 | | | 99 | | | 99 | | | 99 | | | 99 | |
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The following table summarizes the changes in our net operating revenues and patient day volume for 2020, as compared to the same period in 2019, for each of the periods presented. | | | | | | | | | | | | | | | | |
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
Critical illness recovery hospital | | | | | | | | | | | | | | | | |
Net operating revenues | | 9.0 | % | | 13.6 | % | | 6.0 | % | | 9.7 | % | | 13.9 | % | | 14.5 | % | | 12.7 | % | | 11.0 | % |
Patient days | | 5.3 | % | | 8.7 | % | | 0.8 | % | | 2.7 | % | | 6.5 | % | | 6.9 | % | | 5.3 | % | | 5.1 | % |
Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS and Congress acted to temporarily suspend certain regulations that govern admissions into our rehabilitation hospitals in order to facilitate the transfer of patients from general acute care hospitals and critical illness recovery hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. COVID-19 has become more prevalent in certain markets that we serve; as a result, our rehabilitation hospitals have admitted patients with COVID-19 and we have faced the challenging task of treating those patients while also taking measures to protect our patients and staff members who do not have COVID-19. The pandemic has caused, and will continue to cause, disruptions in our rehabilitation hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. At the beginning of the pandemic, elective surgeries at hospitals and other facilities were suspended, which reduced the need for inpatient rehabilitation services. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginning of the pandemic and hospitals began to perform elective surgeries again, which has increased the need for the services provided by our rehabilitation hospitals.
The following table shows the trend in net operating revenues and patient day volume for each of the periods presented, as well as the number of rehabilitation hospitals we operated at the end of each period.
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
2020 | | | | | | | | | | | | | | | | |
Rehabilitation hospital | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 61,673 | | | $ | 60,690 | | | $ | 59,656 | | | $ | 45,878 | | | $ | 57,815 | | | $ | 64,974 | | | $ | 168,667 | | | $ | 350,686 | |
Patient days | | 32,111 | | | 31,813 | | | 30,644 | | | 23,553 | | | 29,787 | | | 30,741 | | | 84,081 | | | 178,649 | |
Occupancy rate | | 79 | % | | 84 | % | | 76 | % | | 61 | % | | 73 | % | | 78 | % | | 71 | % | | 75 | % |
Number of hospitals owned | | 19 | | 19 | | 19 | | 19 | | 19 | | 19 | | 19 | | 19 |
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2019 | | | | | | | | | | | | | | | | |
Rehabilitation hospital | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 50,615 | | | $ | 48,080 | | | $ | 55,863 | | | $ | 51,991 | | | $ | 56,019 | | | $ | 52,364 | | | $ | 160,374 | | | $ | 314,932 | |
Patient days | | 27,434 | | | 25,442 | | | 29,940 | | | 28,266 | | | 29,730 | | | 28,529 | | | 86,525 | | | 169,341 | |
Occupancy rate | | 74 | % | | 76 | % | | 78 | % | | 76 | % | | 75 | % | | 73 | % | | 75 | % | | 76 | % |
Number of hospitals owned | | 17 | | 17 | | 18 | | 18 | | 19 | | 19 | | 19 | | 19 |
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The following table summarizes the changes in our net operating revenues and patient day volume for 2020, as compared to the same period in 2019, for each of the periods presented. | | | | | | | | | | | | | | | | |
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
Rehabilitation hospital | | | | | | | | | | | | | | | | |
Net operating revenues | | 21.8 | % | | 26.2 | % | | 6.8 | % | | (11.8) | % | | 3.2 | % | | 24.1 | % | | 5.2 | % | | 11.4 | % |
Patient days | | 17.0 | % | | 25.0 | % | | 2.4 | % | | (16.7) | % | | 0.2 | % | | 7.8 | % | | (2.8) | % | | 5.5 | % |
Outpatient Rehabilitation Segment. Beginning in mid-March, hospitals and other facilities began to suspend elective surgeries. Additionally, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatorymandated closures of non-essential or non-life sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel, and closures of schools. By the end of March, most states had implemented significant restrictions on businesses and individuals. The suspension of elective surgeries at hospitals and other facilities and the reduction of physician office visits, combined with recommendations of social distancing and the other items noted above, have had significant effects on our patient visit volumes. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginning of the pandemic and hospitals began to perform elective surgeries again, which has increased the need for the services provided by our outpatient rehabilitation clinics. Additionally, most physician offices have reopened for routine office visits. While some of our volume has recovered, our outpatient rehabilitation segment continues to experience reduced volume of patients seeking rehabilitation services for employment injuries and sports activities.
The following table shows the trend in net operating revenues and patient visit volume for each of the periods presented, as well as the number of working days for each period.
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
2020 | | | | | | | | | | | | | | | | |
Outpatient Rehabilitation | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 90,924 | | | $ | 88,239 | | | $ | 76,086 | | | $ | 49,084 | | | $ | 51,186 | | | $ | 66,868 | | | $ | 167,138 | | | $ | 422,387 | |
Visits | | 757,171 | | | 739,061 | | | 626,433 | | | 386,108 | | | 409,703 | | | 546,456 | | | 1,342,267 | | | 3,464,932 | |
Working days(1) | | 22 | | 20 | | 22 | | 22 | | 20 | | 22 | | 64 | | | 128 | |
2019 | | | | | | | | | | | | | | | | |
Outpatient Rehabilitation | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 83,185 | | | $ | 78,573 | | | $ | 85,147 | | | $ | 90,230 | | | $ | 90,272 | | | $ | 81,389 | | | $ | 261,891 | | | $ | 508,796 | |
Visits | | 687,007 | | | 658,610 | | | 708,866 | | | 762,914 | | | 759,829 | | | 680,762 | | | 2,203,505 | | | 4,257,988 | |
Working days(1) | | 22 | | 20 | | 21 | | 22 | | 22 | | 20 | | 64 | | | 127 | |
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(1) Represents the number of days in which normal business operations were conducted during the periods presented.
The following table summarizes the changes in our net operating revenues and patient visit volume for 2020, as compared to the same period in 2019, for each of the periods presented below.
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
Outpatient Rehabilitation | | | | | | | | | | | | | | | | |
Net operating revenues | | 9.3 | % | | 12.3 | % | | (10.6) | % | | (45.6) | % | | (43.3) | % | | (17.8) | % | | (36.2) | % | | (17.0) | % |
Visits | | 10.2 | % | | 12.2 | % | | (11.6) | % | | (49.4) | % | | (46.1) | % | | (19.7) | % | | (39.1) | % | | (18.6) | % |
Concentra Segment. Beginning in mid-March, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses. By the end of March, most states implemented significant restrictions on businesses, causing many employers to furlough their workforce and temporarily cease or significantly reduce their operations. TheseState governments also implemented restrictions on travel and individual activities outside of the home, closed schools, and mandated other social distancing measures. At the same time, hospitals and other facilities began suspending elective surgeries. In an effort to ensure hospitals and health systems had the capacity to absorb and effectively manage surges of COVID-19 patients, a number of waivers and modifications of certain requirements under the Medicare, Medicaid and CHIP programs were authorized in March 2020, including certain regulations under the Medicare program which govern admissions into our critical illness recovery hospitals and rehabilitation hospitals. Specifically, our critical illness recovery hospitals which are certified as LTCHs became exempt from the greater-than-25-day average length of stay requirement for all cost reporting periods that include the COVID-19 public health emergency period. Our rehabilitation hospitals which are certified as IRFs could exclude patients admitted solely to respond to the emergency from the calculation of the “60 percent rule” thresholds to receive payment as an IRF. The COVID-19 public health emergency period has been extended and is currently in effect through October 17, 2021.
The adverse effects of the COVID-19 pandemic, along with the actions have hadof governmental authorities and those in the private sector to limit the spread of COVID-19, caused disruptions in each of our segments; these disruptions were most significant effects onwithin our outpatient rehabilitation and Concentra segments. By mid-March 2020, our outpatient rehabilitation clinics began experiencing significantly less patient visit volumes.volume due to declines in patient referrals from physicians, a reduction in workers’ compensation injury visits resulting from the temporary closure of businesses, and the suspension of elective surgeries which would have required outpatient rehabilitation services. Our Concentra centers experienced similar declines in patient visit volume due to businesses furloughing their workforce and temporarily ceasing or significantly reducing their operations. Since March 2021, our outpatient rehabilitation clinics and Concentra centers have experienced patient visit volumes which approximate or exceed the levels experienced in the months prior to the widespread emergence of COVID-19 in the United States. Although they have experienced temporary disruptions in their core businesses as a result of the COVID-19 pandemic, our outpatient rehabilitation and Concentra segments have been able to expand their services to provide COVID-19 screening and testing.
Our critical illness recovery hospitals have played a critical role in caring for patients during the COVID-19 pandemic, and the relaxation of certain admission restrictions have contributed to volume increases in certain of our hospitals. The revenue of our critical illness recovery hospitals and rehabilitation hospitals has also benefited from the temporary suspension of the 2.0% cut to Medicare payments due to sequestration, which began May 1, 2020 following the enactment of the CARES Act, and has been extended through December 31, 2021. Certain of our rehabilitation hospitals experienced temporary declines in patient volume, beginning in March 2020, in areas more significantly impacted by the spread of COVID-19, and as a result of the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Additionally, some of our rehabilitation hospitals temporarily restricted admissions as a result of the COVID-19 pandemic. Beginning in May, state governors and health departments began to ease the restrictions imposed at the beginningonset of the COVID-19 pandemic, both our critical illness recovery hospitals and employers beganrehabilitation hospitals modified certain of their protocols in order to increase their workforce, whichfollow the guidelines and recommendations for patient treatment and for the protection of our patients and staff members. This has resulted in an increased need for our occupational health services.labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment.
The following table showsunpredictable effects of the trend in netCOVID-19 pandemic, including the duration and extent of disruption on our operations, creates uncertainties about our future operating revenuesresults and patient visit volumefinancial condition. We have provided revenue and certain operating statistics below for each of our segments for each of the periods presented, as well aspresented. Please refer to our risk factors previously reported in our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion.
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| | Critical Illness Recovery Hospital |
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| | Revenue | | | | | Patient Days | | | | | Occupancy Rate | | | Number of Hospitals Owned(1) |
| | 2019 | | 2020 | | 2021 | | | | | 2019 | | 2020 | | 2021 | | | | | 2019 | | 2020 | | 2021 | | | 2019 | | 2020 | | 2021 |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
January | | $ | 149,799 | | | $ | 163,238 | | | $ | 199,611 | | | | | | 86,238 | | | 90,783 | | | 100,933 | | | | | | 69% | | 69% | | 75% | | | 96 | | 100 | | 99 |
February | | 145,586 | | | 165,375 | | | 190,703 | | | | | | 80,806 | | | 87,844 | | | 92,036 | | | | | | 71% | | 72% | | 75% | | | 96 | | 100 | | 99 |
March | | 162,149 | | | 171,908 | | | 204,558 | | | | | | 91,085 | | | 91,831 | | | 100,149 | | | | | | 73% | | 70% | | 74% | | | 96 | | 100 | | 99 |
Three Months Ended March 31 | | $ | 457,534 | | | $ | 500,521 | | | $ | 594,872 | | | | | | 258,129 | | | 270,458 | | | 293,118 | | | | | | 71% | | 70% | | 75% | | | 96 | | 100 | | 99 |
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April | | $ | 156,231 | | | $ | 171,445 | | | $ | 185,934 | | | | | | 88,357 | | | 90,710 | | | 91,506 | | | | | | 70% | | 71% | | 70% | | | 99 | | 100 | | 99 |
May | | 156,422 | | | 178,223 | | | 183,471 | | | | | | 89,350 | | | 95,191 | | | 93,708 | | | | | | 69% | | 72% | | 70% | | | 99 | | 100 | | 99 |
June | | 148,490 | | | 169,958 | | | 174,654 | | | | | | 85,153 | | | 90,988 | | | 87,767 | | | | | | 68% | | 71% | | 68% | | | 99 | | 100 | | 99 |
Three Months Ended June 30 | | $ | 461,143 | | | $ | 519,626 | | | $ | 544,059 | | | | | | 262,860 | | | 276,889 | | | 272,981 | | | | | | 69% | | 72% | | 69% | | | 99 | | 100 | | 99 |
Six Months Ended June 30 | | $ | 918,677 | | | $ | 1,020,147 | | | $ | 1,138,931 | | | | | | 520,989 | | | 547,347 | | | 566,099 | | | | | | 70% | | 71% | | 72% | | | 99 | | 100 | | 99 |
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| | Rehabilitation Hospital |
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| | Revenue | | | | | Patient Days | | | | | Occupancy Rate | | | Number of Hospitals Owned(1) |
| | 2019 | | 2020 | | 2021 | | | | | 2019 | | 2020 | | 2021 | | | | | 2019 | | 2020 | | 2021 | | | 2019 | | 2020 | | 2021 |
| | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
January | | $ | 50,615 | | | $ | 61,673 | | | $ | 68,297 | | | | | | 27,434 | | | 32,111 | | | 34,404 | | | | | | 74% | | 79% | | 82% | | | 17 | | 19 | | 20 |
February | | 48,080 | | | 60,690 | | | 64,202 | | | | | | 25,442 | | | 31,813 | | | 32,178 | | | | | | 76% | | 84% | | 84% | | | 17 | | 19 | | 20 |
March | | 55,863 | | | 59,656 | | | 75,305 | | | | | | 29,940 | | | 30,644 | | | 35,857 | | | | | | 78% | | 76% | | 85% | | | 18 | | 19 | | 20 |
Three Months Ended March 31 | | $ | 154,558 | | | $ | 182,019 | | | $ | 207,804 | | | | | | 82,816 | | | 94,568 | | | 102,439 | | | | | | 76% | | 79% | | 84% | | | 18 | | 19 | | 20 |
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April | | $ | 51,991 | | | $ | 45,878 | | | $ | 70,295 | | | | | | 28,266 | | | 23,553 | | | 34,861 | | | | | | 76% | | 61% | | 85% | | | 18 | | 19 | | 20 |
May | | 56,019 | | | 57,815 | | | 71,190 | | | | | | 29,730 | | | 29,787 | | | 35,604 | | | | | | 75% | | 73% | | 84% | | | 19 | | 19 | | 20 |
June | | 52,364 | | | 64,974 | | | 71,181 | | | | | | 28,529 | | | 30,741 | | | 34,483 | | | | | | 73% | | 78% | | 84% | | | 19 | | 19 | | 20 |
Three Months Ended June 30 | | $ | 160,374 | | | $ | 168,667 | | | $ | 212,666 | | | | | | 86,525 | | | 84,081 | | | 104,948 | | | | | | 75% | | 71% | | 85% | | | 19 | | 19 | | 20 |
Six Months Ended June 30 | | $ | 314,932 | | | $ | 350,686 | | | $ | 420,470 | | | | | | 169,341 | | | 178,649 | | | 207,387 | | | | | | 76% | | 75% | | 84% | | | 19 | | 19 | | 20 |
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| | Outpatient Rehabilitation |
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| | Revenue | | | | | Visits | | | | | Working Days(2) |
| | 2019 | | 2020 | | 2021 | | | | | 2019 | | 2020 | | 2021 | | | | | 2019 | | 2020 | | 2021 |
| | (in thousands) | | | | | | | | | | | | | | | | |
January | | $ | 83,185 | | | $ | 90,924 | | | $ | 76,763 | | | | | | 687,007 | | | 757,171 | | | 625,964 | | | | | | 22 | | | 22 | | | 20 | |
February | | 78,573 | | | 88,239 | | | 77,063 | | | | | | 658,610 | | | 739,061 | | | 641,942 | | | | | | 20 | | | 20 | | | 20 | |
March | | 85,147 | | | 76,086 | | | 98,135 | | | | | | 708,866 | | | 626,433 | | | 832,248 | | | | | | 21 | | | 22 | | | 23 | |
Three Months Ended March 31 | | $ | 246,905 | | | $ | 255,249 | | | $ | 251,961 | | | | | | 2,054,483 | | | 2,122,665 | | | 2,100,154 | | | | | | 63 | | | 64 | | | 63 | |
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April | | $ | 90,230 | | | $ | 49,084 | | | $ | 95,251 | | | | | | 762,914 | | | 386,108 | | | 810,314 | | | | | | 22 | | | 22 | | | 22 | |
May | | 90,272 | | | 51,186 | | | 89,030 | | | | | | 759,829 | | | 409,703 | | | 758,773 | | | | | | 22 | | | 20 | | | 20 | |
June | | 81,389 | | | 66,868 | | | 96,128 | | | | | | 680,762 | | | 546,456 | | | 835,774 | | | | | | 20 | | | 22 | | | 22 | |
Three Months Ended June 30 | | $ | 261,891 | | | $ | 167,138 | | | $ | 280,409 | | | | | | 2,203,505 | | | 1,342,267 | | | 2,404,861 | | | | | | 64 | | | 64 | | | 64 | |
Six Months Ended June 30 | | $ | 508,796 | | | $ | 422,387 | | | $ | 532,370 | | | | | | 4,257,988 | | | 3,464,932 | | | 4,505,015 | | | | | | 127 | | | 128 | | | 127 | |
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| | Revenue | | | | | Visits | | | | | Working Days(2) | |
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| | (in thousands) | | | | | | | | | | | | | | | | | |
January | | $ | 133,507 | | | $ | 141,236 | | | $ | 127,103 | | | | | | 985,598 | | | 1,032,069 | | | 867,793 | | | | | | 22 | | | 22 | | | 20 | | |
February | | 126,309 | | | 133,690 | | | 132,349 | | | | | | 919,065 | | | 965,741 | | | 869,910 | | | | | | 20 | | | 20 | | | 20 | | |
March | | 136,505 | | | 123,609 | | | 163,388 | | | | | | 1,006,944 | | | 879,585 | | | 1,057,871 | | | | | | 21 | | | 22 | | | 23 | | |
Three Months Ended March 31 | | $ | 396,321 | | | $ | 398,535 | | | $ | 422,840 | | | | | | 2,911,607 | | | 2,877,395 | | | 2,795,574 | | | | | | 63 | | | 64 | | | 63 | | |
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April | | $ | 140,050 | | | $ | 91,178 | | | $ | 152,143 | | | | | | 1,040,543 | | | 610,555 | | | 999,622 | | | | | | 22 | | | 22 | | | 22 | | |
May | | 143,183 | | | 99,228 | | | 142,228 | | | | | | 1,073,763 | | | 674,629 | | | 956,250 | | | | | | 22 | | | 20 | | | 20 | | |
June | | 130,218 | | | 121,932 | | | 162,001 | | | | | | 988,783 | | | 865,896 | | | 1,074,206 | | | | | | 20 | | | 22 | | | 22 | | |
Three Months Ended June 30 | | $ | 413,451 | | | $ | 312,338 | | | $ | 456,372 | | | | | | 3,103,089 | | | 2,151,080 | | | 3,030,078 | | | | | | 64 | | | 64 | | | 64 | | |
Six Months Ended June 30 | | $ | 809,772 | | | $ | 710,873 | | | $ | 879,212 | | | | | | 6,014,696 | | | 5,028,475 | | | 5,825,652 | | | | | | 127 | | | 128 | | | 127 | | |
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_______________________________________________________________________________(1) Represents the number of working days forhospitals owned at the end of each period.period presented.
