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SELECT MEDICAL HOLDINGS CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read this discussion together with the consolidated financial
statements and accompanying notes included elsewhere herein.
This section of this 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
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 inthe United States . As ofDecember 31, 2022 , we had operations in 46 states and theDistrict of Columbia . We operated 103 critical illness recovery hospitals in 28 states, 31 rehabilitation hospitals in 12 states, 1,928 outpatient rehabilitation clinics in 39 states and theDistrict of Columbia , 540 occupational health centers in 41 states, and 147 onsite clinics at employer worksites as ofDecember 31, 2022 . Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and theConcentra segment. We had revenue of$6,333.5 million for the year endedDecember 31, 2022 . Of this total, we earned approximately 35% of our revenue from our critical illness recovery hospital segment, approximately 14% from our rehabilitation hospital segment, approximately 18% from our outpatient rehabilitation segment, and approximately 27% from ourConcentra 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. OurConcentra 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. 53
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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 segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted inthe United States of America ("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 following table reconciles net income and income from operations to Adjusted
EBITDA and should be referenced when we discuss Adjusted EBITDA.
For the Year Ended December 31,
2020 2021 2022
(in thousands)
Net income $ 344,606 $ 499,949 $ 198,026
Income tax expense 111,867 129,773 62,553
Interest expense 153,011 135,985 169,111
Interest income - (5,350) -
Gain on sale of businesses (12,387) (2,155) -
Equity in earnings of unconsolidated subsidiaries (29,440) (44,428) (26,407)
Income from operations 567,657 713,774 403,283
Stock compensation expense:
Included in general and administrative 22,053 24,598 30,555
Included in cost of services 5,197 6,342 7,200
Depreciation and amortization 205,659 202,645 205,825
Adjusted EBITDA $ 800,566 $ 947,359 $ 646,863
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Effects of the COVID-19 Pandemic on our Results of Operations
The COVID-19 pandemic caused disruptions in each of our segments. These disruptions were most significant within our outpatient rehabilitation andConcentra segments, both of which experienced significant declines in patient volume during the year endedDecember 31, 2020 . Beginning inMarch 2021 , these segments began experiencing patient visit volumes which approximated or exceeded the levels experienced in the months prior to the widespread emergence of COVID-19 inthe United States . As illustrated in the tables below, which present revenue and certain operating statistics for each of our segments for the years endedDecember 31, 2022 , 2021, and 2020 as well as the comparable pre-COVID-19 pandemic period in 2019, our revenue and patient volume were only temporarily impacted by the effects of COVID-19 pandemic. Our businesses have, however, experienced other challenges exacerbated by the pandemic, including constrained staffing due to a shortage of healthcare workers, an increased usage of high-cost contract clinical workers, and increased costs associated with retaining existing and recruiting new employees, which have caused significant increases in our labor costs. The effects of these challenges and other changes in the business environment on our segment operating results are described further under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations." Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Operating Statistics" for a discussion regarding the uses and calculations of the metrics provided below. Critical Illness Recovery Hospital Year Ended December 31, 2019 2020 2021 2022 Revenue (in thousands)$ 1,836,518 $ 2,077,499 $ 2,246,772 $ 2,234,132 Patient Days 1,038,361 1,111,756 1,133,039 1,127,911 Occupancy Rate 68 % 71 % 71 % 69 % Number of Hospitals(1) 100 99 104 103 Rehabilitation Hospital Year Ended December 31, 2019 2020 2021 2022 Revenue (in thousands)$ 670,971 $ 734,673 $ 849,340 $ 916,763 Patient Days 353,031 370,833 414,701 430,547 Occupancy Rate 76 % 78 % 83 % 85 % Number of Hospitals(1) 19 19 20 20 Outpatient Rehabilitation Year Ended December 31, 2019 2020 2021 2022 Revenue (in thousands)$ 1,046,011 $ 919,913 $ 1,084,361 $ 1,125,282 Visits 8,719,282 7,593,344 9,193,624 9,573,980 Working Days(2) 255 256 254 255 Concentra Year Ended December 31, 2019 2020 2021 2022 Revenue (in thousands)$ 1,628,817 $ 1,501,434 $ 1,732,041 $ 1,724,359 Visits 12,068,865 10,627,904 12,052,724 12,579,468 Working Days(2) 254 255 254 255
_______________________________________________________________________________ (1) Represents the number of hospitals included in our consolidated financial results at the end of each period presented and does not include the managed hospitals in which we have a minority ownership interest.
(2) Represents the number of days in which normal business operations were
conducted during the periods presented.
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Summary Financial Results
Net income was$198.0 million ,$499.9 million , and$344.6 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively. Net income included pre-tax gains on sales of businesses of$2.2 million and$12.4 million during the years endedDecember 31, 2021 and 2020, respectively.
The following tables reconcile our segment performance measures to our
consolidated operating results for the years ended
2020:
For the Year Ended
Critical Illness Rehabilitation Outpatient Concentra Other Total
Recovery Hospital Hospital Rehabilitation
(in thousands)
Revenue $ 2,234,132 $ 916,763 $ 1,125,282 $ 1,724,359 $ 333,002 $ 6,333,538
Operating expenses (2,127,233) (718,970) (1,023,422) (1,392,475) (491,096) (5,753,196)
Depreciation and amortization (61,565) (27,814) (32,663) (73,667) (10,116) (205,825)
Other operating income 4,445 241 - 312 23,768 28,766
Income (loss) from operations 49,779 170,220 69,197 258,529 (144,442) 403,283
Depreciation and amortization 61,565 27,814 32,663 73,667 10,116 205,825
Stock compensation expense - - - 2,141 35,614 37,755
Adjusted EBITDA $ 111,344 $ 198,034 $ 101,860 $ 334,337 $ (98,712) $ 646,863
Adjusted EBITDA margin 5.0 % 21.6 % 9.1 % 19.4 % N/M 10.2 %
For the Year Ended December 31, 2021
Critical Illness Rehabilitation Outpatient Concentra Other Total
Recovery Hospital Hospital Rehabilitation
(in thousands)
Revenue $ 2,246,772 $ 849,340 $ 1,084,361 $ 1,732,041 $ 292,001 $ 6,204,515
Operating expenses (1,998,660) (664,636) (946,086) (1,379,566) (443,176) (5,432,124)
Depreciation and amortization (53,094) (27,677) (29,592) (82,210) (10,072) (202,645)
Other operating income 19,881 - - 34,999 89,148 144,028
Income (loss) from operations 214,899 157,027 108,683 305,264 (72,099) 713,774
Depreciation and amortization 53,094 27,677 29,592 82,210 10,072 202,645
Stock compensation expense - - - 2,142 28,798 30,940
Adjusted EBITDA $ 267,993 $ 184,704 $ 138,275 $ 389,616 $ (33,229) $ 947,359
Adjusted EBITDA margin 11.9 % 21.7 % 12.8 % 22.5 % N/M 15.3 %
For the Year Ended December 31, 2020
Critical Illness Rehabilitation Outpatient Concentra Other Total
Recovery Hospital Hospital Rehabilitation
(in thousands)
Revenue $ 2,077,499 $ 734,673 $ 919,913 $ 1,501,434 $ 298,194 $ 5,531,713
Operating expenses (1,735,072) (581,470) (840,749) (1,252,200) (438,918) (4,848,409)
Depreciation and amortization (51,531) (27,727) (29,009) (87,865) (9,527) (205,659)
Other operating income - - - 1,146 88,866 90,012
Income (loss) from operations 290,896 125,476 50,155 162,515 (61,385) 567,657
Depreciation and amortization 51,531 27,727 29,009 87,865 9,527 205,659
Stock compensation expense - - - 2,512 24,738 27,250
Adjusted EBITDA $ 342,427 $ 153,203 $ 79,164 $ 252,892 $ (27,120) $ 800,566
Adjusted EBITDA margin 16.5 % 20.9 % 8.6 % 16.8 % N/M 14.5 %
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The following tables summarize the changes in our segment performance measures
for the year-to-date periods specified below.