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
2020 | | | | | | | | | | | | | | | | |
Concentra | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 141,236 | | | $ | 133,690 | | | $ | 123,609 | | | $ | 91,178 | | | $ | 99,228 | | | $ | 121,932 | | | $ | 312,338 | | | $ | 710,873 | |
Visits | | 1,032,069 | | | 965,741 | | | 879,585 | | | 610,555 | | | 674,629 | | | 865,896 | | | 2,151,080 | | | 5,028,475 | |
Working days(1) | | 22 | | 20 | | 22 | | 22 | | 20 | | 22 | | 64 | | | 128 | |
2019 | | | | | | | | | | | | | | | | |
Concentra | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 133,507 | | | $ | 126,309 | | | $ | 136,505 | | | $ | 140,050 | | | $ | 143,183 | | | $ | 130,218 | | | $ | 413,451 | | | $ | 809,772 | |
Visits | | 985,598 | | | 919,065 | | | 1,006,944 | | | 1,040,543 | | | 1,073,763 | | | 988,783 | | | 3,103,089 | | | 6,014,696 | |
Working days(1) | | 22 | | 20 | | 21 | | 22 | | 22 | | 20 | | 64 | | | 127 | |
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(1)(2) Represents the number of days in which normal business operations were conducted during the periods presented.
The following table summarizes the changes in our net operating revenues and patient visit volume for 2020, as compared to the same period in 2019, for each of the periods presented below.
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| | One Month Ended | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | January 31 | | February 28 | | March 31 | | April 30 | | May 31 | | June 30 | | | | |
Concentra | | | | | | | | | | | | | | | | |
Net operating revenues | | 5.8 | % | | 5.8 | % | | (9.4) | % | | (34.9) | % | | (30.7) | % | | (6.4) | % | | (24.5) | % | | (12.2) | % |
Visits | | 4.7 | % | | 5.1 | % | | (12.6) | % | | (41.3) | % | | (37.2) | % | | (12.4) | % | | (30.7) | % | | (16.4) | % |
Please refer to “Summary Financial Results” and “Results of Operations” for further discussion of our segment performance measures for the three and six months ended June 30, 20192020 and 2020.2021. Please refer to “Operating StatisticsStatistic”s” for further discussion regarding the uses and calculations of the metrics provided above, as well as the operating statistics data for each segment for the three and six months ended June 30, 20192020 and 2020.
The continued uncertainty of the potential impact of the COVID-19 pandemic on the healthcare sector could have a materially adverse impact our business, results of operations, and overall financial performance in future periods. See Item 1A. “Risk Factors” of this Form 10-Qfor further discussion of the possible impact of the COVID-19 pandemic on our business.2021.
Other Significant Events
Purchase of Concentra InterestDividend Payments
On JanuaryMay 5, 2021, our board of directors declared a cash dividend of $0.125 per share. The dividend, totaling $16.9 million was paid on June 1, 2020,2021 to stockholders of record as of the close of business on May 19, 2021.
Financing Transactions
On June 2, 2021, Select WCAS, and DHHC entered into anAmendment No. 5 to the Select credit agreement pursuantwhich, among other things, increased the aggregate commitments available under the Select revolving facility from $450.0 million to which Select acquired approximately 17.2%$650.0 million, including a $125.0 million sublimit for the issuance of the outstanding membership interestsstandby letters of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $338.4 million.credit.
On February 1, 2020, Select, WCAS and DHHC entered into an agreement pursuant to which Select acquired an additional 1.4% of the outstanding membership interests ofJune 2, 2021, Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $27.8 million.
Following these purchases, Select owns approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding Class A membership interests of Concentra Group Holdings Parent. These purchases were in lieu of, and are considered to be, the exercise of the first put right provided to certain equity holdersInc. terminated its obligations under the termsConcentra-JPM first lien credit agreement. The Concentra-JPM first lien credit agreement provided for commitments of $100.0 million under the Concentra LLC Agreement.Concentra-JPM revolving facility, which was set to mature on March 1, 2022.
Summary Financial Results
Three Months Ended June 30, 20202021
For the three months ended June 30, 2020,2021, our net operating revenues were $1,232.7revenue increased 26.9% to $1,564.0 million, compared to $1,361.4$1,232.7 million for the three months ended June 30, 2019.2020. Income from operations wasincreased 137.6% to $284.0 million for the three months ended June 30, 2021, compared to $119.5 million for the three months ended June 30, 2020, compared to $124.92020. Income from operations included other operating income of $98.1 million and $55.0 million for the three months ended June 30, 2019. For2021 and 2020, respectively.
Net income increased 190.7% to $196.2 million for the three months ended June 30, 2020, income from operations included other operating income of $55.0 million related to the recognition of payments received under the Provider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19.
Net income increased 12.5%2021, compared to $67.5 million for the three months ended June 30, 2020, compared to $60.0 million for the three months ended June 30, 2019.2020. Net income included a pre-tax gain on sale of businesses of $0.3 million for the three months ended June 30, 2020.
Adjusted EBITDA wasincreased 91.3% to $342.0 million for the three months ended June 30, 2021, compared to $178.8 million for the three months ended June 30, 2020, compared to $186.2 million2020. Our Adjusted EBITDA margin was 21.9% for the three months ended June 30, 2019. Our Adjusted EBITDA margin was2021, compared to 14.5% for the three months ended June 30, 2020, compared to 13.7% for the three months ended June 30, 2019.2020.
The following tables reconcile our segment performance measures to our consolidated operating results:
| | | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2021 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Net operating revenues | $ | 519,626 | | | $ | 168,667 | | | $ | 167,138 | | | $ | 312,338 | | | $ | 64,949 | | | $ | 1,232,718 | | |
Revenue | | Revenue | $ | 544,059 | | | $ | 212,666 | | | $ | 280,409 | | | $ | 456,372 | | | $ | 70,514 | | | $ | 1,564,020 | |
Operating expenses | Operating expenses | (429,883) | | | (141,062) | | | (173,420) | | | (272,331) | | | (99,221) | | | (1,115,917) | | Operating expenses | (471,155) | | | (161,898) | | | (234,776) | | | (352,163) | | | (107,193) | | | (1,327,185) | |
Depreciation and amortization | Depreciation and amortization | (13,892) | | | (6,907) | | | (7,194) | | | (21,857) | | | (2,421) | | | (52,271) | | Depreciation and amortization | (12,936) | | | (6,939) | | | (7,345) | | | (21,230) | | | (2,504) | | | (50,954) | |
Other operating income | Other operating income | — | | | — | | | — | | | 789 | | | 54,199 | | | 54,988 | | Other operating income | — | | | — | | | — | | | 32,316 | | | 65,771 | | | 98,087 | |
Income (loss) from operations | $ | 75,851 | | | $ | 20,698 | | | $ | (13,476) | | | $ | 18,939 | | | $ | 17,506 | | | $ | 119,518 | | |
Income from operations | | Income from operations | $ | 59,968 | | | $ | 43,829 | | | $ | 38,288 | | | $ | 115,295 | | | $ | 26,588 | | | $ | 283,968 | |
Depreciation and amortization | Depreciation and amortization | 13,892 | | | 6,907 | | | 7,194 | | | 21,857 | | | 2,421 | | | 52,271 | | Depreciation and amortization | 12,936 | | | 6,939 | | | 7,345 | | | 21,230 | | | 2,504 | | | 50,954 | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 701 | | | 6,262 | | | 6,963 | | Stock compensation expense | — | | | — | | | — | | | 535 | | | 6,564 | | | 7,099 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 89,743 | | | $ | 27,605 | | | $ | (6,282) | | | $ | 41,497 | | | $ | 26,189 | | | $ | 178,752 | | Adjusted EBITDA | $ | 72,904 | | | $ | 50,768 | | | $ | 45,633 | | | $ | 137,060 | | | $ | 35,656 | | | $ | 342,021 | |
Adjusted EBITDA margin | Adjusted EBITDA margin | 17.3 | % | | 16.4 | % | | (3.8) | % | | 13.3 | % | | N/M | | 14.5 | % | Adjusted EBITDA margin | 13.4 | % | | 23.9 | % | | 16.3 | % | | 30.0 | % | | N/M | | 21.9 | % |
| | | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2020 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Net operating revenues | $ | 461,143 | | | $ | 160,374 | | | $ | 261,891 | | | $ | 413,451 | | | $ | 64,505 | | | $ | 1,361,364 | | |
Revenue | | Revenue | $ | 519,626 | | | $ | 168,667 | | | $ | 167,138 | | | $ | 312,338 | | | $ | 64,949 | | | $ | 1,232,718 | |
Operating expenses | Operating expenses | (397,005) | | | (130,406) | | | (219,307) | | | (338,131) | | | (96,640) | | | (1,181,489) | | Operating expenses | (429,883) | | | (141,062) | | | (173,420) | | | (272,331) | | | (99,221) | | | (1,115,917) | |
Depreciation and amortization | Depreciation and amortization | (14,495) | | | (6,696) | | | (6,991) | | | (24,479) | | | (2,332) | | | (54,993) | | Depreciation and amortization | (13,892) | | | (6,907) | | | (7,194) | | | (21,857) | | | (2,421) | | | (52,271) | |
| Other operating income | | Other operating income | — | | | — | | | — | | | 789 | | | 54,199 | | | 54,988 | |
Income (loss) from operations | Income (loss) from operations | $ | 49,643 | | | $ | 23,272 | | | $ | 35,593 | | | $ | 50,841 | | | $ | (34,467) | | | $ | 124,882 | | Income (loss) from operations | $ | 75,851 | | | $ | 20,698 | | | $ | (13,476) | | | $ | 18,939 | | | $ | 17,506 | | | $ | 119,518 | |
Depreciation and amortization | Depreciation and amortization | 14,495 | | | 6,696 | | | 6,991 | | | 24,479 | | | 2,332 | | | 54,993 | | Depreciation and amortization | 13,892 | | | 6,907 | | | 7,194 | | | 21,857 | | | 2,421 | | | 52,271 | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 767 | | | 5,591 | | | 6,358 | | Stock compensation expense | — | | | — | | | — | | | 701 | | | 6,262 | | | 6,963 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 64,138 | | | $ | 29,968 | | | $ | 42,584 | | | $ | 76,087 | | | $ | (26,544) | | | $ | 186,233 | | Adjusted EBITDA | $ | 89,743 | | | $ | 27,605 | | | $ | (6,282) | | | $ | 41,497 | | | $ | 26,189 | | | $ | 178,752 | |
Adjusted EBITDA margin | Adjusted EBITDA margin | 13.9 | % | | 18.7 | % | | 16.3 | % | | 18.4 | % | | N/M | | 13.7 | % | Adjusted EBITDA margin | 17.3 | % | | 16.4 | % | | (3.8) | % | | 13.3 | % | | N/M | | 14.5 | % |
The following table summarizes changes in segment performance measures for the three months ended June 30, 2020,2021, compared to the three months ended June 30, 2019:2020:
| | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 12.7 | % | | 5.2 | % | | (36.2) | % | | (24.5) | % | | 0.7 | % | | (9.4) | % | |
Change in revenue | | Change in revenue | 4.7 | % | | 26.1 | % | | 67.8 | % | | 46.1 | % | | 8.6 | % | | 26.9 | % |
Change in income from operations | Change in income from operations | 52.8 | % | | (11.1) | % | | (137.9) | % | | (62.7) | % | | N/M | | (4.3) | % | Change in income from operations | (20.9) | % | | 111.8 | % | | 384.1 | % | | 508.8 | % | | N/M | | 137.6 | % |
Change in Adjusted EBITDA | Change in Adjusted EBITDA | 39.9 | % | | (7.9) | % | | (114.8) | % | | (45.5) | % | | N/M | | (4.0) | % | Change in Adjusted EBITDA | (18.8) | % | | 83.9 | % | | 826.4 | % | | 230.3 | % | | N/M | | 91.3 | % |
_______________________________________________________________________________N/M — Not meaningful.
Six Months Ended June 30, 20202021
For the six months ended June 30, 2020,2021, our net operating revenues were $2,647.4revenue increased 17.5% to $3,110.5 million, compared to $2,686.0$2,647.4 million for the six months ended June 30, 2019.2020. Income from operations increased 4.9%95.8% to $486.0 million for the six months ended June 30, 2021, compared to $248.2 million for the six months ended June 30, 2020, compared to $236.62020. Income from operations included other operating income of $132.1 million and $55.0 million for the six months ended June 30, 2019. For2021 and 2020, respectively.
Net income increased 141.7% to $333.4 million for the six months ended June 30, 2020, income from operations included other operating income of $55.0 million related to the recognition of payments received under the Provider Relief Fund for loss of revenue and health care related expenses attributable to COVID-19.
Net income increased 21.7%2021, compared to $137.9 million for the six months ended June 30, 2020, compared to $113.3 million for the six months ended June 30, 2019.2020. Net income included a pre-tax gain on sale of businesses of $7.5 million and $6.5for the six months ended June 30, 2020.
Adjusted EBITDA increased 64.0% to $600.4 million for the six months ended June 30, 2020 and 2019, respectively.
Adjusted EBITDA increased 2.7%2021, compared to $366.1 million for the six months ended June 30, 2020, compared to $356.4 million2020. Our Adjusted EBITDA margin was 19.3% for the six months ended June 30, 2019. Our Adjusted EBITDA margin was2021, compared to 13.8% for the six months ended June 30, 2020, compared to 13.3% for the six months ended June 30, 2019.2020.
The following tables reconcile our segment performance measures to our consolidated operating results:
| | | Six Months Ended June 30, 2020 | | | Six Months Ended June 30, 2021 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Net operating revenues | $ | 1,020,147 | | | $ | 350,686 | | | $ | 422,387 | | | $ | 710,873 | | | $ | 143,257 | | | $ | 2,647,350 | | |
Revenue | | Revenue | $ | 1,138,931 | | | $ | 420,470 | | | $ | 532,370 | | | $ | 879,212 | | | $ | 139,500 | | | $ | 3,110,483 | |
Operating expenses | Operating expenses | (841,834) | | | (284,512) | | | (401,547) | | | (610,167) | | | (212,059) | | | (2,350,119) | | Operating expenses | (970,642) | | | (319,168) | | | (460,408) | | | (693,524) | | | (212,295) | | | (2,656,037) | |
Depreciation and amortization | Depreciation and amortization | (26,228) | | | (13,794) | | | (14,412) | | | (44,744) | | | (4,845) | | | (104,023) | | Depreciation and amortization | (25,986) | | | (13,999) | | | (14,536) | | | (41,128) | | | (4,925) | | | (100,574) | |
Other operating income | Other operating income | — | | | — | | | — | | | 789 | | | 54,199 | | | 54,988 | | Other operating income | 17,887 | | | — | | | — | | | 32,316 | | | 81,905 | | | 132,108 | |
Income (loss) from operations | $ | 152,085 | | | $ | 52,380 | | | $ | 6,428 | | | $ | 56,751 | | | $ | (19,448) | | | $ | 248,196 | | |
Income from operations | | Income from operations | $ | 160,190 | | | $ | 87,303 | | | $ | 57,426 | | | $ | 176,876 | | | $ | 4,185 | | | $ | 485,980 | |
Depreciation and amortization | Depreciation and amortization | 26,228 | | | 13,794 | | | 14,412 | | | 44,744 | | | 4,845 | | | 104,023 | | Depreciation and amortization | 25,986 | | | 13,999 | | | 14,536 | | | 41,128 | | | 4,925 | | | 100,574 | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 1,468 | | | 12,398 | | | 13,866 | | Stock compensation expense | — | | | — | | | — | | | 1,071 | | | 12,737 | | | 13,808 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 178,313 | | | $ | 66,174 | | | $ | 20,840 | | | $ | 102,963 | | | $ | (2,205) | | | $ | 366,085 | | Adjusted EBITDA | $ | 186,176 | | | $ | 101,302 | | | $ | 71,962 | | | $ | 219,075 | | | $ | 21,847 | | | $ | 600,362 | |
Adjusted EBITDA margin | Adjusted EBITDA margin | 17.5 | % | | 18.9 | % | | 4.9 | % | | 14.5 | % | | N/M | | 13.8 | % | Adjusted EBITDA margin | 16.3 | % | | 24.1 | % | | 13.5 | % | | 24.9 | % | | N/M | | 19.3 | % |
| | | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2020 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | | (in thousands) |
Net operating revenues | $ | 918,677 | | | $ | 314,932 | | | $ | 508,796 | | | $ | 809,772 | | | $ | 133,818 | | | $ | 2,685,995 | | |
Revenue | | Revenue | $ | 1,020,147 | | | $ | 350,686 | | | $ | 422,387 | | | $ | 710,873 | | | $ | 143,257 | | | $ | 2,647,350 | |
Operating expenses | Operating expenses | (781,541) | | | (259,167) | | | (437,221) | | | (668,961) | | | (195,368) | | | (2,342,258) | | Operating expenses | (841,834) | | | (284,512) | | | (401,547) | | | (610,167) | | | (212,059) | | | (2,350,119) | |
Depreciation and amortization | Depreciation and amortization | (25,946) | | | (13,098) | | | (14,023) | | | (49,383) | | | (4,681) | | | (107,131) | | Depreciation and amortization | (26,228) | | | (13,794) | | | (14,412) | | | (44,744) | | | (4,845) | | | (104,023) | |
| Other operating income | | Other operating income | — | | | — | | | — | | | 789 | | | 54,199 | | | 54,988 | |
Income (loss) from operations | Income (loss) from operations | $ | 111,190 | | | $ | 42,667 | | | $ | 57,552 | | | $ | 91,428 | | | $ | (66,231) | | | $ | 236,606 | | Income (loss) from operations | $ | 152,085 | | | $ | 52,380 | | | $ | 6,428 | | | $ | 56,751 | | | $ | (19,448) | | | $ | 248,196 | |
Depreciation and amortization | Depreciation and amortization | 25,946 | | | 13,098 | | | 14,023 | | | 49,383 | | | 4,681 | | | 107,131 | | Depreciation and amortization | 26,228 | | | 13,794 | | | 14,412 | | | 44,744 | | | 4,845 | | | 104,023 | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 1,534 | | | 11,079 | | | 12,613 | | Stock compensation expense | — | | | — | | | — | | | 1,468 | | | 12,398 | | | 13,866 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 137,136 | | | $ | 55,765 | | | $ | 71,575 | | | $ | 142,345 | | | $ | (50,471) | | | $ | 356,350 | | Adjusted EBITDA | $ | 178,313 | | | $ | 66,174 | | | $ | 20,840 | | | $ | 102,963 | | | $ | (2,205) | | | $ | 366,085 | |
Adjusted EBITDA margin | Adjusted EBITDA margin | 14.9 | % | | 17.7 | % | | 14.1 | % | | 17.6 | % | | N/M | | 13.3 | % | Adjusted EBITDA margin | 17.5 | % | | 18.9 | % | | 4.9 | % | | 14.5 | % | | N/M | | 13.8 | % |
The following table summarizes changes in segment performance measures for the six months ended June 30, 2020,2021, compared to the six months ended June 30, 2019:2020:
| | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 11.0 | % | | 11.4 | % | | (17.0) | % | | (12.2) | % | | 7.1 | % | | (1.4) | % | |
Change in revenue | | Change in revenue | 11.6 | % | | 19.9 | % | | 26.0 | % | | 23.7 | % | | (2.6) | % | | 17.5 | % |
Change in income from operations | Change in income from operations | 36.8 | % | | 22.8 | % | | (88.8) | % | | (37.9) | % | | N/M | | 4.9 | % | Change in income from operations | 5.3 | % | | 66.7 | % | | 793.4 | % | | 211.7 | % | | N/M | | 95.8 | % |
Change in Adjusted EBITDA | Change in Adjusted EBITDA | 30.0 | % | | 18.7 | % | | (70.9) | % | | (27.7) | % | | N/M | | 2.7 | % | Change in Adjusted EBITDA | 4.4 | % | | 53.1 | % | | 245.3 | % | | 112.8 | % | | N/M | | 64.0 | % |
_______________________________________________________________________________N/M — Not meaningful.
Regulatory Changes
Our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on February 20, 2020,25, 2021, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.