2022 Compared to 2021
Critical Illness Outpatient
Recovery Rehabilitation Hospital Rehabilitation Concentra Other Total
Hospital
Change in revenue (0.6) % 7.9 % 3.8 % (0.4) % 14.0 % 2.1 %
Change in income (loss) from
operations (76.8) % 8.4 % (36.3) % (15.3) % N/M (43.5) %
Change in Adjusted EBITDA (58.5) % 7.2 % (26.3) % (14.2) % N/M (31.7) %
2021 Compared to 2020
Critical Illness Outpatient
Recovery Rehabilitation Hospital Rehabilitation Concentra Other Total
Hospital
Change in revenue 8.1 % 15.6 % 17.9 % 15.4 % (2.1) % 12.2 %
Change in income (loss) from
operations (26.1) % 25.1 % 116.7 % 87.8 % N/M 25.7 %
Change in Adjusted EBITDA (21.7) % 20.6 % 74.7 % 54.1 % N/M 18.3 %
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N/M Not meaningful. Significant Events Dividend Payments OnFebruary 17, 2022 ,May 5, 2022 ,August 2, 2022 , andNovember 2, 2022 , our board of directors declared cash dividends, each in the amount of$0.125 per share. Cash dividends totaling$64.6 million were paid during the year endedDecember 31, 2022 . Financing Transactions OnFebruary 21, 2023 , Select entered into Amendment No. 6 to the credit agreement. Amendment No. 6 extended the maturity date on$530.0 million of the total borrowing capacity of$650.0 million under the revolving facility toMarch 6, 2025 ; however, in the event that our term loan is not refinanced byJanuary 3, 2025 , the maturity date for those revolving borrowings will beJanuary 3, 2025 . 57
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Regulatory Changes
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 theDepartment of Health and Human Services and CMS. Revenues from providing services to patients covered under the Medicare program represented approximately 25%, 23%, and 23% of our revenue for the years endedDecember 31, 2020 , 2021, and 2022, respectively. The Medicare program reimburses various types of providers using different payment methodologies. Those payment methodologies are complex and are described elsewhere in this report under "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.
Federal Health Care Program Changes in Response to the COVID-19 Pandemic
OnJanuary 31, 2020 , 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 inthe United States . The HHS Secretary renewed the public health emergency determination for 90-day periods effective onApril 26, 2020 ,July 25, 2020 ,October 23, 2020 ,January 21, 2021 ,April 21, 2021 ,July 20, 2021 ,October 18, 2021 ,January 16, 2022 ,April 16, 2022 ,July 15, 2022 ,October 13, 2022 , andJanuary 11, 2023 . OnJanuary 30, 2023 , the Biden administration announced that it intends to extend the public health emergency declaration untilMay 11, 2023 , and end the emergency declaration on that date. OnFebruary 9, 2023 , the HHS Secretary issued a final 90-day renewal of the public health emergency, effective onFebruary 11, 2023 , and confirmed that it would end onMay 11, 2023 . OnMarch 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 Medicare, Medicaid, and the CHIP program 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.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.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. The Health Extenders, Improving Access to Medicare, Medicaid, and CHIP, and Strengthening Public Health Act of 2022 extended this expansion of eligible practitioners for telehealth services untilDecember 31, 2024 . 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.
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.
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.
vii.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 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.