Medicare Reimbursement
The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human ServicesHHS and CMS. Net operating revenuesRevenue generated directly from the Medicare program represented approximately 26%23% of our net operating revenuesrevenue for the six months ended June 30, 2020,2021, and 26%25% of our net operating revenuesrevenue for the year ended December 31, 2019.2020.
Federal Health Care Program Changes in Response to the COVID-19 Pandemic
On January 31, 2020, the Secretary of Health and Human Services (“HHS”)HHS declared a public health emergency under section 319 of the Public Health Service Act, 42 U.S.C. § 247d, in response to the COVID-19 outbreak in the United States. The HHS Secretary renewed the public health emergency determination for 90-day periods effective on April 26, 2020, July 25, 2020, October 23, 2020, January 21, 2021, April 21, 2021, and July 20, 2021. On March 13, 2020, President Trump declared a national emergency due to the COVID-19 pandemic and the HHS Secretary authorized the waiver or modification of certain requirements under the Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) pursuant to section 1135 of the Social Security Act. Under this authority, CMS issued a number of blanket waivers that excuse health care providers or suppliers from specific program requirements. The following blanket waivers, while in effect, may impact our results of operations:
i.Inpatient rehabilitation facilities (“IRFs”), IRF units, and hospitals and units applying to be classified as IRFs, can exclude patients admitted solely to respond to the emergency from the calculation of the “60 percent rule” thresholds to receive payment as an IRF.
ii.Long-term care hospitals (“LTCHs”) are exempt from the greater-than-25-day average length of stay requirement for all cost reporting periods that include the COVID-19 public health emergency period. Hospitals seeking LTCH classification can exclude patient stays from the greater-than-25-day average length of stay requirement where the patient was admitted or discharged to meet the demands of the COVID-19 public health emergency.
iii.Medicare expanded the types of health care professionals who can furnish telehealth services to include all those who are eligible to bill Medicare for their professional services. This allows health care professionals who were previously ineligible to furnish and bill for Medicare telehealth services, including physical therapists, occupational therapists, speech language pathologists, and others, to receive payment for Medicare telehealth services.
iv.Medicare will not require out-of-state physician and non-physician practitioners to be licensed in the state where they are providing services when they are licensed in another state, subject to certain conditions and state or local licensure requirements.
iv.v.Many requirements under the hospital conditions of participation (“CoPs”) are waived during the emergency period to give hospitals more flexibility in treating COVID-19 patients.
v.vi.Hospitals can operate temporary expansion locations without meeting the provider-based entity requirements or certain requirements in the physical environment CoP for hospitals during the emergency. This waiver also allows hospitals to change the status of their current provider-based department locations to meet patient needs as part of the state or local pandemic plan.
vi.vii.IRFs, LTCHs, and certain other providers dodid not need to submit quality data to Medicare for October 1, 2019 through June 30, 2020 to comply with the quality reporting programs.
vii.viii.The HHS Secretary waived sanctions under the physician self-referral law (i.e., Stark law) for certain types of remuneration and referral arrangements that are related to a COVID-19 purpose. The Office of the Inspector General (“OIG”) will also exercise enforcement discretion to not impose administrative sanctions under the federal anti-kickback statute for many payments covered by the Stark law waivers.
CMS also approved section 1135 waivers for 54 state Medicaid programs (including the District of Columbia, Puerto Rico, and other territories), 4551 temporary changes to Medicaid or CHIP state plan amendments, and 16 traditional changechanges to a Medicaid state plan amendment.amendments, and section 1115 waivers for 12 state Medicaid demonstration projects addressing the COVID-19 public health emergency. CMS will consider specific waiver requests from providers and suppliers. We have submitted one or more specific waiver requests to make it easier for our operators or referral partners to treat COVID-19 patients, and we may submit others in the future.
Pursuant to the Coronavirus Preparedness and Response Supplemental Appropriations Act, Public Law 116-123, CMS has waived Medicare telehealth payment requirements during the emergency so that beneficiaries in all areas of the country (not just rural areas) can receive telehealth services, including in their homes, beginning on March 6, 2020. CMS issued additional waivers to permit more than 130160 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs.
In addition to these agency actions, the CARES Act was enacted on March 27, 2020. It provides additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 public health emergency. Some of the CARES Act provisions that may impact our operations include:
i.$100 billion in appropriations for the Public Health and Social Services Emergency Fund to be used for preventing, preparing, and responding to the coronavirus,COVID-19 and for reimbursing “eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Half ofThe Paycheck Protection Program and Health Care Enhancement Act, Public Law 116-139, added $75 billion to this fund. The Consolidated Appropriations Act, 2021, added another $3 billion to this fund. HHS has allocated three general distributions from the fund is allocated for general distributionpayments to Medicare providers. The firstPhase 1 General Distribution included $30 billion was distributed tofor health care providers that received Medicare fee-for-service payments in 2019. The remainingAnother $20 billion is being distributedwas allocated to Medicare providers in a manner that makeswas intended to make the entire $50 billion general distributionPhase 1 General Distribution proportional to providers’each provider’s share of 2018 net patient revenue. Payments from the additional $20 billion allocation were determined based on the lesser of a provider’s 2018 (or most recent complete tax year) gross receipts or the sum of incurred losses for March and April of 2020. HHS distributed $16 billion from the additional $20 billion allocation. The other halfPhase 2 General Distribution allocated $18 billion for providers in state Medicaid/CHIP programs, Medicaid managed care plans, dentists, and certain Medicare providers who did not receive a Phase 1 General Distribution payment. HHS distributed $5.98 billion from the $18 billion Phase 2 allocation. The Phase 3 General Distribution was projected to include $20 billion for providers to apply for if they suffered financial losses or changes in operating expenses caused by COVID-19 or if they were previously ineligible for a general distribution. HHS made $24.5 billion in payments as part of the fundPhase 3 General Distribution. The remainder of the COVID-19 related appropriations to the Public Health and Social Services Emergency Fund is for targeted allocations to providers in high impact COVID-19 areas ($1020.75 billion), rural providers ($10(approximately $11.09 billion), skilled nursing facilities (approximately $5 billion), nursing home infection control (approximately $2.75 billion), safety net hospitals (approximately $13.07 billion), Indian Health Service and urban health centers ($400520 million), children’s hospitals ($1.06 billion), and unspecified allocations for treatment ofproviders treating uninsured COVID-19 patients and providers who need additional funding such aspatients. HHS also established a $2.25 billion incentive payment structure for skilled nursing facilities dentists, and nursing homes for keeping new COVID-19 infection and mortality rates among residents lower than the communities they serve. Starting on July 1, 2021, recipients of these payments must begin reporting data to HHS on the use of the funds via an online portal. By September 30, 2021, recipients must report to HHS on the use of funds received from April 10, 2020 to June 30, 2020. The deadline to apply these initial payments towards eligible expenses and lost revenue attributable to COVID-19 was June 30, 2021. For payments received from July 1, 2020 to December 31, 2020, recipients must use the funds by December 31, 2021 and will report to HHS regarding the use of the funds during the period of January 1, 2022 to March 31, 2022. Next, any payments received from January 1, 2021 to June 30, 2021 must be used by June 30, 2022 and recipients must report to HHS regarding such payments from July 1, 2022 to September 30, 2022. Finally, if any provider receives payments during the period of July 1, 2021 to December 31, 2021, the provider must use the funds by December 31, 2022 and report to HHS on the use of these funds during the period of January 1, 2023 to March 31, 2023. Any funds that a provider does not apply towards expenses or lost revenue attributable to COVID-19 must be returned to HHS within 30 calendar days after the end of the applicable reporting period. All recipients of funds are subject to audit by HHS, the HHS OIG, or the Pandemic Response Accountability Committee. Audits may include examination of the accuracy of the data providers that only treat Medicaid patients.submitted to HHS in their applications for payments.
ii.Expansion of the Accelerated and Advance Payment Program to advance three months of payments to Medicare providers. CMS has the ability to recoup the advanced payments through future Medicare claims, beginning 121 daysclaims. Section 2501 of the Continuing Appropriations Act, 2021 and Other Extensions Act, Public Law 116-159, modified the terms of repayment so that a provider can request no recoupment for one year after the advanced payment was issued. Repaymentissued, followed by a 25% offset the next 11 months, and a 50% offset the last 6 months. Any amounts that remain unpaid after 29 months will be subject to a 4% interest rate (instead of amounts10.25%). CMS began recouping advance payments on March 30, 2021, but the actual date for each provider is based on the first anniversary of when the provider received under the Accelerated and Advance Payment Program are due 210 days after the advanced payment was issued.first payment.
iii.Temporary suspension of the 2% cut to Medicare payments due to sequestration so that, for the period of May 1, 2020 to December 31, 2020, the Medicare program will be exempt from any sequestration order. The Consolidated Appropriations Act, 2021, extended this temporary suspension of the 2% sequestration cut through March 31, 2021. The Medicare sequester relief bill, which became Public Law 117-7, extended the temporary suspension of the sequestration cut again, through December 31, 2021. To pay for the continued suspension of the sequestration cuts through December 31, 2021, Congress increased the sequester cuts that will apply in fiscal year 2030.
iv.Two waivers of Medicare statutory requirements regarding site neutral payment to LTCHs. The first waives the LTCH discharge payment percentage requirement (i.e., 50% rule) for the cost reporting period(s) that include the emergency period. The second waives application of the site neutral payment rate so that all LTCH cases admitted during the emergency period will be paid the LTCH-PPS standard federal rate.
v.Waiver of the IRF 3-hour rule so that IRF services provided during the public health emergency period do not need to meet the coverage requirement that patients receive at least 3 hours of therapy a day or 15 hours of therapy per week.
vi.Broader waiver authority for HHS under section 1135 of the Social Security Act to issue additional telehealth waivers.
The CARES Act also provides for a 20% increase in the payment weight for Medicare payments to hospitals paid under the inpatient hospital prospective payment system (“IPPS”) for treating COVID-19 patients. We are monitoring developments related to this provision, in case CMS provides a similar payment add-on for LTCHs and IRFs.
Medicare Reimbursement of LTCH Services
The following is a summary of significant regulatory changes to the Medicare prospective payment system for our critical illness recovery hospitals, which are certified by Medicare as LTCHs, which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our critical illness recovery hospitals are made in accordance with the long termlong-term care hospital prospective payment system (“LTCH-PPS”).
Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). Certain errors in the final rule were corrected in a document published October 3, 2018. The standard federal rate was set at $41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard federal rate for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget neutrality factor of 0.999215 and a temporary, one-time budget neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, a decrease from the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.
Fiscal Year 2020. On August 16, 2019, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). Certain errors in the final rule were corrected in a document published October 8, 2019. The standard federal rate was set at $42,678, an increase from the standard federal rate applicable during fiscal year 2019 of $41,559. The update to the standard federal rate for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. The standard federal rate also included an area wage budget neutrality factor of 1.0020203 and a temporary, one-time budget neutrality adjustment of 0.999858 in connection with the elimination of the 25 Percent Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $26,778, a decrease from the fixed-loss amount in the 2019 fiscal year of $27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,552, an increase from the fixed-loss amount in the 2019 fiscal year of $25,743. For LTCH discharges occurring in cost reporting periods beginning in FYfiscal year 2020, site neutral payment rate cases will begin to be paid fully on the site neutral payment rate, rather than the transitional blended rate. However, the CARES Act waives the site neutral payment rate for patients admitted during such coronavirusthe COVID-19 emergency period and in response to the public health emergency, as discussed above.
Fiscal Year 2021. On May 29,September 18, 2020, CMS published the proposedfinal rule updating policies and payment rates for the LTCH-PPS for fiscal year 2021 (affecting discharges and cost reporting periods beginning on or after October 1, 2020 through September 30, 2021). Certain errors in the final rule were corrected in a document published December 7, 2020. The standard federal rate for fiscal year 2021, if adopted, would bewas set at $43,849,$43,755, an increase from the standard federal rate applicable during fiscal year 2020 of $42,678. The update to the standard federal rate for fiscal year 2021 if adopted, includesincluded a market basket increase of 2.9%, less a2.3% with no productivity adjustment of 0.4%.adjustment. The standard federal rate would also includeincluded an area wage budget neutrality factor of 1.00187551.0016837 and a permanent, one-time budget neutrality adjustment of 1.000517 in connection with the elimination of the 25 Percent Rule. As a result of the CARES Act, all LTCH cases are paid at the standard federal rate during the public health emergency. If the public health emergency ends during fiscal year 2021, then CMS will return to using the site-neutral payment rate for reimbursement of cases that do not meet the LTCH patient criteria. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS if adopted, would bewas set at $30,515,$27,195, an increase from the fixed-loss amount in the 2020 fiscal year of $26,778. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate if adopted, would bewas set at $30,006,$29,064, an increase from the fixed-loss amount in the 2020 fiscal year of $26,552.
Fiscal Year 2022. On August 2, 2021, CMS released a display copy of the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2022 (affecting discharges and cost reporting periods beginning on or after October 1, 2021 through September 30, 2022). The standard federal rate was set at $44,714, an increase from the standard federal rate applicable during fiscal year 2021 of $43,755. The update to the standard federal rate for fiscal year 2022 included a market basket increase of 2.6%, less a productivity adjustment of 0.7%. The standard federal rate also included an area wage budget neutrality factor of 1.002848. As a result of the CARES Act, all LTCH cases are paid at the standard federal rate during the public health emergency. If the public health emergency ends before or during fiscal year 2022, then CMS will return to using the site-neutral payment rate for reimbursement of cases that do not meet the LTCH patient criteria. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $33,015, a significant increase from the fixed-loss amount in the 2021 fiscal year of $27,195. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $30,988, an increase from the fixed-loss amount in the 2021 fiscal year of $29,064.
Medicare Reimbursement of IRF Services
The following is a summary of significant regulatory changes to the Medicare prospective payment system for our rehabilitation hospitals, which are certified by Medicare as IRFs, which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our rehabilitation hospitals are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).
Fiscal Year 2019. On August 6, 2018, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The standard payment conversion factor for discharges for fiscal year 2019 was set at $16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. CMS increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established in the final rule for fiscal year 2018.
Fiscal Year 2020. On August 8, 2019, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard payment conversion factor for discharges for fiscal year 2020 was set at $16,489, an increase from the standard payment conversion factor applicable during fiscal year 2019 of $16,021. The update to the standard payment conversion factor for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS decreased the outlier threshold amount for fiscal year 2020 to $9,300 from $9,402 established in the final rule for fiscal year 2019.
Fiscal Year 2021. On April 21,August 10, 2020, CMS published the proposedfinal rule updating policies and payment rates for the IRF-PPS for fiscal year 2021 (affecting discharges and cost reporting periods beginning on or after October 1, 2020 through September 30, 2021). The standard payment conversion factor for discharges for fiscal year 2021 would bewas set at $16,847,$16,856, an increase from the standard payment conversion factor applicable during fiscal year 2020 of $16,489. The update to the standard payment conversion factor for fiscal year 2021 if adopted, would includeincluded a market basket increase of 2.9%, less a2.4% with no productivity adjustment of 0.4%.adjustment. CMS proposed to decreasedecreased the outlier threshold amount for fiscal year 2021 to $8,102$7,906 from $9,300 established in the final rule for fiscal year 2020.
Fiscal Year 2022. On August 4, 2021, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2022 (affecting discharges and cost reporting periods beginning on or after October 1, 2021 through September 30, 2022). The standard payment conversion factor for discharges for fiscal year 2022 was set at $17,240, an increase from the standard payment conversion factor applicable during fiscal year 2021 of $16,856. The update to the standard payment conversion factor for fiscal year 2022 included a market basket increase of 2.6%, less a productivity adjustment of 0.7%. CMS increased the outlier threshold amount for fiscal year 2022 to $9,491 from $7,906 established in the final rule for fiscal year 2021.
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
Outpatient rehabilitation providers enroll in Medicare as a rehabilitation agency, a clinic, or a public health agency. The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update was applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the Merit-Based Incentive Payment System (“MIPS”). In 2019, CMS added physical and occupational therapists to the list of MIPS eligible clinicians. For these therapists in private practice, payments under the fee schedule are subject to adjustment in a later year based on their performance in MIPS according to established performance standards. Calendar year 2021 is the first year that payments are adjusted, based upon the therapist’s performance under MIPS in 2019. Providers in facility-based outpatient therapy settings are excluded from MIPS eligibility and therefore not subject to this payment adjustment. For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the alternative payment models (“APMs”). In 2026 and subsequent years, eligible professionals participating in APMs who meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.
Each year from 2019 through 2024 eligible clinicians who receive a significant share of their revenues through an advanced APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors.
In the final 2020 Medicare physician fee schedule final rule, CMS revised coding, documentation guidelines, and increased the valuation for evaluation and management (“E/M”) office visit codes.codes, beginning in 2021. Because the Medicare physician fee schedule is budget-neutral, any revaluation of E/M services that will increase spending by more than $20 million will require a budget neutrality adjustment. To increase values for the E/M codes while maintaining budget neutrality under the fee schedule, CMS proposed cuts tocut the values of other codes to make up the difference, beginning in 2021. Under
In the proposal,2021 Medicare physician fee schedule final rule, CMS increased the values for the E/M office visit codes and cuts to other specialty codes to maintain budget neutrality. As a result, therapy services provided in our outpatient rehabilitation clinics will receive an estimated 3.6% decrease in payment from Medicare in calendar year 2021. Legislation was introduced in Congress that, if enacted, would waive the budget neutrality requirement with respect to the E/M codes for 2021 in order to avoid or minimize cuts to physical and occupational therapy services could seeand other code reductionsvalues. Separately, the Consolidated Appropriations Act, 2021, provides a one-time 3.75% increase in payments in calendar year 2021 for therapy services and other services paid under the physician fee schedule. This 3.75% increase will expire at the end of calendar year 2021.
In the calendar year 2022 physician fee schedule proposed rule, CMS announced its plan to transition the MIPS program to MIPS Value Pathways (“MVPs”). CMS proposes to begin the transition to MVPs in 2023 with an initial set of MVPs in which reporting is voluntary. CMS proposes to develop more MVPs from 2024 to 2027 so that may resultMVP reporting would become mandatory in an estimated 8% decrease in payment. However, many providers have opposed2028. The first seven proposed MVPs for 2023 align with the proposed cuts,following clinical topics: (1) Rheumatology; (2) Stroke Care and CMS has not yet determinedPrevention; (3) Heart Disease; (4) Chronic Disease Management; (5) Emergency Medicine; (6) Lower Extremity Joint Repair; and (7) Anesthesia. Each MVP would include population health claims-based measures and require clinicians to report on the actual cuts to each code.Promoting Interoperability performance category measures. In addition, MVP participants would select certain quality measures and improvement activities and then report data for such measures and activities.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants
In the Medicare Physician Fee Schedulephysician fee schedule final rule for calendar year 2019, CMS established two new modifiers (CQ and CO) to identify services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Act of 2018, which requires that claims for outpatient therapy services furnished in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning on January 1, 2022. In the final 2020 Medicare physician fee schedule rule, CMS clarified that when the physical therapist is involved for the entire duration of the service and the PTA provides skilled therapy alongside the physical therapist, the CQ modifier is not required. Also, when the same service (code) is furnished separately by the physical therapist and PTA, CMS will apply the de minimis standard to each 15-minute unit of codes, not on the total physical therapist and PTA time of the service, allowing the separate reporting, on twotwo different claim lines, of the number of units to which the new modifiers apply and the number of units to which the modifiers do not apply. In the calendar year 2022 physician fee schedule proposed rule, CMS proposes to implement the final part of the requirements in the Bipartisan Budget Act of 2018 regarding PTA and OTA services. For dates of service on and after January 1, 2022, CMS will pay for physical therapy and occupational therapy services provided by PTAs and OTAs at 85% of the otherwise applicable Part B payment amount. CMS also proposes to modify the de minimis standard for calendar year 2022. Specifically, CMS is proposing to allow a timed service to be billed without the CQ or CO modifier when a PTA or OTA participates in providing care, but the physical therapist or occupational therapist meets the Medicare billing requirements without including the PTA’s or OTA’s minutes. This occurs when the physical therapist or occupational therapist provides more minutes than the 15-minute midpoint.
IMPACT Act
In October 2014, President Obama signed into law the Improving Medicare Post-Acute Care Transformation Act of 2014 (the “IMPACT Act”). The IMPACT Act made a number of changes and additions to Medicare quality reporting for LTCHs, IRFs, skilled nursing facilities (“SNFs”), and home health agencies (“HHAs”). In addition, the IMPACT Act requires HHS and the Medicare Payment Advisory Commission (“MedPAC”) to develop a technical prototype for a unified post-acute care (“PAC”) prospective payment system (“PPS”) that could replace the four existing payment systems for LTCHs, IRFs, SNFs, and HHAs.
The IMPACT Act directed HHS to begin requiring providers to report certain standardized patient assessment data to CMS. HHS had to adopt this reporting requirement by October 1, 2018, for LTCHs, IRFs, and SNFs, and by January 1, 2019, for HHAs. The IMPACT Act also required CMS to adopt and implement new cross-setting quality measures addressing, at a minimum, the following quality domains: (1) functional status, cognitive function, and changes in function and cognitive function; (2) skin integrity and changes in skin integrity; (3) medication reconciliation; (4) incidence of major falls; and (5) providing for the transfer of health information and treatment preferences of the patient upon transition from a hospital or critical access hospital to another setting, including a PAC provider or the individual’s home, or upon transition from a PAC provider to another setting including a different PAC provider, hospital, critical access hospital, or the individual’s home. Next, the IMPACT Act required that by October 1, 2016, for SNFs, IRFs and LTCHs, and by January 1, 2017, for HHAs, CMS specify resource use and other measures for inclusion in the applicable reporting provisions. At a minimum, the resource use measures shall include the following resource use domains: (1) resource use measures, including total estimated Medicare spending per beneficiary; (2) discharge to community; and (3) measures to reflect all-condition risk-adjusted hospitalization rates of potentially preventable readmission rates. CMS began implementing the IMPACT Act’s data reporting requirements in the FY 2016 rulemakings for LTCHs, IRFs, SNFs, and HHAs.
In addition to the new reporting requirements, the IMPACT Act outlined a process for the potential development of a unified PAC PPS. The IMPACT Act does not require CMS to adopt a unified PAC PPS, nor does it provide CMS with specific authority to implement a new payment system. However, the IMPACT Act does require HHS and MedPAC to submit a series of reports to Congress with recommendations and a technical prototype for a PAC PPS. These recommendations and prototypes could become the basis of future legislation that would create a unified PAC PPS to replace some or all of the existing Medicare payment systems for LTCHs, IRFs, SNFs, and HHAs. MedPAC submitted the first report to Congress in June 2016. The report included recommended features for a unified PAC payment system. The Secretary of HHS will submit the next report to Congress with recommendations and a technical prototype. The Secretary’s report is due no later than two years after CMS has collected two years of data on the quality measures required by the IMPACT Act. After the CMS report, MedPAC is to submit a second report to Congress with recommendations and a technical prototype for a new PAC payment system. The Secretary is expected to issue his report to Congress sometime in 2022. However, a bipartisan bill introduced in the House of Representatives in April 2021 would require the Secretary to first collect eight quarters of IMPACT Act data, including standardized patient assessment data, quality measure data, resource use and claims data, before submitting his report to Congress. The legislation would require that the eight quarters of data could not include any month in which the COVID-19 public health emergency, or a similar nationwide public health emergency, is ongoing. If enacted, the Secretary’s report would not be submitted before the later of January 1, 2024 or two years after the Secretary collects eight quarters of data.
Price Transparency
Starting January 1, 2021, new regulations went into effect requiring hospitals to provide clear and accessible pricing information online regarding the items and services they provide. First, a new regulation requires hospitals to provide a machine readable file containing the following standard charges for all items and services provided by the hospital: gross charges, discounted cash prices, payer-specific negotiated charges, and de-identified minimum and maximum negotiated charges. Second, hospitals must provide a consumer-friendly display of standard charges for at least 300 “shoppable services” that consumers can schedule in advance. If a hospital does not offer 300 “shoppable services,” then the hospital must provide the consumer-friendly display of standard charges for all of the “shoppable services” that it does provide. For each “shoppable service,” hospitals must provide: discounted cash prices, payer-specific negotiated charges, and de-identified minimum and maximum negotiated charges. For hospitals that do not comply with these requirements, CMS may issue a warning notice, request a corrective action plan, and impose a civil monetary penalty that is publicized on the CMS website. These regulations were promulgated by the Trump administration and, on July 9, 2021, President Biden issued an Executive Order directing HHS to support the new price transparency regulations. On July 19, 2021, CMS issued a proposed rule to increase fines for hospitals that do not comply with the price transparency regulations of at least $300 per day, not to exceed $2,007,500 per hospital per year. CMS is asking for comments on alternative or additional criteria that could be used to scale a penalty, and its proposal that the machine-readable file of hospital charges is accessible to automated searches and direct downloads.
Surprise Billing
On July 13, 2021, HHS, the Department of the Treasury, the Department of Labor and the Office of Personnel Management published an interim final rule with comment period to implement certain provisions of the No Surprises Act, which was enacted as part of the Consolidated Appropriations Act, 2021. The interim final rule includes new regulations aimed at limiting surprise medical bills issued by health care providers to consumers. The HHS regulations adopted by this interim final rule are effective January 1, 2022 and apply to hospital emergency departments, freestanding emergency departments, health care providers and facilities, and providers of air ambulance services. The new regulations do not apply to patients covered by Medicare, Medicaid, Indian Health Services, Veterans Affairs health care, or TRICARE because these programs already prohibit balance billing.
Starting January 1, 2022, the interim final rule’s new regulations will apply to patients with health insurance coverage from a group health plan (including a self-insured group health plan) or from an individual market health insurance issuer. First, if a plan provides coverage for emergency services, the interim final rule requires that emergency services must be covered: (1) without prior authorization; (2) regardless of whether the provider is an in-network provider or an in-network emergency facility; and (3) regardless of any other term or condition of the plan or coverage other than the exclusion or coordination of benefits, or a permitted affiliation or waiting period. Second, the interim final rule includes new limits on patient cost-sharing obligations for out-of-network services. Specifically, patient cost-sharing amounts for emergency services provided by out-of-network emergency facilities and out-of-network providers, and certain non-emergency services furnished by out-of-network providers at certain in-network facilities, must be calculated based on one of the following amounts: (1) an amount determined by an applicable All-Payer Model Agreement under section 1115A of the Social Security Act; (2) a specified state law if there is no such All-Payer Model Agreement; or (3) if neither of the above apply, the lesser amount of either the billed charge or the qualifying payment amount, which is generally the plan or issuer’s median contracted rate. Third, the interim final rule prohibits non-participating providers, health care facilities, and providers of air ambulance services from balance billing participants, beneficiaries, and enrollees in certain situations. Fourth, the interim final rule establishes that the total amount to be paid to an out-of-network provider or facility, including any cost-sharing, is based on: (1) an amount determined by an applicable All-Payer Model Agreement under section 1115A of the Social Security Act; (2) a specified state law if there is no such All-Payer Model Agreement; or (3) an amount agreed upon by the plan or issuer and the provider or facility if there is no such Agreement or state law. If none of these three circumstances apply, then the amount is determined by an independent dispute resolution (“IDR”) entity. Regulations regarding IDR entities and the IDR process will be issued in the future. Fifth, a new regulation requires providers and facilities to make publicly available and provide patients with a one-page notice regarding the requirements and prohibitions applicable to the provider or facility regarding balance billing, any applicable state balance billing prohibitions or limitations, and information on how to contact appropriate state and federal agencies if the patient believes the provider or facility has violated the requirements described in the notice. Finally, the interim final rule establishes a process for HHS to receive and resolve complaints regarding information that any health care provider, provider of air ambulance services, or health care facility may be failing to meet the requirements set forth in the interim final rule. Because these new regulations were adopted through an interim final rule with comment period, they may be modified after CMS reviews public comments.
Operating Statistics
The following table sets forth operating statistics for each of our reportable segments for the periods presented. The operating statistics reflect data for the period of time we managed these operations. Our operating statistics include metrics we believe provide relevant insight about the number of facilities we operate, volume of services we provide to our patients, and average payment rates for services we provide. These metrics are utilized by management to monitor trends and performance in our businesses and therefore may be important to investors because management may assess our performance based in part on such metrics. Other healthcare providers may present similar statistics, and these statistics are susceptible to varying definitions. Our statistics as presented may not be comparable to other similarly titled statistics of other companies.
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2020 | | 2019 | | 2020 | | | 2020 | | 2021 | | 2020 | | 2021 |
Critical illness recovery hospital data: | Critical illness recovery hospital data: | | | | | | | | | Critical illness recovery hospital data: | | | | | | | | |
Number of hospitals owned—start of period | Number of hospitals owned—start of period | | 96 | | | 100 | | | 96 | | | 100 | | Number of hospitals owned—start of period | | 100 | | | 99 | | | 100 | | | 99 | |
Number of hospitals acquired | Number of hospitals acquired | | 3 | | | — | | | 3 | | | — | | Number of hospitals acquired | | — | | | — | | | — | | | — | |
| Number of hospital start-ups | | Number of hospital start-ups | | — | | | — | | | — | | | — | |
Number of hospitals closed/sold | | Number of hospitals closed/sold | | — | | | — | | | — | | | — | |
Number of hospitals owned—end of period | Number of hospitals owned—end of period | | 99 | | | 100 | | | 99 | | | 100 | | Number of hospitals owned—end of period | | 100 | | | 99 | | | 100 | | | 99 | |
Number of hospitals managed—end of period | Number of hospitals managed—end of period | | 1 | | | 1 | | | 1 | | | 1 | | Number of hospitals managed—end of period | | 1 | | | — | | | 1 | | | — | |
Total number of hospitals (all)—end of period | Total number of hospitals (all)—end of period | | 100 | | | 101 | | | 100 | | | 101 | | Total number of hospitals (all)—end of period | | 101 | | | 99 | | | 101 | | | 99 | |
Available licensed beds(1) | Available licensed beds(1) | | 4,230 | | | 4,308 | | | 4,230 | | | 4,308 | | Available licensed beds(1) | | 4,308 | | | 4,322 | | | 4,308 | | | 4,322 | |
Admissions(1)(2) | Admissions(1)(2) | | 9,172 | | | 9,167 | | | 18,628 | | | 18,700 | | Admissions(1)(2) | | 9,167 | | | 9,026 | | | 18,700 | | | 18,885 | |
Patient days(1)(3) | Patient days(1)(3) | | 262,860 | | | 276,889 | | | 520,989 | | | 547,347 | | Patient days(1)(3) | | 276,889 | | | 272,981 | | | 547,347 | | | 566,099 | |
Average length of stay (days)(1)(4) | Average length of stay (days)(1)(4) | | 28 | | | 30 | | | 28 | | | 30 | | Average length of stay (days)(1)(4) | | 30 | | | 29 | | | 30 | | | 30 | |
Net revenue per patient day(1)(5) | | $ | 1,739 | | | $ | 1,867 | | | $ | 1,749 | | | $ | 1,853 | | |
Revenue per patient day(1)(5) | | Revenue per patient day(1)(5) | | $ | 1,867 | | | $ | 1,986 | | | $ | 1,853 | | | $ | 2,006 | |
Occupancy rate(1)(6) | Occupancy rate(1)(6) | | 69 | % | | 72 | % | | 70 | % | | 71 | % | Occupancy rate(1)(6) | | 72 | % | | 69 | % | | 71 | % | | 72 | % |
Percent patient days—Medicare(1)(7) | Percent patient days—Medicare(1)(7) | | 50 | % | | 42 | % | | 52 | % | | 46 | % | Percent patient days—Medicare(1)(7) | | 42 | % | | 38 | % | | 46 | % | | 39 | % |
Rehabilitation hospital data: | Rehabilitation hospital data: | | Rehabilitation hospital data: | |
Number of hospitals owned—start of period | Number of hospitals owned—start of period | | 18 | | | 19 | | | 17 | | | 19 | | Number of hospitals owned—start of period | | 19 | | | 20 | | | 19 | | | 19 | |
| Number of hospitals acquired | | Number of hospitals acquired | | — | | | — | | | — | | | 1 | |
Number of hospital start-ups | Number of hospital start-ups | | 1 | | | — | | | 2 | | | — | | Number of hospital start-ups | | — | | | — | | | — | | | — | |
| Number of hospitals closed/sold | | Number of hospitals closed/sold | | — | | | — | | | — | | | — | |
Number of hospitals owned—end of period | Number of hospitals owned—end of period | | 19 | | | 19 | | | 19 | | | 19 | | Number of hospitals owned—end of period | | 19 | | | 20 | | | 19 | | | 20 | |
Number of hospitals managed—end of period | Number of hospitals managed—end of period | | 9 | | | 10 | | | 9 | | | 10 | | Number of hospitals managed—end of period | | 10 | | | 10 | | | 10 | | | 10 | |
Total number of hospitals (all)—end of period | Total number of hospitals (all)—end of period | | 28 | | | 29 | | | 28 | | | 29 | | Total number of hospitals (all)—end of period | | 29 | | | 30 | | | 29 | | | 30 | |
Available licensed beds(1) | Available licensed beds(1) | | 1,299 | | | 1,309 | | | 1,299 | | | 1,309 | | Available licensed beds(1) | | 1,309 | | | 1,361 | | | 1,309 | | | 1,361 | |
Admissions(1)(2) | Admissions(1)(2) | | 6,017 | | | 5,713 | | | 11,853 | | | 12,046 | | Admissions(1)(2) | | 5,713 | | | 7,360 | | | 12,046 | | | 14,491 | |
Patient days(1)(3) | Patient days(1)(3) | | 86,525 | | | 84,081 | | | 169,341 | | | 178,649 | | Patient days(1)(3) | | 84,081 | | | 104,948 | | | 178,649 | | | 207,387 | |
Average length of stay (days)(1)(4) | Average length of stay (days)(1)(4) | | 14 | | | 15 | | | 14 | | | 15 | | Average length of stay (days)(1)(4) | | 15 | | | 14 | | | 15 | | | 14 | |
Net revenue per patient day(1)(5) | | $ | 1,635 | | | $ | 1,831 | | | $ | 1,634 | | | $ | 1,778 | | |
Revenue per patient day(1)(5) | | Revenue per patient day(1)(5) | | $ | 1,831 | | | $ | 1,849 | | | $ | 1,778 | | | $ | 1,851 | |
Occupancy rate(1)(6) | Occupancy rate(1)(6) | | 75 | % | | 71 | % | | 76 | % | | 75 | % | Occupancy rate(1)(6) | | 71 | % | | 85 | % | | 75 | % | | 84 | % |
Percent patient days—Medicare(1)(7) | Percent patient days—Medicare(1)(7) | | 50 | % | | 43 | % | | 51 | % | | 48 | % | Percent patient days—Medicare(1)(7) | | 43 | % | | 49 | % | | 48 | % | | 49 | % |
Outpatient rehabilitation data: | Outpatient rehabilitation data: | | | | | | Outpatient rehabilitation data: | | | | | |
Number of clinics owned—start of period | Number of clinics owned—start of period | | 1,407 | | | 1,471 | | | 1,423 | | | 1,461 | | Number of clinics owned—start of period | | 1,471 | | | 1,517 | | | 1,461 | | | 1,503 | |
Number of clinics acquired | Number of clinics acquired | | 10 | | | 1 | | | 14 | | | 3 | | Number of clinics acquired | | 1 | | | 4 | | | 3 | | | 12 | |
Number of clinic start-ups | Number of clinic start-ups | | 11 | | | 13 | | | 22 | | | 25 | | Number of clinic start-ups | | 13 | | | 12 | | | 25 | | | 22 | |
Number of clinics closed/sold | Number of clinics closed/sold | | (9) | | | (10) | | | (40) | | | (14) | | Number of clinics closed/sold | | (10) | | | (5) | | | (14) | | | (9) | |
Number of clinics owned—end of period | Number of clinics owned—end of period | | 1,419 | | | 1,475 | | | 1,419 | | | 1,475 | | Number of clinics owned—end of period | | 1,475 | | | 1,528 | | | 1,475 | | | 1,528 | |
Number of clinics managed—end of period | Number of clinics managed—end of period | | 276 | | | 282 | | | 276 | | | 282 | | Number of clinics managed—end of period | | 282 | | | 305 | | | 282 | | | 305 | |
Total number of clinics (all)—end of period | Total number of clinics (all)—end of period | | 1,695 | | | 1,757 | | | 1,695 | | | 1,757 | | Total number of clinics (all)—end of period | | 1,757 | | | 1,833 | | | 1,757 | | | 1,833 | |
Number of visits(1)(8) | Number of visits(1)(8) | | 2,203,505 | | | 1,342,267 | | | 4,257,988 | | | 3,464,932 | | Number of visits(1)(8) | | 1,342,267 | | | 2,404,861 | | | 3,464,932 | | | 4,505,015 | |
Net revenue per visit(1)(9) | | $ | 102 | | | $ | 106 | | | $ | 103 | | | $ | 105 | | |
Revenue per visit(1)(9) | | Revenue per visit(1)(9) | | $ | 106 | | | $ | 102 | | | $ | 105 | | | $ | 103 | |
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2020 | | 2019 | | 2020 | | | 2020 | | 2021 | | 2020 | | 2021 |
Concentra data: | Concentra data: | | | | | | | | | Concentra data: | | | | | | | | |
Number of centers owned—start of period | Number of centers owned—start of period | | 525 | | | 523 | | | 524 | | | 521 | | Number of centers owned—start of period | | 523 | | | 519 | | | 521 | | | 517 | |
Number of centers acquired | Number of centers acquired | | 4 | | | — | | | 5 | | | 4 | | Number of centers acquired | | — | | | — | | | 4 | | | 3 | |
| Number of center start-ups | | Number of center start-ups | | — | | | — | | | — | | | — | |
Number of centers closed/sold | Number of centers closed/sold | | (3) | | | (1) | | | (3) | | | (3) | | Number of centers closed/sold | | (1) | | | (1) | | | (3) | | | (2) | |
Number of centers owned—end of period | Number of centers owned—end of period | | 526 | | | 522 | | | 526 | | | 522 | | Number of centers owned—end of period | | 522 | | | 518 | | | 522 | | | 518 | |
Number of onsite clinics operated—end of period | Number of onsite clinics operated—end of period | | 129 | | | 129 | | | 129 | | | 129 | | Number of onsite clinics operated—end of period | | 129 | | | 131 | | | 129 | | | 131 | |
Number of CBOCs owned—end of period | Number of CBOCs owned—end of period | | 33 | | | 33 | | | 33 | | | 33 | | Number of CBOCs owned—end of period | | 33 | | | — | | | 33 | | | — | |
Number of visits(1)(8) | Number of visits(1)(8) | | 3,103,089 | | | 2,151,080 | | | 6,014,696 | | | 5,028,475 | | Number of visits(1)(8) | | 2,151,080 | | | 3,030,078 | | | 5,028,475 | | | 5,825,652 | |
Net revenue per visit(1)(9) | | $ | 121 | | | $ | 124 | | | $ | 122 | | | $ | 124 | | |
Revenue per visit(1)(9) | | Revenue per visit(1)(9) | | $ | 124 | | | $ | 125 | | | $ | 124 | | | $ | 125 | |
(1)Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics (“CBOCs”) are excluded.