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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 onMarch 6, 2020 . In the Health Extenders, Improving Access to Medicare, Medicaid, and CHIP, and Strengthening Public Health Act of 2022,Congress extended several telehealth flexibilities that were scheduled to expire 151 days after the end of the COVID-19 public health emergency, including the expansion of permitted originating sites for telehealth, expansion of eligible practitioners for furnishing telehealth, and coverage of audio-only telehealth services. As a result, these flexibilities will remain in effect throughDecember 31, 2024 . CMS issued additional waivers to permit more than 150 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 onMarch 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 thePublic Health and Social Services Emergency Fund to be used for preventing, preparing, and responding to COVID-19 and for reimbursing "eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus." The 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 began distributing these funds to providers inApril 2020 . HHS initially allocated funds for a general distribution to providers that received Medicare fee-for-service payments in 2019. Later general distributions required providers to submit an application to HHS. Other funding was allocated for targeted distributions for specific provider types. Recipients of payments must report data to HHS on the use of the funds via an online portal by specific deadlines established by HHS based on the date of the payment. 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 submitted to HHS in their applications for payments.Additional Public Health and Social Services Emergency Fund distributions are not expected. 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. 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, 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 10.25%). CMS began recouping advance payments onMarch 30, 2021 , but the actual date for each provider is based on the first anniversary of when the provider received the first payment. CMS publishes repayment data every six months. iii.Temporary suspension of the 2% cut to Medicare payments due to sequestration so that, for the period ofMay 1, 2020 , toDecember 31, 2020 , the Medicare program would be exempt from any sequestration order. The Consolidated Appropriations Act, 2021, extended this temporary suspension of the 2% sequestration cut throughMarch 31, 2021 . The Medicare sequester relief bill, which became Public Law 117-7, extended the temporary suspension of the sequestration cut again, throughDecember 31, 2021 . To pay for the continued suspension of the sequestration cuts throughDecember 31, 2021 ,Congress increased the sequestration cut that will apply in fiscal year 2030. The Protecting Medicare and American Farmers from Sequester Cuts Act, signed into law byPresident Biden onDecember 10, 2021 , further extended the suspension of the sequestration cut throughMarch 31, 2022 , and reduced the sequestration cut to 1% fromApril 1, 2022 , throughJune 30, 2022 . The full 2% sequestration cut resumed onJuly 1, 2022 . To pay for this relief,Congress increased the sequestration cut to Medicare payments to 2.25% for the first six months of fiscal year 2030 and to 3% for the final six months of fiscal year 2030. The same legislation defers an across-the-board 4% payment cut due to the American Rescue Plan from the FY 2022 Statutory Pay-As-You-Go ("PAYGO") scorecard to the FY 2023 PAYGO scorecard.Congress subsequently delayed the 4% PAYGO payment cut for an additional two years, through the end of 2024, in the Consolidated Appropriations Act, 2023, Public Law 117-328. 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. 59
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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 IPPS for treating COVID-19
patients.
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 LTCH-PPS. Fiscal Year 2021. OnSeptember 18, 2020 , CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2021 (affecting discharges and cost reporting periods beginning on or afterOctober 1, 2020 throughSeptember 30, 2021 ). Certain errors in the final rule were corrected in a document publishedDecember 7, 2020 . The standard federal rate was set at$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 included a market basket increase of 2.3% with no productivity adjustment. The standard federal rate also included an area wage budget neutrality factor of 1.0016837. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at$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 was set at$29,064 , an increase from the fixed-loss amount in the 2020 fiscal year of$26,552 . Fiscal Year 2022. OnAugust 13, 2021 , CMS published 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 afterOctober 1, 2021 throughSeptember 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. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at$33,015 , an 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 . Fiscal Year 2023. OnAugust 10, 2022 , CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2023 (affecting discharges and cost reporting periods beginning on or afterOctober 1, 2022 , throughSeptember 30, 2023 ). Certain errors in the final rule were corrected in documents publishedNovember 4, 2022 , andDecember 13, 2022 . The standard federal rate for fiscal year 2023 is$46,433 , an increase from the standard federal rate applicable during fiscal year 2022 of$44,714 . The update to the standard federal rate for fiscal year 2023 includes a market basket increase of 4.1%, less a productivity adjustment of 0.3%. The standard federal rate also includes an area wage budget neutrality factor of 1.0004304. As a result of the CARES Act, all LTCH cases are paid at the standard federal rate during the public health emergency. Once the public health emergency ends, which is expected to occur onMay 11, 2023 , 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 is$38,518 , an increase from the fixed-loss amount in the 2022 fiscal year of$33,015 . The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate is$38,788 , an increase from the fixed-loss amount in the 2022 fiscal year of$30,988 . 60
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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 IRF-PPS. Fiscal Year 2021. OnAugust 10, 2020 , CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2021 (affecting discharges and cost reporting periods beginning on or afterOctober 1, 2020 throughSeptember 30, 2021 ). The standard payment conversion factor for discharges for fiscal year 2021 was set at$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 included a market basket increase of 2.4% with no productivity adjustment. CMS decreased the outlier threshold amount for fiscal year 2021 to$7,906 from$9,300 established in the final rule for fiscal year 2020. Fiscal Year 2022. OnAugust 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 afterOctober 1, 2021 throughSeptember 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. Fiscal Year 2023. OnAugust 1, 2022 , CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2023 (affecting discharges and cost reporting periods beginning on or afterOctober 1, 2022 , throughSeptember 30, 2023 ). The standard payment conversion factor for discharges for fiscal year 2023 was set at$17,878 , an increase from the standard payment conversion factor applicable during fiscal year 2022 of$17,240 . The update to the standard payment conversion factor for fiscal year 2023 included a market basket increase of 4.2%, less a productivity adjustment of 0.3%. CMS increased the outlier threshold amount for fiscal year 2023 to$12,526 from$9,491 established in the final rule for fiscal year 2022.
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
The Medicare program reimburses outpatient rehabilitation providers based on the MPFS. Outpatient rehabilitation providers may enroll in Medicare as institutional outpatient rehabilitation facilities (i.e., rehab agencies) or individual physical or occupational therapists in private practice. The majority of our providers are reimbursed through enrolled rehab agencies while the remaining balance of our clinicians are enrolled as individual physical or occupational therapists in private practice. On an annual basis, our provider reimbursement under the MPFS is subject to changes by CMS, which may include adjustments in our reimbursement based on performance under the MIPS, and additional incentives for participation in APMs. Historically, outpatient rehabilitation providers were not eligible to participate in the MIPS program. In 2019, CMS added physical and occupational therapists in private practice to the list of MIPS eligible clinicians. For enrolled therapists in private practice, payments under the MPFS are subject to adjustment in a later year based on their performance in MIPS according to established performance standards. Calendar year 2021 was the first year that payments were adjusted, based upon the therapist's performance under MIPS in 2019. Providers in facility-based outpatient therapy settings, including rehab agencies, are excluded from MIPS eligibility and therefore not subject to this payment adjustment. As required under the MACRA, a 0.0% percent update will be applied each year to the fee schedule payment rates for therapy services provided in 2020 through 2025, subject to adjustments under MIPS and 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. To date, none of our outpatient rehabilitation providers participate in qualified APMs. In the 2020 MPFS final rule, CMS revised coding, documentation guidelines, and increased the valuation for the E/M office visit codes, beginning in 2021. Because the MPFS is statutorily required to be budget-neutral, any revaluation of E/M services that will increase spending by more than$20 million requires a budget neutrality adjustment. To increase values for the E/M codes while maintaining budget neutrality under the fee schedule, CMS cut the values of other codes to make up the difference, beginning in 2021. 61