(2)Represents the number of patients admitted to our hospitals during the periods presented.
(3)Each patient day represents one patient occupying one bed for one day during the periods presented.
(4)Represents the average number of days in which patients were admitted to our hospitals. Average length of stay is calculated by dividing the number of patient days, as presented above, by the number of patients discharged from our hospitals during the periods presented.
(5)Represents the average amount of revenue recognized for each patient day. Net revenueRevenue per patient day is calculated by dividing patient service revenues, excluding revenues from certain other ancillary and outpatient services provided at our hospitals, by the total number of patient days.
(6)Represents the portion of our hospitals being utilized for patient care during the periods presented. Occupancy rate is calculated using the number of patient days, as presented above, divided by the total number of bed days available during the period. Bed days available is derived by adding the daily number of available licensed beds for each of the periods presented.
(7)Represents the portion of our patient days which are paid by Medicare. The Medicare patient day percentage is calculated by dividing the total number of patient days which are paid by Medicare by the total number of patient days, as presented above.
(8)Represents the number of visits in which patients were treated at our outpatient rehabilitation clinics and Concentra centers during the periods presented.
(9)Represents the average amount of revenue recognized for each patient visit. Net revenueRevenue per visit is calculated by dividing patient service revenue, excluding revenues from certain other ancillary services, by the total number of visits. For purposes of this computation for our Concentra segment, patient service revenue does not include onsite clinics and CBOCs.
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenuesrevenue for the periods indicated:
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2020 | | 2019 | | 2020 | | | 2020 | | 2021 | | 2020 | | 2021 |
Net operating revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | |
Revenue | | Revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Costs and expenses: | Costs and expenses: | | Costs and expenses: | |
Cost of services, exclusive of depreciation and amortization(1) | Cost of services, exclusive of depreciation and amortization(1) | | 84.5 | | | 87.8 | | | 85.0 | | | 86.2 | | Cost of services, exclusive of depreciation and amortization(1) | | 87.8 | | | 82.6 | | | 86.2 | | | 83.1 | |
General and administrative | General and administrative | | 2.3 | | | 2.7 | | | 2.2 | | | 2.5 | | General and administrative | | 2.7 | | | 2.3 | | | 2.5 | | | 2.3 | |
Depreciation and amortization | Depreciation and amortization | | 4.0 | | | 4.3 | | | 4.0 | | | 4.0 | | Depreciation and amortization | | 4.3 | | | 3.2 | | | 4.0 | | | 3.2 | |
Total costs and expenses | Total costs and expenses | | 90.8 | | | 94.8 | | | 91.2 | | | 92.7 | | Total costs and expenses | | 94.8 | | | 88.1 | | | 92.7 | | | 88.6 | |
Other operating income | Other operating income | | — | | | 4.5 | | | — | | | 2.1 | | Other operating income | | 4.5 | | | 6.3 | | | 2.1 | | | 4.2 | |
Income from operations | Income from operations | | 9.2 | | | 9.7 | | | 8.8 | | | 9.4 | | Income from operations | | 9.7 | | | 18.2 | | | 9.4 | | | 15.6 | |
| Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | | 0.5 | | | 0.7 | | | 0.5 | | | 0.4 | | Equity in earnings of unconsolidated subsidiaries | | 0.7 | | | 0.8 | | | 0.4 | | | 0.7 | |
Gain on sale of businesses | Gain on sale of businesses | | — | | | 0.0 | | | 0.2 | | | 0.3 | | Gain on sale of businesses | | — | | | — | | | 0.3 | | | — | |
Interest income | | Interest income | | — | | | — | | | — | | | 0.2 | |
Interest expense | Interest expense | | (3.8) | | | (3.0) | | | (3.8) | | | (3.2) | | Interest expense | | (3.0) | | | (2.3) | | | (3.2) | | | (2.2) | |
Income before income taxes | Income before income taxes | | 5.9 | | | 7.4 | | | 5.7 | | | 6.9 | | Income before income taxes | | 7.4 | | | 16.7 | | | 6.9 | | | 14.3 | |
Income tax expense | Income tax expense | | 1.5 | | | 1.9 | | | 1.5 | | | 1.7 | | Income tax expense | | 1.9 | | | 4.2 | | | 1.7 | | | 3.6 | |
Net income | Net income | | 4.4 | | | 5.5 | | | 4.2 | | | 5.2 | | Net income | | 5.5 | | | 12.5 | | | 5.2 | | | 10.7 | |
Net income attributable to non-controlling interests | Net income attributable to non-controlling interests | | 1.1 | | | 1.3 | | | 1.0 | | | 1.2 | | Net income attributable to non-controlling interests | | 1.3 | | | 2.0 | | | 1.2 | | | 1.8 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | | 3.3 | % | | 4.2 | % | | 3.2 | % | | 4.0 | % | Net income attributable to Select Medical Holdings Corporation | | 4.2 | % | | 10.5 | % | | 4.0 | % | | 8.9 | % |
(1)Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating costs.
The following table summarizes selected financial data by segment for the periods indicated:
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2020 | | % Change | | 2019 | | 2020 | | % Change | | | 2020 | | 2021 | | % Change | | 2020 | | 2021 | | % Change |
| | | | | | | (in thousands, except percentages) |
Net operating revenues: | | | | | | | | | | | | | |
Revenue: | | Revenue: | | | | | | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | | $ | 461,143 | | | $ | 519,626 | | | 12.7 | % | | $ | 918,677 | | | $ | 1,020,147 | | | 11.0 | % | Critical illness recovery hospital | | $ | 519,626 | | | $ | 544,059 | | | 4.7 | % | | $ | 1,020,147 | | | $ | 1,138,931 | | | 11.6 | % |
Rehabilitation hospital | Rehabilitation hospital | | 160,374 | | | 168,667 | | | 5.2 | | | 314,932 | | | 350,686 | | | 11.4 | | Rehabilitation hospital | | 168,667 | | | 212,666 | | | 26.1 | | | 350,686 | | | 420,470 | | | 19.9 | |
Outpatient rehabilitation | Outpatient rehabilitation | | 261,891 | | | 167,138 | | | (36.2) | | | 508,796 | | | 422,387 | | | (17.0) | | Outpatient rehabilitation | | 167,138 | | | 280,409 | | | 67.8 | | | 422,387 | | | 532,370 | | | 26.0 | |
Concentra | Concentra | | 413,451 | | | 312,338 | | | (24.5) | | | 809,772 | | | 710,873 | | | (12.2) | | Concentra | | 312,338 | | | 456,372 | | | 46.1 | | | 710,873 | | | 879,212 | | | 23.7 | |
Other(1) | Other(1) | | 64,505 | | | 64,949 | | | 0.7 | | | 133,818 | | | 143,257 | | | 7.1 | | Other(1) | | 64,949 | | | 70,514 | | | 8.6 | | | 143,257 | | | 139,500 | | | (2.6) | |
Total Company | Total Company | | $ | 1,361,364 | | | $ | 1,232,718 | | | (9.4) | % | | $ | 2,685,995 | | | $ | 2,647,350 | | | (1.4) | % | Total Company | | $ | 1,232,718 | | | $ | 1,564,020 | | | 26.9 | % | | $ | 2,647,350 | | | $ | 3,110,483 | | | 17.5 | % |
Income (loss) from operations: | Income (loss) from operations: | | | | | | | | | | | | | Income (loss) from operations: | | | | | | | | | | | | |
Critical illness recovery hospital | | $ | 49,643 | | | $ | 75,851 | | | 52.8 | % | | $ | 111,190 | | | $ | 152,085 | | | 36.8 | % | |
Critical illness recovery hospital(2) | | Critical illness recovery hospital(2) | | $ | 75,851 | | | $ | 59,968 | | | (20.9) | % | | $ | 152,085 | | | $ | 160,190 | | | 5.3 | % |
Rehabilitation hospital | Rehabilitation hospital | | 23,272 | | | 20,698 | | | (11.1) | | | 42,667 | | | 52,380 | | | 22.8 | | Rehabilitation hospital | | 20,698 | | | 43,829 | | | 111.8 | | | 52,380 | | | 87,303 | | | 66.7 | |
Outpatient rehabilitation | Outpatient rehabilitation | | 35,593 | | | (13,476) | | | (137.9) | | | 57,552 | | | 6,428 | | | (88.8) | | Outpatient rehabilitation | | (13,476) | | | 38,288 | | | 384.1 | | | 6,428 | | | 57,426 | | | 793.4 | |
Concentra(2) | Concentra(2) | | 50,841 | | | 18,939 | | | (62.7) | | | 91,428 | | | 56,751 | | | (37.9) | | Concentra(2) | | 18,939 | | | 115,295 | | | 508.8 | | | 56,751 | | | 176,876 | | | 211.7 | |
Other(1)(2) | Other(1)(2) | | (34,467) | | | 17,506 | | | N/M | | (66,231) | | | (19,448) | | | N/M | Other(1)(2) | | 17,506 | | | 26,588 | | | N/M | | (19,448) | | | 4,185 | | | N/M |
Total Company | Total Company | | $ | 124,882 | | | $ | 119,518 | | | (4.3) | % | | $ | 236,606 | | | $ | 248,196 | | | 4.9 | % | Total Company | | $ | 119,518 | | | $ | 283,968 | | | 137.6 | % | | $ | 248,196 | | | $ | 485,980 | | | 95.8 | % |
Adjusted EBITDA: | Adjusted EBITDA: | | | | | | | | | | | | | Adjusted EBITDA: | | | | | | | | | | | | |
Critical illness recovery hospital | | $ | 64,138 | | | $ | 89,743 | | | 39.9 | % | | $ | 137,136 | | | $ | 178,313 | | | 30.0 | % | |
Critical illness recovery hospital(2) | | Critical illness recovery hospital(2) | | $ | 89,743 | | | $ | 72,904 | | | (18.8) | % | | $ | 178,313 | | | $ | 186,176 | | | 4.4 | % |
Rehabilitation hospital | Rehabilitation hospital | | 29,968 | | | 27,605 | | | (7.9) | | | 55,765 | | | 66,174 | | | 18.7 | | Rehabilitation hospital | | 27,605 | | | 50,768 | | | 83.9 | | | 66,174 | | | 101,302 | | | 53.1 | |
Outpatient rehabilitation | Outpatient rehabilitation | | 42,584 | | | (6,282) | | | (114.8) | | | 71,575 | | | 20,840 | | | (70.9) | | Outpatient rehabilitation | | (6,282) | | | 45,633 | | | 826.4 | | | 20,840 | | | 71,962 | | | 245.3 | |
Concentra(2) | Concentra(2) | | 76,087 | | | 41,497 | | | (45.5) | | | 142,345 | | | 102,963 | | | (27.7) | | Concentra(2) | | 41,497 | | | 137,060 | | | 230.3 | | | 102,963 | | | 219,075 | | | 112.8 | |
Other(1)(2) | Other(1)(2) | | (26,544) | | | 26,189 | | | N/M | | (50,471) | | | (2,205) | | | N/M | Other(1)(2) | | 26,189 | | | 35,656 | | | N/M | | (2,205) | | | 21,847 | | | N/M |
Total Company | Total Company | | $ | 186,233 | | | $ | 178,752 | | | (4.0) | % | | $ | 356,350 | | | $ | 366,085 | | | 2.7 | % | Total Company | | $ | 178,752 | | | $ | 342,021 | | | 91.3 | % | | $ | 366,085 | | | $ | 600,362 | | | 64.0 | % |
Adjusted EBITDA margins: | Adjusted EBITDA margins: | | | | | | | | | | | | | Adjusted EBITDA margins: | | | | | | | | | | | | |
Critical illness recovery hospital | | 13.9 | % | | 17.3 | % | | | | 14.9 | % | | 17.5 | % | | | |
Critical illness recovery hospital(2) | | Critical illness recovery hospital(2) | | 17.3 | % | | 13.4 | % | | | | 17.5 | % | | 16.3 | % | | |
Rehabilitation hospital | Rehabilitation hospital | | 18.7 | | | 16.4 | | | 17.7 | | | 18.9 | | | Rehabilitation hospital | | 16.4 | | | 23.9 | | | 18.9 | | | 24.1 | | |
Outpatient rehabilitation | Outpatient rehabilitation | | 16.3 | | | (3.8) | | | | | 14.1 | | | 4.9 | | | | Outpatient rehabilitation | | (3.8) | | | 16.3 | | | | | 4.9 | | | 13.5 | | | |
Concentra(2) | Concentra(2) | | 18.4 | | | 13.3 | | | | | 17.6 | | | 14.5 | | | | Concentra(2) | | 13.3 | | | 30.0 | | | | | 14.5 | | | 24.9 | | | |
Other(1)(2) | Other(1)(2) | | N/M | | N/M | | | | N/M | | N/M | | | Other(1)(2) | | N/M | | N/M | | | | N/M | | N/M | | |
Total Company | Total Company | | 13.7 | % | | 14.5 | % | | | | 13.3 | % | | 13.8 | % | | | Total Company | | 14.5 | % | | 21.9 | % | | | | 13.8 | % | | 19.3 | % | | |
Total assets: | Total assets: | | | | | | | | | | | | | Total assets: | | | | | | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | | $ | 2,119,574 | | | $ | 2,115,294 | | | | | $ | 2,119,574 | | | $ | 2,115,294 | | | | Critical illness recovery hospital | | $ | 2,115,294 | | | $ | 2,187,181 | | | | | $ | 2,115,294 | | | $ | 2,187,181 | | | |
Rehabilitation hospital | Rehabilitation hospital | | 1,107,852 | | | 1,135,206 | | | 1,107,852 | | | 1,135,206 | | | Rehabilitation hospital | | 1,135,206 | | | 1,186,886 | | | 1,135,206 | | | 1,186,886 | | |
Outpatient rehabilitation | Outpatient rehabilitation | | 1,265,487 | | | 1,267,308 | | | | | 1,265,487 | | | 1,267,308 | | | | Outpatient rehabilitation | | 1,267,308 | | | 1,333,661 | | | | | 1,267,308 | | | 1,333,661 | | | |
Concentra | Concentra | | 2,447,387 | | | 2,351,974 | | | | | 2,447,387 | | | 2,351,974 | | | | Concentra | | 2,351,974 | | | 2,518,369 | | | | | 2,351,974 | | | 2,518,369 | | | |
Other(1) | Other(1) | | 166,640 | | | 598,676 | | | | | 166,640 | | | 598,676 | | | | Other(1) | | 598,676 | | | 730,282 | | | | | 598,676 | | | 730,282 | | | |
Total Company | Total Company | | $ | 7,106,940 | | | $ | 7,468,458 | | | | | $ | 7,106,940 | | | $ | 7,468,458 | | | | Total Company | | $ | 7,468,458 | | | $ | 7,956,379 | | | | | $ | 7,468,458 | | | $ | 7,956,379 | | | |
Purchases of property and equipment: | Purchases of property and equipment: | | | | | | | | | | | | | Purchases of property and equipment: | | | | | | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | | $ | 14,488 | | | $ | 14,970 | | | $ | 24,648 | | | $ | 23,935 | | | Critical illness recovery hospital | | $ | 14,970 | | | $ | 16,499 | | | $ | 23,935 | | | $ | 30,884 | | |
Rehabilitation hospital | Rehabilitation hospital | | 5,356 | | | 1,923 | | | | | 18,539 | | | 5,248 | | | | Rehabilitation hospital | | 1,923 | | | 3,257 | | | | | 5,248 | | | 3,922 | | | |
Outpatient rehabilitation | Outpatient rehabilitation | | 6,705 | | | 6,593 | | | | | 15,745 | | | 14,977 | | | | Outpatient rehabilitation | | 6,593 | | | 7,448 | | | | | 14,977 | | | 14,783 | | | |
Concentra | Concentra | | 12,240 | | | 6,820 | | | | | 27,938 | | | 22,406 | | | | Concentra | | 6,820 | | | 7,591 | | | | | 22,406 | | | 20,271 | | | |
Other(1) | Other(1) | | 1,423 | | | 1,739 | | | | | 2,415 | | | 4,687 | | | | Other(1) | | 1,739 | | | 1,928 | | | | | 4,687 | | | 6,582 | | | |
Total Company | Total Company | | $ | 40,212 | | | $ | 32,045 | | | | | $ | 89,285 | | | $ | 71,253 | | | | Total Company | | $ | 32,045 | | | $ | 36,723 | | | | | $ | 71,253 | | | $ | 76,442 | | | |
(1) Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain non-consolidating joint ventures and minority investments in other healthcare related businesses.
(2) ForDuring the three months ended June 30, 2021 and 2020, we recognized other operating income of $98.1 million and $55.0 million, respectively. During the six months ended June 30, 2021 and 2020, we recognized other operating income of $132.1 million and $55.0 million, respectively. The impact of this income on the operating results of our critical illness recovery hospital segment, Concentra segment, and other activities is outlined within the tables presented under “Summary Financial Results” for the three and six months ended June 30, 2020, we recognized approximately $55.0 million of other operating income related to payments received under the Provider Relief Fund for loss of revenue2021 and health care related expenses attributable to COVID-19. $54.2 million and $0.8 million of other operating income is included within the operating results of our other activities and our Concentra segment, respectively.2020.
N/M — Not meaningful.
Three Months Ended June 30, 2020,2021, Compared to Three Months Ended June 30, 20192020
In the following, we discuss our results of operations related to net operating revenues,revenue, operating expenses, other operating income, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest, expense, income taxes, and net income attributable to non-controlling interests.
Please refer to “Effects of the COVID-19 Pandemic on our Results of Operations”s during the Three and Six Months Ended June 30, 2020 and 2021” above for further discussion.
Net Operating RevenuesRevenue
Our net operating revenues wererevenue increased 26.9% to $1,564.0 million for the three months ended June 30, 2021, compared to $1,232.7 million for the three months ended June 30, 2020, compared2020.
Critical Illness Recovery Hospital Segment. Revenue increased 4.7% to $1,361.4$544.1 million for the three months ended June 30, 2019.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 12.7%2021, compared to $519.6 million for the three months ended June 30, 2020, compared to $461.1 million for the three months ended June 30, 2019.2020. The increase in net operating revenues resulted from increasesrevenue was due to an increase in both patient volume and net revenue per patient day during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. Revenue per patient day increased 6.4% to $1,986 for the three months ended June 30, 2021, compared to $1,867 for the three months ended June 30, 2020. We experienced increases in both our non-Medicare and Medicare revenue per patient day during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. Occupancy in our critical illness recovery hospitals was 69% during the three months ended June 30, 2021, compared to 72% for the three months ended June 30, 2020. Our patient days increased 5.3% towere 272,981 for the three months ended June 30, 2021, 276,889 days for the three months ended June 30, 2020, and 262,860 days for the three months ended June 30, 2019. Our critical illness recovery hospitals experienced an increase in patient days during the three months ended June 30, 2020 which was due in part to the effects of the COVID-19 pandemic. Our patient days increased 3.9% to 272,981 days for the three months ended June 30, 2021, compared to 262,860 days for the three months ended June 30, 2019. We experienced a 4.5% increase in patient days in our existing critical illness recovery hospitals. The remaining increase was attributable
Rehabilitation Hospital Segment. Revenue increased 26.1% to the four critical illness recovery hospitals we acquired in 2019. Occupancy in our critical illness recovery hospitals increased to 72% during the three months ended June 30, 2020, compared to 69%$212.7 million for the three months ended June 30, 2019. Net revenue per patient day increased 7.4% to $1,867 for the three months ended June 30, 2020,2021, compared to $1,739 for the three months ended June 30, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from an increase in patient acuity.
Rehabilitation Hospital Segment. Net operating revenues increased 5.2% to $168.7 million for the three months ended June 30, 2020,2020. The increase in revenue resulted primarily from an increase in patient volume during the three months ended June 30, 2021, compared to $160.4 millionthe three months ended June 30, 2020. Occupancy in our rehabilitation hospitals increased to 85% during the three months ended June 30, 2021, compared to 71% for the three months ended June 30, 2019. The increase in net operating revenues resulted from increases in net revenue per patient day.2020. Our net revenue per patient day increased 12.0% to $1,831 for the three months ended June 30, 2020, compared to $1,635 for the three months ended June 30, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day. During the three months ended June 30, 2020, we had 84,081 patient days comparedincreased 24.8% to 86,525104,948 days for the three months ended June 30, 2019. The decline2021, compared to 84,081 days for the three months ended June 30, 2020. We experienced a 18.9% increase in patient days occurredin our rehabilitation hospitals which operated during Aprilboth the three months ended June 30, 2021 and 2020. Our patient volume during the three months ended June 30, 2020 and was principally driven byadversely affected within our rehabilitation hospitals in New Jersey and South Florida that temporarily restricted their admissions as a result of the COVID-19 pandemic. Certain of our other rehabilitation hospitals also experienced overall lower patient volumesvolume due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Ourservices during the three months ended June 30, 2020. Since June 30, 2020, we acquired controlling interests in two rehabilitation hospitals; we were previously a minority owner in each of these businesses. These hospitals began to see improvement in patient volume during May 2020 and, during June 2020, ourcontributed 6,528 patient days during the three months ended June 30, 2021. Our revenue per patient day increased 7.8% as1.0% to $1,849 for the three months ended June 30, 2021, compared to $1,831 for the three months ended June 2019.30, 2020.
Outpatient Rehabilitation Segment. Net operating revenues wereRevenue increased 67.8% to $280.4 million for the three months ended June 30, 2021, compared to $167.1 million for the three months ended June 30, 2020, compared2020. The increase in revenue was attributable to $261.9 millionan increase in visits, which increased 79.2% to 2,404,861 for the three months ended June 30, 2019. The decrease in net operating revenues was attributable to a decline in visits, which were 1,342,267 for the three months ended June 30, 2020,2021, compared to 2,203,5051,342,267 visits for the three months ended June 30, 2019. For2020. During the three months ended June 30, 2020, the decline in volume resulted from actions by governmental authorities and the private sector to limit the spread of COVID-19. Ourour outpatient rehabilitation clinics experienced less demand for servicessignificant declines in patient visit volume due to a decline infewer patient referrals from physicians, a reduction in workers’ compensation injury visits due to the temporary closure of businesses, the suspension of elective surgeries at hospitals and other facilities which resulted in less demand for outpatient rehabilitation services, and mandated social distancing measures.practices resulting from the COVID-19 pandemic. Our outpatient rehabilitation clinics experienced a 47.7% decrease in visits during April and May 2020 as compared to the same period in 2019. Patient volume in our outpatient rehabilitation clinics began to improve during June 2020 as compared to April and May 2020. During June 2020, we experienced a 19.7% decrease in visits as compared to the same period in 2019. As of June 30, 2020, we have 66 outpatient rehabilitation clinics that remain temporarily closed. Our net revenue per visit was $102 for the three months ended June 30, 2021, compared to $106 for the three months ended June 30, 2020, compared to $102 for2020. During the three months ended June 30, 2019. The higher net2020, we experienced changes in our payor mix as our patient volume declined from the effects of the COVID-19 pandemic. These changes caused our revenue per visit rate reflects a higher percentage of workers’ compensation patients treatedto increase. As our patient volume increased during the three months ended June 30, 2020,2021, as compared to the three months ended June 30, 2019.2020, our payor mix began to normalize and is now more closely aligned with the mix experienced during the months prior to the widespread emergence of COVID-19 in the United States.
Concentra Segment. Net operating revenues wereRevenue increased 46.1% to $456.4 million for the three months ended June 30, 2021, compared to $312.3 million for the three months ended June 30, 2020, compared2020. Our patient visits, which increased 40.9% to $413.5 million3,030,078 for the three months ended June 30, 2019. The decrease in net operating revenues was attributable2021, compared to a decline in2,151,080 visits which were 2,151,080 for the three months ended June 30, 2020, comparedcontributed to 3,103,089 visits for the three months ended June 30, 2019. Forincrease in revenue. During the three months ended June 30, 2020, the declineour centers experienced significant declines in patient visit volume resulted fromdue to employers furloughing their workforce and temporarily ceasing or significantly reducing their operations asoperations. As a result of the actionsCOVID-19 pandemic, we generated revenue from COVID-19 screening and testing services. These services contributed $55.0 million of governmental authorities and those inrevenue during the private sector to limit the spread of COVID-19. Consequently, our centers experienced a reduction in workers’ compensation and employer services visits. During April and May 2020, our centers experienced a 39.2% decrease in visits asthree months ended June 30, 2021, compared to $6.2 million during the same period in 2019. Patient volume in our centers began to improve duringthree months ended June 2020, as compared to April and May30, 2020. During June 2020, we experienced a 12.4% decrease in visits as compared to the same period in 2019. As ofthree months ended June 30, 2020, we have 18 centers that remain temporarily closed and 195 centers are operating at reduced hours. Our net2021, our revenue per visit wasincreased to $125, compared to $124 for the three months ended June 30, 2020, compared to $121 for the three months ended June 30, 2019. The2020. We experienced a higher net revenue per visit rate reflects a higher percentage ofdue to increases in the reimbursement rates payable pursuant to certain state fee schedules for workers’ compensation patients treatedvisits, as well as increases in our employer services rates during the three months ended June 30, 2020, as compared2021. The increase in revenue per visit was offset partially by a greater percentage of employer services visits, which yield lower per visit rates. Additionally, the revenue of the Concentra segment was impacted by the sale of its Department of Veterans Affairs community-based outpatient clinic business on September 1, 2020. This business contributed $22.0 million of revenue to the Concentra segment during the three months ended June 30, 2019.2020.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,115.9$1,327.2 million, or 90.5%84.9% of net operating revenues,revenue, for the three months ended June 30, 2020,2021, compared to $1,181.5$1,115.9 million, or 86.8%90.5% of net operating revenues,revenue, for the three months ended June 30, 2019.2020. Our cost of services, a major component of which is labor expense, was $1,082.5$1,291.4 million, or 87.8%82.6% of net operating revenues,revenue, for the three months ended June 30, 2020,2021, compared to $1,150.2$1,082.5 million, or 84.5%87.8% of net operating revenues,revenue, for the three months ended June 30, 2019.2020. The increasedecrease in our operating expenses relative to our net operating revenuesrevenue was principally due to reduced patient volume inthe improved operating performances of our Concentra, outpatient rehabilitation, and Concentra segments,rehabilitation hospital segments. This was driven primarily by an increase in patient volume, as discussed above.described further within the “Revenue” and “Adjusted EBITDA” discussions. General and administrative expenses were $33.5$35.7 million, or 2.7%2.3% of net operating revenues,revenue, for the three months ended June 30, 2020,2021, compared to $31.3$33.5 million, or 2.3%2.7% of net operating revenues,revenue, for the three months ended June 30, 2019.2020.
Other Operating Income
ForOther operating income was $98.1 million for the three months ended June 30, 2020, we had2021, compared to $55.0 million for the three months ended June 30, 2020. The other operating income is primarily related to the recognition of $55.0 million. We recognized payments received under the Provider Relief Fund as other operating income as we have incurred losses of revenue andfor health care related expenses and lost revenues attributable to COVID-19. Refer to Note 12 – CARES Act
Other operating income of the notes to our condensed consolidated financial statements included herein for further information. For the three months ended June 30, 2020, $54.2$65.8 million of other operating incomeand $32.3 million is included within the operating results of our other activities;activities and Concentra segment, respectively, for the three months ended June 30, 2021. Other operating income of $54.2 million and $0.8 million of other operating income is included inwithin the operating results of our other activities and Concentra segment.segment, respectively, for the three months ended June 30, 2020.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 39.9%was $72.9 million for the three months ended June 30, 2021, compared to $89.7 million for the three months ended June 30, 2020, compared to $64.1 million for the three months ended June 30, 2019.2020. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 13.4% for the three months ended June 30, 2021, compared to 17.3% for the three months ended June 30, 2020, compared to 13.9% for the three months ended June 30, 2019.2020. The increasesdecreases in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment were driven by increasesa decline in both patient volume, and our net revenue per patient day, as discussed above under “Net Operating RevenuesRevenue,.” The increases in Adjusted EBITDA and Adjusted EBITDA margin were offset, in part, by the incurrence of additional operating expenses as a result of the effects of the COVID-19 pandemic. We experienced an increase in these operating expenses during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020. Our critical illness recovery hospitals have experienced increased usage of contract clinical labor during this time and the cost of this labor has risen significantly due to the demand for healthcare professionals. Additionally, our critical illness recovery hospitals have modified certain of their protocols which have resulted in increased costs, including adjusting staffing ratios and purchasing additional personal protective equipment, in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment.
Rehabilitation Hospital Segment. Adjusted EBITDA wasincreased 83.9% to $50.8 million for the three months ended June 30, 2021, compared to $27.6 million for the three months ended June 30, 2020, compared to $30.0 million for the three months ended June 30, 2019.2020. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 23.9% for the three months ended June 30, 2021, compared to 16.4% for the three months ended June 30, 2020, compared to 18.7% for the three months ended June 30, 2019.2020. The declinesincreases in Adjusted EBITDA and Adjusted EBITDA margin were primarily driven by our rehabilitation hospitalsattributable to an increase in New Jersey and South Florida which implemented temporary restrictions on admissions as a result of the COVID-19 pandemic,patient volume, as discussed abovefurther under “Net Operating RevenuesRevenue..” Our Adjusted EBITDA and Adjusted EBITDA margin were also impacted by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our rehabilitation hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs as well as additional costs resulting from the purchase of personal protective equipment.
Outpatient Rehabilitation Segment. We incurredAdjusted EBITDA increased to $45.6 million for the three months ended June 30, 2021, compared to Adjusted EBITDA losses of $6.3 million for the three months ended June 30, 2020, compared to Adjusted EBITDA of $42.6 million for the three months ended June 30, 2019.2020. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 16.3% for the three months ended June 30, 2021, compared to (3.8)% for the three months ended June 30, 2020, compared to 16.3% for the three months ended June 30, 2019.2020. The declineincreases in Adjusted EBITDA and Adjusted EBITDA margin were primarily causeddriven by increases in patient visit volume. During the three months ended June 30, 2020, our outpatient rehabilitation clinics experienced significant declines in patient visit volume as a 39.1% decreaseresult of the effects of the COVID-19 pandemic, as described further above.
Concentra Segment. Adjusted EBITDA increased to $137.1 million for the three months ended June 30, 2021, compared to $41.5 million for the three months ended June 30, 2020. Our Adjusted EBITDA margin for the Concentra segment was 30.0% for the three months ended June 30, 2021, compared to 13.3% for the three months ended June 30, 2020. The increase in visits, resulting frompatient visit volume contributed to the increases in Adjusted EBITDA and Adjusted EBITDA margin. As discussed further above, our Concentra segment experienced significant declines in patient visit volume as a result of the effects of the COVID-19 pandemic during the three months ended June 30, 2020,2020. The increases in Adjusted EBITDA and Adjusted EBITDA margin were also due in part to the COVID-19 screening and testing services provided at our centers and various onsite clinics located at employer worksites, as discussed further under “Revenue.” We incur lower operating expenses associated with these services as compared to our core services. Our Concentra segment also recognized $32.3 million of other operating income during the three months ended June 30, 2019. We incurred Adjusted EBITDA losses during April and May 2020. We generated positive Adjusted EBITDA in June 20202021, as we began to see improvement in patient volume, which is discusseddescribed further above under “NetOther Operating RevenuesIncome,.” In responsecompared to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to one another and took other measures to reduce labor costs.
Concentra Segment. Adjusted EBITDA was $41.5$0.8 million for the three months ended June 30, 2020, compared to $76.1 million for the three months ended June 30, 2019. Our Adjusted EBITDA margin for the Concentra segment was 13.3% for the three months ended June 30, 2020, compared to 18.4% for the three months ended June 30, 2019. The decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 30.7% decrease in visits, resulting from the effects of the COVID-19 pandemic, during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decreases in our Adjusted EBITDA and Adjusted EBITDA margin occurred during April and May 2020, as compared to the same period in 2019. Our Adjusted EBITDA and Adjusted EBITDA margin improved in June 2020, as compared to both April and May 2020 and the same period in 2019, as we began to see improvement in patient volume, which is discussed above under “Net Operating Revenues.” In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor costs.2020.
Depreciation and Amortization
Depreciation and amortization expense was $51.0 million for the three months ended June 30, 2021, compared to $52.3 million for the three months ended June 30, 2020,2020.
Income from Operations
For the three months ended June 30, 2021, we had income from operations of $284.0 million, compared to $55.0$119.5 million for the three months ended June 30, 2019.2020. The improved operating performance of our Concentra, outpatient rehabilitation, and rehabilitation hospital segments contributed to the increase in income from operations. We also recognized other operating income of $98.1 million during the three months ended June 30, 2021, as described further under “Other Operating Income,” compared to $55.0 million of other operating income for the three months ended June 30, 2020.
Income from OperationsEquity in Earnings of Unconsolidated Subsidiaries
For the three months ended June 30, 2020, we had income from operations of $119.5 million, compared to $124.9 million for the three months ended June 30, 2019. The decrease in income from operations was primarily attributable to the operating performance of our outpatient rehabilitation and Concentra segments. The decrease in income from operations was offset, in part, by the recognition of $55.0 million of other operating income, as discussed above.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the three months ended June 30, 2020,2021, we had equity in earnings of unconsolidated subsidiaries of $8.3$11.8 million, compared to $7.4$8.3 million for the three months ended June 30, 2019.2020. The increase in equity in earnings is principally due to the improved operating performance of our rehabilitation businesses in which we are a minority owner.
Gain on Sale of Businesses
We recognized a gain of $0.3 million duringDuring the three months ended June 30, 2020.2020, we recognized a gain of $0.3 million. The gain was attributable to additional proceeds received from the sale of an outpatient rehabilitation business. The sale occurred during the first quarter ended March 31, 2020.
Interest Expense
Interest expense was $33.9 million for the three months ended June 30, 2021, compared to $37.4 million for the three months ended June 30, 2020, compared to $51.5 million for the three months ended June 30, 2019.2020. The decrease in interest expense was principally due to a decline in variable interest rates, as well as the refinancing of our Select credit facilities, Concentra-JPM credit facilities (as defined below), and senior notes during the third and fourth quarters of 2019.rates.
Income Taxes
We recorded income tax expense of $65.7 million for the three months ended June 30, 2021, which represented an effective tax rate of 25.1%. We recorded income tax expense of $23.3 million for the three months ended June 30, 2020, which represented an effective tax rate of 25.7%. We recorded income tax expense of $20.8 million for the three months ended June 30, 2019, which represented an effective tax rate of 25.8%.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $31.3 million for the three months ended June 30, 2021, compared to $15.8 million for the three months ended June 30, 2020, compared2020. The increase in net income attributable to $15.2 million fornon-controlling interests was principally due to an increase in the net income of our Concentra segment during the three months ended June 30, 2019.2021. This increase resulted from its improved operating performance and the recognition of $32.3 million of other operating income, as described further above, during the three months ended June 30, 2021.
Six Months Ended June 30, 2020,2021, Compared to Six Months Ended June 30, 20192020
In the following, we discuss our results of operations related to net operating revenues,revenue, operating expenses, other operating income, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest, expense, income taxes, and net income attributable to non-controlling interests.
Please refer to “Effects of the COVID-19 Pandemic on our Results of OperationOperations during the Three and Six Months Ended June 30, 2020 and 2021s”” above for further discussion.
Net Operating RevenuesRevenue
Our net operating revenues wererevenue increased 17.5% to $3,110.5 million for the six months ended June 30, 2021, compared to $2,647.4 million for the six months ended June 30, 2020, compared2020.