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In the 2021 MPFS 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 received an estimated 3.6% decrease in payment from Medicare in calendar year 2021. The Consolidated Appropriations Act, 2021, provided relief in the form of a one-time 3.75% increase in payments in calendar year 2021 for therapy services and other services paid under the MPFS. In the calendar year 2022 MPFS final rule, CMS announced that Medicare payments for the therapy specialty were expected to decrease 1% in 2022. After CMS issued the final rule,Congress passed the Protecting Medicare and American Farmers from Sequester Cuts Act, which provided in Section 3 a one-time 3% increase in payments in calendar year 2022 to offset most of the 3.75% cut to payments for therapy services and other services paid under the MPFS. In the final rule, CMS also adopted its plan to transition the MIPS program to MVPs. CMS will begin the transition to MVPs in 2023 with an initial set of MVPs in which reporting is voluntary. CMS plans to develop more MVPs from 2024 to 2027 and is considering that MVP reporting would become mandatory in 2028. In the calendar year 2023 MPFS final rule, CMS announced that it calculated the payment rates for the MPFS as if the 3% payment increase in calendar year 2022 from the Protecting Medicare and American Farmers from Sequester Cuts Act was never applied. The statute stated that the 3% payment increase for 2022 shall not be taken into account in determining the payment rates for subsequent years. As a result, physician fee schedule payments were expected to decrease 4.5% in 2023. CMS stated in the final rule that it expects that its policies for 2023 would result in a 1% decrease in Medicare payments for the therapy specialty, but this decrease did not account for the effects of the end of the 3% payment increase from 2022. However,Congress passed the Consolidated Appropriations Act, 2023, which requires the Secretary to increase 2023 physician fee schedule payments by 2.5% and 2024 payments by 1.25%. As a result, payments under the 2023 MPFS physician fee schedule will decrease by 2% in 2023. Medicare payments were also due to decrease by an additional 4% in 2023 due to mandatory cuts required under the PAYGO Act of 2010. The Consolidated Appropriations Act, 2023, further delays PAYGO until 2025. The calendar year 2023 final rule also includes further development of MVPs. First, CMS revised the first set of seven MVPs that it adopted in the calendar year 2022 final rule. CMS removed certain improvement activities from these seven MVPs and added other quality measures for voluntary reporting by participants in these MVPs. In addition, CMS added five new MVPs that will be available for voluntary reporting for the calendar year 2023 performance period.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational
Therapy Assistants
In the MPFS final rule for calendar year 2019, CMS established two new modifiers (CQ and CO) to identify services furnished in whole or in part by PTAs or 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 afterJanuary 1, 2020 include the appropriate modifier. In the final 2020 MPFS 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, theCQ 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 two 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 MPFS final rule, CMS implemented the final part of the requirements in the Bipartisan Budget Act of 2018 regarding PTA and OTA services. For dates of service on and afterJanuary 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 modified the de minimis standard for calendar year 2022. Specifically, CMS will allow a timed service to be billed without theCQ 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. 62
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Critical Accounting Estimates
Revenue Recognition and Accounts Receivable
Our principal revenue source comes from providing healthcare services to
patients. Patient service revenues are recognized at an amount equal to the
consideration we expect to be entitled to in exchange for providing healthcare
services to our patients. Revenue earned from these services is variable in
nature, as we are required to make judgments that impact the transaction price.