Critical Illness Recovery Hospital Segment. Revenue increased 11.6% to $2,686.0$1,138.9 million for the six months ended June 30, 2019.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 11.0%2021, compared to $1,020.1 million for the six months ended June 30, 2020,2020. The increase in revenue was due to increases in both revenue per patient day and patient volume during the six months ended June 30, 2021, as compared to $918.7 millionthe six months ended June 30, 2020. Revenue per patient day increased 8.3% to $2,006 for the six months ended June 30, 2019. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 5.1% to 547,347 days for the six months ended June 30, 2020,2021, compared to 520,989 days for the six months ended June 30, 2019. We experienced a 2.0% increase in patient days in our existing critical illness recovery hospitals. The remaining increase was attributable to the four critical illness recovery hospitals we acquired in 2019. Net revenue per patient day increased 5.9% to $1,853 for the six months ended June 30, 2020, compared to $1,749 for the six months ended June 30, 2019.2020. We experienced increases in both our Medicarenon-Medicare and non-Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from an increase in patient acuity
Rehabilitation Hospital Segment. Net operating revenues increased 11.4% to $350.7 million for the six months ended June 30, 2020, compared to $314.9 million for the six months ended June 30, 2019. The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the six months ended June 30, 2021, compared to the six months ended June 30, 2020. Our critical illness recovery hospitals experienced an increase in patient acuity during the six months ended June 30, 2021, which contributed to the increase in Medicare revenue per patient day. We also experienced an increase in revenue per patient day as a result of the temporary suspension of the 2.0% cut to Medicare payments due to sequestration, which is described further under “Regulatory Changes.” Occupancy in our critical illness recovery hospitals increased to 72% during the six months ended June 30, 2021, compared to 71% for the six months ended June 30, 2020. Our patient days increased 5.5%3.4% to 566,099 days for the six months ended June 30, 2021, compared to 547,347 days for the six months ended June 30, 2020. Since June 30, 2020, we reopened our Panama City hospital, which was temporarily closed in October 2018, and acquired a controlling interest in a hospital in which we were previously a minority owner. These hospitals contributed 17,547 patient days during the six months ended June 30, 2021. We also experienced a 1.0% increase in patient days in our critical illness recovery hospitals which operated during both the six months ended June 30, 2021 and 2020. The increase in patient days was due in part to our strengthened referral relationships with general acute care hospitals, as our hospitals continue to demonstrate their ability to care for high acuity patients. The effects of the COVID-19 pandemic and the relaxation of certain admission restrictions also contributed to the increase in volume during the six months ended June 30, 2021, as compared to the six months ended June 30, 2020.
Rehabilitation Hospital Segment. Revenue increased 19.9% to $420.5 million for the six months ended June 30, 2021, compared to $350.7 million for the six months ended June 30, 2020. The increase in revenue was due to increases in both patient volume and revenue per patient day during the six months ended June 30, 2021, compared to the six months ended June 30, 2020. Occupancy in our rehabilitation hospitals increased to 84% during the six months ended June 30, 2021, compared to 75% for the six months ended June 30, 2020. Our patient days increased 16.1% to 207,387 days for the six months ended June 30, 2021, compared to 178,649 days for the six months ended June 30, 2020, compared to 169,3412020. We experienced an increase of 12,851 patient days foras a result of acquiring controlling interests in two rehabilitation hospitals since June 30, 2020; we were previously a minority owner in each of these businesses. We also experienced an 11.0% increase in patient days in our rehabilitation hospitals which operated during both the six months ended June 30, 2019. The increase in2021 and 2020. Our patient days was principally driven by our rehabilitation hospitals which commenced operations during 2019. Several of our other rehabilitation hospitals experienced increases in patient daysvolume during the six months ended June 30, 2020; however, these increases were offset by declines in volume experienced2020 was adversely affected within our rehabilitation hospitals in New Jersey and South Florida that temporarily restricted their admissions as a result of the COVID-19 pandemic. Certain of our rehabilitation hospitals also experienced overall lower patient volume due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Patient volume in our rehabilitation hospitals began declining in March 2020 and these declines continued through Aprilservices during the six months ended June 30, 2020. Our rehabilitation hospitals began to see improvement in patient volume during May 2020 and, during June 2020, our rehabilitation hospitals patient days increased 7.8% as compared to June 2019. Our net revenue per patient day increased 8.8%4.1% to $1,851 for the six months ended June 30, 2021, compared to $1,778 for the six months ended June 30, 2020, compared to $1,634 for the six months ended June 30, 2019.2020. We experienced increases in both our Medicare and non-Medicare netrevenue per patient day during the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The temporary suspension of the 2.0% cut to Medicare payments due to sequestration, which is described further under “Regulatory Changes,” contributed to the increase in revenue per patient day.
Outpatient Rehabilitation Segment. Net operating revenues wereRevenue increased 26.0% to $532.4 million for the six months ended June 30, 2021, compared to $422.4 million for the six months ended June 30, 2020, compared2020. The increase in revenue was attributable to $508.8 millionan increase in visits, which increased 30.0% to 4,505,015 for the six months ended June 30, 2019. The decrease in net operating revenues was attributable to a decline in visits, which were 3,464,932 for the six months ended June 30, 2020,2021, compared to 4,257,9883,464,932 visits for the six months ended June 30, 2019. We experienced an 11.2% increase in visits during January and February 2020 as compared to the same period in 2019. Our outpatient rehabilitation clinics experienced a 32.4% decrease in visits during the four months ended June 30, 2020, as compared to same period in 2019. The decline in volume resulted from actions by governmental authorities and the private sector to limit the spread of COVID-19, as discussed above. For2020. During the six months ended June 30, 2020, the decline in volume principally occurred during April and May 2020. During this time, our outpatient rehabilitation clinics experienced significant declines in patient visit volume due to fewer patient referrals from physicians, a 47.7% decreasereduction in workers’ compensation injury visits as compareddue to the same periodclosure of businesses, the suspension of elective surgeries at hospitals and other facilities which resulted in 2019. Patient volume in ourless demand for outpatient rehabilitation clinics began to improve during June 2020, as compared to Aprilservices, and May 2020. During June 2020, we experienced a 19.7% decrease in visits as compared tosocial distancing practices resulting from the same period in 2019. As of June 30, 2020, we have 66 outpatient rehabilitation clinics that remain temporarily closed.COVID-19 pandemic. Our net revenue per visit was $103 for the six months ended June 30, 2021, compared to $105 for the six months ended June 30, 2020, compared to $103 for2020. During the six months ended June 30, 2019. The higher net2020, we experienced changes in our payor mix as our patient volume declined from the effects of the COVID-19 pandemic. These changes caused our revenue per visit rate reflects a higher percentage of workers’ compensation patients treatedto increase. As our patient volume increased during the six months ended June 30, 2020,2021, as compared to the six months ended June 30, 2019.
Concentra Segment. Net operating revenues wereRevenue increased 23.7% to $879.2 million for the six months ended June 30, 2021, compared to $710.9 million for the six months ended June 30, 2020, compared2020. Our patient visits, which increased 15.9% to $809.8 million5,825,652 for the six months ended June 30, 2019. The decrease in net operating revenues was attributable2021, compared to a decline in5,028,475 visits which were 5,028,475 for the six months ended June 30, 2020, comparedcontributed to 6,014,696 visits forthe increase in revenue. During the six months ended June 30, 2019. We experienced a 4.9% increase in visits during January and February 2020, as compared to the same period in 2019. Ourour centers experienced a 26.3% decreasesignificant declines in visits during the four months ended June 30, 2020, as comparedpatient visit volume due to same period in 2019. The decline in volume during these four months resulted from employers furloughing their workforce and temporarily ceasing or significantly reducing their operations asoperations. As a result of the actionsCOVID-19 pandemic, we generated revenue from COVID-19 screening and testing services. These services contributed $106.7 million of governmental authorities and those in the private sector to limit the spread of COVID-19, as discussed above. Forrevenue during the six months ended June 30, 2020,2021, compared to $6.2 million during the decline in volume principally occurred during April and Maysix months ended June 30, 2020. During this time, our centers experienced a 39.2% decrease in visits as compared to the same period in 2019. Patient volume in our centers began to improve during June 2020, as compared to April and May 2020. During June 2020, we experienced a 12.4% decrease in visits as compared to the same period in 2019. As ofsix months ended June 30, 2020, we have 18 centers that remain temporarily closed and 195 centers are operating at reduced hours. Net2021, our revenue per visit wasincreased to $125, compared to $124 for the six months ended June 30, 2020, compared to $122 for the six months ended June 30, 2019. The2020. We experienced a higher net revenue per visit rate reflects a higher percentage ofdue to increases in the reimbursement rates payable pursuant to certain state fee schedules for workers’ compensation patients treatedvisits, as well as increases in our employer services rates during the six months ended June 30, 2020, as compared2021. The increase in revenue per visit was offset partially by a greater percentage of employer services visits, which yield lower per visit rates. Additionally, the revenue of the Concentra segment was impacted by the sale of its Department of Veterans Affairs community-based outpatient clinic business on September 1, 2020. This business contributed $43.5 million of revenue to the Concentra segment during the six months ended June 30, 2019.2020.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $2,350.1$2,656.0 million, or 88.7%85.4% of net operating revenues,revenue, for the six months ended June 30, 2020,2021, compared to $2,342.3$2,350.1 million, or 87.2%88.7% of net operating revenues,revenue, for the six months ended June 30, 2019.2020. Our cost of services, a major component of which is labor expense, was $2,282.8$2,584.9 million, or 86.2%83.1% of net operating revenues,revenue, for the six months ended June 30, 2020,2021, compared to $2,282.2$2,282.8 million, or 85.0%86.2% of net operating revenues,revenue, for the six months ended June 30, 2019.2020. The increasedecrease in our operating expenses relative to our net operating revenuesrevenue was principally due to the reduced patient volume inimproved operating performances of our Concentra, outpatient rehabilitation, and Concentra segments,rehabilitation hospital segments. This was driven primarily by an increase in patient volume, as discussed above.described further within the “Revenue” and “Adjusted EBITDA” discussions. General and administrative expenses were $67.3$71.1 million, or 2.5%2.3% of net operating revenues,revenue, for the six months ended June 30, 2020,2021, compared to $60.0$67.3 million, or 2.2%2.5% of net operating revenues,revenue, for the six months ended June 30, 2019.2020.
Other Operating Income
Other operating income was $132.1 million for the six months ended June 30, 2021, compared to $55.0 million for the six months ended June 30, 2020.
For the six months ended June 30, 2020, we had2021, $114.1 million of other operating income is related to the recognition of $55.0 million. We recognized payments received under the Provider Relief Fund as other operating income as we have incurred losses of revenue andfor health care related expenses and lost revenues attributable to COVID-19. Refer to Note 12 – CARES Act of the notes to our condensed consolidated financial statements included herein for further information. For the six months ended June 30, 2020, $54.2$81.9 million and $32.3 million of other operating income is included within the operating results of our other activities;activities and Concentra segment, respectively. The remaining $17.9 million of other operating income is related to the outcome of litigation with CMS and is included in the operating results of our critical illness recovery hospital segment.
For the six months ended June 30, 2020, the other operating income of $55.0 million is related to the recognition of payments received under the Provider Relief Fund for health care related expenses and lost revenues attributable to COVID-19. $54.2 million and $0.8 million of other operating income is included inwithin the operating results of our other activities and Concentra segment.segment, respectively.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 30.0%4.4% to $186.2 million for the six months ended June 30, 2021, compared to $178.3 million for the six months ended June 30, 2020, compared to $137.1 million for the six months ended June 30, 2019.2020. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 16.3% for the six months ended June 30, 2021, compared to 17.5% for the six months ended June 30, 2020, compared to 14.9% for the six months ended June 30, 2019.2020. The increasesincrease in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment werewas primarily driven by increases in both patient volume and net revenue per patient day,the recognition of $17.9 million of other operating income during the six months ended June 30, 2021, as discusseddescribed further above under “NetOther Operating RevenuesIncome.” The increases inOur Adjusted EBITDA and Adjusted EBITDA margin were offset, in part,adversely affected by the incurrence of additional operating expenses as a result of the effects of the COVID-19 pandemic. We experienced an increase in these operating expenses during the six months ended June 30, 2021, as compared to the six months ended June 30, 2020. Our critical illness recovery hospitals have experienced increased usage of contract clinical labor during this time and the cost of this labor has risen significantly due to the demand for healthcare professionals. Additionally, our critical illness recovery hospitals have modified certain of their protocols which have resulted in increased costs, including adjusting staffing ratios and purchasing additional personal protective equipment, in order to follow the guidelines and recommendations for patient treatment and for the protection of both our patients and staff members. This has resulted in increased labor costs, including increased contracted labor usage, as well as additional costs resulting from the purchase of personal protective equipment.
Rehabilitation Hospital Segment. Adjusted EBITDA increased 18.7%53.1% to $101.3 million for the six months ended June 30, 2021, compared to $66.2 million for the six months ended June 30, 2020, compared to $55.8 million for the six months ended June 30, 2019.2020. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 24.1% for the six months ended June 30, 2021, compared to 18.9% for the six months ended June 30, 2020, compared to 17.7% for the six months ended June 30, 2019.2020. The increases in Adjusted EBITDA and Adjusted EBITDA margin were primarily attributable to our hospitals which commenced operations in 2019. We also experienceddriven by increases in Adjusted EBITDA and Adjusted EBITDA margin at many of our existing hospitals as a result of increased patient volume and increases in net revenue per patient day. These increases were offset, in part, by declines in Adjusted EBITDA and Adjusted EBITDA marginday in our rehabilitation hospitals in New Jersey and South Florida that implemented temporary restrictions on admissions as a result of the COVID-19 pandemic. Our Adjusted EBITDA and Adjusted EBITDA margin were also impacted by the incurrence of additional operating expenses as a result of the COVID-19 pandemic. Our rehabilitation hospitals have modified certain of their protocols in order to follow the guidelines and recommendations for patient treatment and for the protection ofwhich operated during both our patients and staff members. This has resulted in increased labor costs as well as additional costs resulting from the purchase of personal protective equipment.
Prior to our rehabilitation hospitals becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 72.5% to $27.4 million for January and February 2020, compared to $15.9 million for the same period in 2019. Our Adjusted EBITDA margin increased to 22.4% for January and February 2020, compared to 16.1% for the same period in 2019. We experienced declines in Adjusted EBITDA and Adjusted EBITDA margin during April and May 2020, as compared to the same period in 2019, as a result of lower patient volume. Our Adjusted EBITDA and Adjusted EBITDA margin improved in June 2020 as compared to both April and May 2020 and the same period in 2019. For the six months ended June 30, 2019, the2021 and 2020, as discussed further under “Revenue.” Our two newly acquired rehabilitation hospitals also contributed $4.6 million of Adjusted EBITDA results forduring the rehabilitation hospital segment include start-up losses of approximately $8.8 million.six months ended June 30, 2021.
Outpatient Rehabilitation Segment. Adjusted EBITDA wasincreased to $72.0 million for the six months ended June 30, 2021, compared to $20.8 million for the six months ended June 30, 2020, compared to $71.6 million for the six months ended June 30, 2019.2020. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.5% for the six months ended June 30, 2021, compared to 4.9% for the six months ended June 30, 2020, compared to 14.1% for the six months ended June 30, 2019.2020. The decreaseincreases in Adjusted EBITDA and Adjusted EBITDA margin were causeddriven by a declineincreases in visits, beginningpatient visit volume. During the six months ended June 30, 2020, our outpatient rehabilitation clinics experienced significant declines in mid-March 2020,patient visit volume as a result of the effects of the COVID-19 pandemic, as described further above. During the months of March through June 2020, our outpatient rehabilitation clinics experienced a 32.4% decrease in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to one another and took other measures to reduce labor costs. Prior to our outpatient rehabilitation clinics becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 33.6% to $23.1 million for January and February 2020, compared to $17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for January and February 2020, compared to 10.7% for the same period in 2019. We incurred Adjusted EBITDA losses during April and May 2020 as a result of the decline in patient visits we experienced. Our outpatient rehabilitation segment generated positive Adjusted EBITDA in June 2020 as we saw improvement in patient volume.
Concentra Segment. Adjusted EBITDA wasincreased to $219.1 million for the six months ended June 30, 2021, compared to $103.0 million for the six months ended June 30, 2020, compared to $142.3 million for the six months ended June 30, 2019.2020. Our Adjusted EBITDA margin for the Concentra segment was 24.9% for the six months ended June 30, 2021, compared to 14.5% for the six months ended June 30, 2020, compared2020. The increase in patient visit volume contributed to 17.6% for the six months ended June 30, 2019. The decreasesincreases in Adjusted EBITDA and Adjusted EBITDA margin were caused by a declinemargin. As discussed further above, our Concentra segment experienced significant declines in visits, beginning in mid-March 2020,patient visit volume as a result of the effects of the COVID-19 pandemic as described above. Duringduring the six months of March throughended June 2020, our centers experienced a 26.3% decrease30, 2020. The increases in visits, as compared to the same period in 2019. In response to the decline in patient volume and in an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other measures to reduce labor costs. Prior to our centers becoming affected by the COVID-19 pandemic, our Adjusted EBITDA increased 11.7% to $45.5 million for January and February 2020, compared to $40.8 million for the same period in 2019. Our Adjusted EBITDA margin increased to 16.6% for January and February 2020, compared to 15.7% for the same period in 2019. Our Adjusted EBITDA and Adjusted EBITDA margin were most significantly impactedalso due in Aprilpart to the COVID-19 screening and May 2020testing services provided at our centers and various onsite clinics located at employer worksites, as a result of the decline in patient visits we experienced. Our Adjusted EBITDA and Adjusted EBITDA margin improved in June 2020,discussed further under “Revenue.” We incur lower operating expenses associated with these services as compared to both April and May 2020 andour core services. Our Concentra segment also recognized $32.3 million of other operating income during the same period in 2019,six months ended June 30, 2021, as we saw improvement in patient volume.described further above under “Other Operating Income,” compared to $0.8 million for the six months ended June 30, 2020.
Depreciation and Amortization
Depreciation and amortization expense was $100.6 million for the six months ended June 30, 2021, compared to $104.0 million for the six months ended June 30, 2020,2020.
Income from Operations
For the six months ended June 30, 2021, we had income from operations of $486.0 million, compared to $107.1$248.2 million for the six months ended June 30, 2019.2020. The improved operating performance of our Concentra, outpatient rehabilitation, and rehabilitation hospital segments contributed to the increase in income from operations. We also recognized other operating income of $132.1 million during the six months ended June 30, 2021, as described further under “Other Operating Income,” compared to $55.0 million of other operating income for the six months ended June 30, 2020.
Equity in Earnings of Unconsolidated Subsidiaries
For the six months ended June 30, 2021, we had equity in earnings of unconsolidated subsidiaries of $21.7 million, compared to $10.9 million for the six months ended June 30, 2020. The increase in equity in earnings is principally due to the improved operating performance of our rehabilitation businesses in which we are a minority owner.
Income from OperationsGain on Sale of Businesses
ForWe recognized a gain of $7.5 million related to the sale of an outpatient rehabilitation business during the six months ended June 30, 2020, we had income from operations of $248.2 million, compared to $236.62020.
Interest
Interest expense was $68.3 million for the six months ended June 30, 2019. The increase in income from operations was primarily attributable to the improved operating performance of our critical illness recovery hospital segment, as well as the recognition of $55.0 million of other operating income, as discussed above.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the six months ended June 30, 2020, we had equity in earnings of unconsolidated subsidiaries of $10.9 million,2021, compared to $11.8 million for the six months ended June 30, 2019.
Gain on Sale of Businesses
We recognized gains of $7.5 million and $6.5 million during the six months ended June 30, 2020 and 2019, respectively. These gains were attributable to the sales of outpatient rehabilitation businesses.
Interest Expense
Interest expense was $83.5 million for the six months ended June 30, 2020, compared to $102.3 million for the six months ended June 30, 2019.2020. The decrease in interest expense was principally due to a decline in variable interest rates, as well asrates.
For the refinancingsix months ended June 30, 2021, we recognized interest income of our Select credit facilities, Concentra-JPM credit facilities, and senior notes during$4.7 million. The interest income is related to the third and fourth quartersoutcome of 2019.litigation with CMS.
Income Taxes
We recorded income tax expense of $110.7 million for the six months ended June 30, 2021, which represented an effective tax rate of 24.9%. We recorded income tax expense of $45.2 million for the six months ended June 30, 2020, which represented an effective tax rate of 24.7%. We recorded income tax expense of $39.3 million for the six months ended June 30, 2019, which represented an effective tax rate of 25.7%. For the six months ended June 30, 2020, the lower effective tax rate resulted primarily from the discrete tax benefits realized from the exercise of certain equity options in connection with the purchase of additional membership interests in Concentra Group Holdings Parent, as described under “Other Significant Events.” The impact of these tax benefits were offset, in part, by the sale of an outpatient rehabilitation business. The selling price for this business exceeded our tax basis, resulting in a taxable gain. This sale was treated as a discrete tax event for the six months ended June 30, 2020.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $58.0 million for the six months ended June 30, 2021, compared to $33.2 million for the six months ended June 30, 2020, compared2020. The increase in net income attributable to $27.7 million fornon-controlling interests was principally due to an increase in the net income of our Concentra segment during the six months ended June 30, 2019.2021. This increase resulted primarily from its improved operating performance and the recognition of $32.3 million of other operating income, as described further above, during the six months ended June 30, 2021. The increase was principally duein net income attributable to non-controlling interests also resulted from improvements in the operating performance of our joint ventureless than wholly owned critical illness recovery hospitals and rehabilitation hospitals.
Liquidity and Capital Resources
Cash Flows for the Six Months Ended June 30, 20202021 and Six Months Ended June 30, 20192020
In the following, we discuss cash flows from operating activities, investing activities, and financing activities.
| | | | Six Months Ended June 30, | | | | Six Months Ended June 30, |
| | | 2019 | | 2020 | | | 2020 | | 2021 |
| | | (in thousands) | | | | (in thousands) |
Cash flows provided by operating activities | Cash flows provided by operating activities | | $ | 132,914 | | | $ | 686,098 | | Cash flows provided by operating activities | | $ | 686,098 | | | $ | 363,026 | |
Cash flows used in investing activities | Cash flows used in investing activities | | (227,479) | | | (80,562) | | Cash flows used in investing activities | | (80,562) | | | (88,245) | |
Cash flows provided by (used in) financing activities | | 43,423 | | | (431,681) | | |
Net increase (decrease) in cash and cash equivalents | | (51,142) | | | 173,855 | | |
Cash flows used in financing activities | | Cash flows used in financing activities | | (431,681) | | | (48,349) | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | | 173,855 | | | 226,432 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 175,178 | | | 335,882 | | Cash and cash equivalents at beginning of period | | 335,882 | | | 577,061 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 124,036 | | | $ | 509,737 | | Cash and cash equivalents at end of period | | $ | 509,737 | | | $ | 803,493 | |
Operating activities provided $363.0 million of cash flows for the six months ended June 30, 2021, compared to $686.1 million of cash flows for the six months ended June 30, 2020, compared to $132.9 million of cash flows for2020. During the six months ended June 30, 2019. The2020, we experienced an increase in cash flowflows provided by operating activities is primarily attributable toas a result of receiving approximately $317.0 million of advanced payments received under the Accelerated and Advance Payment Program, for Medicare providers, as well as approximately $100.5 million of payments under the Provider Relief Fund. During the six months ended June 30, 2021, we received an additional $35.8 million of payments under the Provider Relief Fund. Refer to Note 1215 – CARES Act of the notes to our condensed consolidated financial statements included herein for further information.
Our days sales outstanding was 54 days at June 30, 2021 compared to 56 days at December 31, 2020. Our days sales outstanding was 55 days at June 30, 2020, compared to 51 days at December 31, 2019. Our days sales outstanding was 53 days atwill fluctuate based upon variability in our collection cycles and patient volumes.
Investing activities used $88.2 million of cash flows for the six months ended June 30, 2019, compared to 51 days at December 31, 2018. Our days sales outstanding experiences variability throughout2021. The principal uses of cash were $76.4 million for purchases of property and equipment and $21.3 million for investments in and acquisitions of businesses. The cash outflows were offset in part by proceeds received from the collection cycle, and the trend we have observed is an increase in days sales outstanding at June 30, 2020 and 2019, as compared to our days sales outstanding at December 31, 2019 and 2018, respectively. Our cash collections from accounts receivable have been ample and are expected to provide us with sufficient working capital to operate our businesses.
sale of assets of $9.5 million. Investing activities used $80.6 million of cash flows for the six months ended June 30, 2020. The principal uses of cash were $71.3 million for purchases of property and equipment and $21.7 million for investments in and acquisitions of businesses. This wasThe cash outflows were offset in part by proceeds received from the sale of assets and businesses of $12.4 million. Investing
Financing activities used $227.5$48.3 million of cash flows for the six months ended June 30, 2019.2021. The principal uses of cash were $89.3$29.2 million for distributions to and purchases of propertynon-controlling interests and equipment and $138.3$16.9 million for investments in and acquisitions of businesses.
dividend payments to common stockholders. Financing activities used $431.7 million of cash flows for the six months ended June 30, 2020. The principal use of cash was $366.2 million for the purchase of additional membership interests of Concentra Group Holdings Parent during the six months ended June 30, 2020, as discussed above under “OtherSignificant Events.”2020. We also used $39.8 million of cash for the mandatory prepayment of term loans under the Select credit facilities.
Financing activities provided $43.4 million of cash flows for the six months ended June 30, 2019. The principal source of cash was net borrowings of $175.0 million on the Select revolving facility. This was offset in part by $98.8 million and $33.9 million for mandatory prepayments of term loans under the Select credit facilities and Concentra-JPM credit facilities, respectively.
Capital Resources
Working capital. We had net working capital of $107.4$459.1 million at June 30, 2020,2021, compared to $298.7$155.6 million at December 31, 2019.2020. The decreaseincrease in net working capital was principallyprimarily due to an increase in cash and cash equivalents and decreases in our liabilities related to the purchasepayments received under the Accelerated and Advance Payment Program and the Provider Relief Fund. Refer to Note 15 – CARES Act of additional membership interests of Concentra Group Holdings Parentthe notes to our condensed consolidated financial statements included herein for $366.2 million during the three months ended March 31, 2020, as discussed above under “Other Significant Events.”further information.
Select credit facilities.
In February 2020,On June 2, 2021, Select made a principal prepayment of approximately $39.8 million associated with its term loans in accordance with the provision inentered into Amendment No. 5 to the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined inagreement which, among other things, increased the aggregate commitments available under the Select credit facilities.revolving facility from $450.0 million to $650.0 million, including a $125.0 million sublimit for the issuance of standby letters of credit.
At June 30, 2020,2021, Select had outstanding borrowings under the Select credit facilities consisting of $2,103.4 million in term loans (excluding unamortized original issue discounts and debt issuance costs of $19.7$15.5 million) (the “Select term loan”). Select did not have any borrowings outstanding under the Select revolving facility. At June 30, 2020,2021, Select had $410.7$594.6 million of availability under itsthe Select revolving facility (the “Select revolving facility”) after giving effect to $39.3$55.4 million of outstanding letters of credit.
Concentra credit facilities.
AtOn June 30, 2020,2, 2021, Concentra Inc. did not have any term loan or revolving facility borrowingsterminated its obligations under itsthe Concentra-JPM first lien credit agreement. The Concentra-JPM first lien credit agreement dated June 1, 2015 (together with any borrowings thereunder, the “Concentra-JPM credit facilities”). At June 30, 2020, Concentra Inc. had $85.7provided for commitments of $100.0 million of availability under its revolving facility (the “Concentra-JPM revolving facility”) after giving effect to $14.3 million of outstanding letters of credit. Select and Holdings are not obligors with respect to Concentra Inc.’s debt under the Concentra-JPM credit facilities. At June 30, 2020, Concentra Inc. had outstanding borrowings under its intercompany loan agreement with Select of $1,199.8 million.revolving facility, which was set to mature on March 1, 2022.
Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2020,2021, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. Holdings did not repurchase shares during the three months ended June 30, 2020.2021. Since the inception of the program through June 30, 2020,2021, Holdings has repurchased 38,580,908 shares at a cost of approximately $356.6 million, or $9.24 per share, which includes transaction costs.
Liquidity. The COVID-19 pandemic adversely affected our operations during the three and six months ended June 30, 2020. The duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments that cannot be accurately predicted at this time; however, we believe our internally generated cash flows and borrowing capacity under the Select and Concentra-JPM credit facilities, and other measures to enhance our liquidity position that we have taken, as described below,revolving facility will allow us to finance our operations overin both the next twelve months.short and long term. As of June 30, 2020,2021, we had cash and cash equivalents of $509.7$803.5 million and availability of $410.7$594.6 million under the Select revolving facility after giving effect to $39.3$55.4 million of outstanding letters of credit, and availability of $85.7 million under the Concentra-JPM revolving facility after giving effect to $14.3 million of outstanding letters of credit.
On March 27, 2020, the CARES Act, which is explained further within “Regulatory Changes,” was enacted. The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to the coronavirus. We received approximately $100.5 million of payments under the Provider Relief Fund.
In accordance with the CARES Act, CMS expanded its current Accelerated and Advance Payment Program for Medicare providers. Under this program, qualified healthcare providers could receive advanced or accelerated payments from CMS. We received approximately $317.0 million of advanced payments under this program. The majority of these payments were received in April 2020. For our critical illness recovery hospitals and rehabilitation hospitals, repayment of amounts received under the Accelerated and Advance Payment Program are due 210 days after the advanced payment was issued. Failure to repay the advanced payments when due result in interest charges on the outstanding balance owed.
The CARES Act further included a technical correction to allow for bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and provided for an increase in the amounts allowed for interest expense deductions for tax years beginning January 1, 2019. As a result of these provisions, we expect to reduce our estimated tax payments during 2020 by approximately $20.0 million.
Additionally, we have taken other temporary measures to reduce operating costs and expenses. These measures have included reducing labor costs through employee furloughs, salary and wage reductions for certain employees, and reducing the hours worked by part time employees, as well as limiting discretionary spending on capital expenditures. Further, we are deferring payment on our share of payroll taxes owed, as allowed by the CARES Act. Many of these initiatives will be curtailed as we see improvement in patient volumes.
At June 30, 2020, we were in compliance with each of our financial covenants. As of June 30, 2020, Select’s leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters), which is required to be maintained at less than 7.00 to 1.00 under the terms of the Select revolving facility, was 4.01 to 1.00. As of June 30, 2020, we do not anticipate events or circumstances which would preclude us from complying with our financial covenants in the future or prevent us from making interest and principal payments when due. Select is not required to make further principal payments on the Select term loan until September 30, 2023 and its senior notes are due August 15, 2026. Concentra is not required to make further principal payments on its intercompany term loan with Select until its maturity on June 1, 2022. The Select and Concentra-JPM revolving credit facilities mature on March 6, 2024 and March 1, 2022, respectively. Our ability to comply with our financial covenants and obligations outlined within our debt agreements can be affected by various risks and uncertainties. Please refer to our risk factors discussed in Item 1A. “Risk Factors” of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 for further discussion.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with significantlarge, regional health systems and other healthcare providers. We also intend to open new outpatient rehabilitation clinics and occupational health centers in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic acquisitions.
Dividend
On August 4, 2021, our board of directors declared a cash dividend of $0.125 per share. The dividend will be payable on or about August 30, 2021 to stockholders of record as of the close of business on August 18, 2021.
There is no assurance that future dividends will be declared. The declaration and payment of dividends in the future are at the discretion of our board of directors after taking into account various factors, including, but not limited to, our financial condition, operating results, available cash and current and anticipated cash needs, the terms of our indebtedness, and other factors our board of directors may deem to be relevant.
Recent Accounting Pronouncements
Refer to Note 2 – Accounting Policies of the notes to our condensed consolidated financial statements included herein for information regarding recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under the Select credit facilities, and Concentra-JPM revolving facility.which generally bear interest rates that are indexed against LIBOR.
At June 30, 2020,2021, Select had outstanding borrowings under the Select credit facilities consisting of the $2,103.4 million Select term loan (excluding unamortized original issue discounts and debt issuance costs of $19.7$15.5 million). At June 30, 2020,2021, Select did not have any borrowings outstanding under the Select revolving facility.
At June 30, 2020, Concentra Inc. did not have any borrowingsIn order to mitigate our exposure to rising interest rates, we entered into an interest rate cap transaction to limit our 1-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding under the Concentra-JPM revolving facility.
Select term loan. The agreement became effective on March 31, 2021 and applies to interest payments from and including April 30, 2021 through September 30, 2024. As of June 30, 2020, each2021, the 1-month LIBOR rate was 0.10%. A 0.25% increasechange in market interest rates willwould impact the interest expense on our variable rate debt by $5.3 million per annum.until 1-month LIBOR exceeds 1.0%, at which time the impact of increases in 1-month LIBOR on our interest expense will be mitigated in part by the interest rate cap, as described further in Note 9 – Interest Rate Cap of the notes to our condensed consolidated financial statements included herein.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, as of June 30, 2020,2021, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the second quarter ended June 30, 2020,2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations relatedRefer to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations,“Litigation” section contained within Note 14 – Commitments and liquidity.
To address claims arising outContingencies of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of upnotes to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has designed a separate insurance program that responds to the risks of the specific joint venture. The Company’s joint ventures are insured under a master program with an annual aggregate limit of up to $80.0 million, subject to a sublimit aggregate ranging from $23.0 million to $33.0 million for each specific joint venture. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on itsour condensed consolidated financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc., Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff-relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH-Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena.On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company has produced documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
Ann Arbor Complaint.On May 12, 2020, the United States District Court for the Eastern District of Michigan unsealed qui tam Complaints in United States of America and State of Michigan ex rel. Neal Elkin v. Select Medical Holdings Corp., Select Medical, and Select Specialty Hospital – Ann Arbor, Inc. (“SSH-Ann Arbor”), No. 12-cv-13984. An initial Complaint was filed under seal in September 2012 and a First Amended Complaint was filed under seal in September 2019. Both Complaints were unsealed after the United States and State of Michigan filed a Notice of Election to Decline Intervention in May 2020. In the First Amended Complaint, the plaintiff-relator, a physician formerly practicing at SSH-Ann Arbor, alleges that the defendants had a policy to keep respiratory patients on ventilators longer than medically necessary in order to increase reimbursement, and that, after he complained of this practice, SSH-Ann Arbor retaliated by refusing to assign new patients to him. The First Amended Complaint has not yet been served on the defendants. If the plaintiff-relator serves the First Amended Complaint and pursues this action, the Company intends to vigorously defend this action; however, at this time the Company is unable to predict the timing and outcome of this matter.statements included herein.
ITEM 1A. RISK FACTORS
TheThere have been no material changes from our risk factors set forthas previously reported in this report update, and should be read together with, the risk factors discussed in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 20192020 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
Risks Related to Our Business
The unpredictable effects of the COVID-19 pandemic, including the duration and extent of disruption on our operations, creates significant uncertainties about our future operating results and financial condition.
The extent to which the COVID-19 pandemic continues to disrupt our business and results of operations, financial position, and cash flows will depend on a number of evolving factors and future developments that we are not able to predict, including, but not limited to, the duration of the outbreak; further actions by governmental authorities and the private sector to limit the spread of COVID-19; continued encouragement to social distance; and the economic impact on our patients and the communities we serve as a result of containment efforts. The adverse impacts of COVID-19 on our business may also exacerbate other risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
Our hospitals may experience declines in their occupancy in future months in order protect both our patients and staff members and to prevent the spread of COVID-19 within our hospitals. Our rehabilitation hospitals may experience declines in patient volume if governmental authorities and health departments continue to suspend or resume suspension of elective surgeries at hospitals and other facilities. Our critical illness recovery hospitals and rehabilitation hospitals may experience constrained staffing levels and increased operating costs resulting from increased usage of contract clinical labor due to the overwhelming need for healthcare professionals, particularly in areas which are heavily impacted by the pandemic. Our hospitals may also experience increased operating costs resulting from shortages of medical supplies, including personal protective equipment, and supply chain disruptions.
In our outpatient rehabilitation clinics and Concentra centers, we may continue to experience declines in demand for our services if governmental authorities continue to mandate or resume mandates requiring the temporary closure of non-essential and non-life sustaining businesses. Our outpatient rehabilitation clinics may experience reductions in patient volume if governmental authorities and health departments continue to suspend or resume suspension of elective surgeries which would typically result in a patient seeking outpatient services and if the operations of our referral sources experience disruption as a result of the COVID-19 pandemic. Our clinics may continue to experience a decline in workers’ compensation injury visits as a result of business closures and our Concentra centers may continue to experience a reduction in workers’ compensation and employer services visits as a result of businesses furloughing their workforce and temporarily ceasing and reducing operations.
Our future results of operations and financial condition depend upon, among other things, the operating costs we face and the demand for our services. To the extent that we face increased operating costs and declines in demand for our services as a result of the adverse impacts of COVID-19, our ability to comply with financial covenants and obligations under the Select credit facilities, the Concentra-JPM credit facilities and the indenture governing our senior notes in future periods, as well as our ability to pay amounts due to WCAS and the other members of Concentra Group Holdings Parent or DHHC in connection with their Put Right (as defined below), if exercised, may be adversely affected. Risks related to our capital structure are described further in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program, which has been extended until December 31, 2020,2021, will remain in effect until then unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate.
The following table provides information regarding repurchases of our common stock during the three months ended June 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs |
April 1 - April 30, 2020 | | 46,955 | | | $ | 15.41 | | | — | | | $ | 143,394,863 | |
May 1 - May 31, 2020 | | — | | | — | | | — | | | 143,394,863 | |
June 1 - June 30, 2020 | | — | | | — | | | — | | | 143,394,863 | |
Total | | 46,955 | | | $ | 15.41 | | | — | | | $ | 143,394,863 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs |
April 1 – April 30, 2021 | | — | | | $ | — | | | — | | | $ | 143,394,863 | |
May 1 – May 31, 2021 | | 42,250 | | | 38.10 | | | — | | | 143,394,863 | |
June 1 – June 30, 2021 | | — | | | — | | | — | | | 143,394,863 | |
Total | | 42,250 | | | $ | 38.10 | | | — | | | $ | 143,394,863 | |
(1) Represents common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| | | | | | | | |
Number | | Description |
10.1 | | First Amendment No. 5, dated June 2, 2021, to Leasethe Credit Agreement, dated March 6, 2017, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other lenders and issuing banks party thereto, as amended by Amendment No. 1, dated as of April 24, 2020, between 225 Grandview Investors, LLC and Select Medical Corporation. |
10.2 | | Third Addendum to Lease Agreement,March 22, 2018, Amendment No. 2, dated as of May 5, 2020, between Old Gettysburg Associates III, LPOctober 26, 2018, Amendment No. 3, dated as of August 1, 2019 and Select Medical Corporation.Amendment No. 4, dated as of December 10, 2019 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on June 4, 2021). |
31.1 | | |
31.2 | | |
32.1 | | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| SELECT MEDICAL HOLDINGS CORPORATION |
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| By: | /s/ Martin F. Jackson |
| | Martin F. Jackson |
| | Executive Vice President and Chief Financial Officer |
| | (Duly Authorized Officer) |
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| By: | /s/ Scott A. Romberger |
| | Scott A. Romberger |
| | Senior Vice President, Chief Accounting Officer and Controller |
| | (Principal Accounting Officer) |
Dated: July 30, 2020August 5, 2021