We determine the transaction price for services provided to patients who are Medicare beneficiaries using Medicare's prospective payment systems and other payment methods. The expected payment is determined by the level of clinical services provided and is sensitive to the patient's length of stay. Additionally, we are paid by various other non-Medicare payor sources including, but not limited to, insurance companies (including Medicare Advantage plans), state Medicaid programs, workers' compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients themselves. The transaction price for services provided to non-Medicare patients include amounts prescribed by state and federal fee schedules, negotiated contracted amounts, or usual and customary amounts associated with the specific payor or based on the service provided. We apply a portfolio approach in determining revenues for certain homogeneous non-Medicare patient populations. There is variability in the transaction price for services provided to our patients, as the transaction price is impacted by several factors, such as the patient's condition and length of stay, which in turn impact the payment we expect to receive for providing such services. Variable consideration included in the transaction price is inclusive of our estimates of implicit discounts and other adjustments related to timely filing and documentation denials, out of network adjustments, and medical necessity denials, which are estimated using our historical experience. We are also subject to regular post-payment inquiries, investigations, and audits of the claims we submit for services provided. Some claims can take several years for resolution and may result in adjustments to the transaction price. Management includes in its estimates of the transaction price its expectations for these types of adjustments such that the amount of cumulative revenue recognized will not be subject to significant reversal in future periods. Historically, adjustments arising from a change in the transaction price have not been significant. Our accounts receivable is reported at an amount equal to the amount we expect to collect for providing healthcare services to our patients. Because our accounts receivable is typically paid for by highly-solvent, creditworthy payors, such as Medicare, other governmental programs, and highly-regulated commercial insurers on behalf of the patient, our credit losses are infrequent and insignificant in nature; as such, we generally do not recognize allowances for expected credit losses. Insurance Risk Programs Under a number of our insurance programs, which include our employee health insurance, workers' compensation, and professional malpractice liability insurance programs, we are liable for a portion of our losses before we can attempt to recover from the applicable insurance carrier. We accrue for losses under an occurrence-based approach, whereby we estimate the losses that will be incurred in a respective accounting period. The estimate of losses includes actuarial loss projections of both known claims and incurred but not reported claims. These estimates are based on specific claim facts, claim frequency and severity, payment patterns for historical claims, and estimates of fees for outside counsel. In addition to the actuarial loss projections, insurance premiums and out-of-pocket expenses for the administration and analysis of claims are included in the estimate of losses accrued in a respective accounting period. We monitor these programs quarterly and revise our estimates as necessary to take into account additional information. We recorded a liability of$173.5 million and$192.3 million for our estimated losses under these insurance programs atDecember 31, 2021 and 2022, respectively. We also recorded insurance proceeds receivable of$14.5 million and$13.1 million atDecember 31, 2021 and 2022, respectively, for liabilities which exceed our deductibles and self-insured retention limits and are recoverable through our insurance policies. 63
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We operate four reporting units which include the critical illness recovery hospital reporting unit, the rehabilitation hospital reporting unit, the outpatient rehabilitation reporting unit, and theConcentra reporting unit. We assign goodwill to our reporting units based upon the specific nature of the business acquired or, when a business combination contains business components related to more than one reporting unit, goodwill is assigned to each reporting unit based upon an allocation determined by the relative fair values of the business acquired. When we dispose of a business, we allocate a portion of the reporting unit's goodwill to that business based on the relative fair values of the portion of the reporting unit being disposed of and the portion of the reporting unit remaining. We evaluate our reporting units on an annual basis and, if our reporting units are reorganized, we reassign goodwill based on the relative fair values of the new reporting units. We have elected to perform our annual goodwill impairment assessments as ofOctober 1 . We also test goodwill for impairment when events or conditions occur that might suggest a possible impairment. These events or conditions could include a significant change in the business environment, the regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. We performed quantitative impairment assessments as ofOctober 1, 2022 , to assess the impact of rising interest rates and rising costs, particularly our labor costs, on the estimated fair values our reporting units. We considered both the income and market approaches in determining the fair value of our reporting units. Included in the income approach, specific for each reporting unit, are assumptions regarding revenue growth rates, future Adjusted EBITDA margin estimates, the industry's weighted average cost of capital, and industry specific, market observable implied Adjusted EBITDA multiples. We also include estimated residual values at the end of the forecast period and future capital expenditure requirements. In establishing our assumptions, we consider current industry and market conditions, historical financial performance, including our revenue, earnings, and operating cash flow growth trends, cost factors, including the effects of inflation and rising prices, and the regulatory environment, including reimbursement and compliance requirements such as those that exist under the Medicare program. If any one of the above assumptions or judgments used to estimate the fair value of our reporting units fail to materialize, the resulting decline in our estimated fair value could result in an impairment charge to the goodwill associated with any one of the reporting units. Our annual assessment did not indicate that goodwill impairment was likely for any of our reporting units. We did not identify any goodwill impairment events during the quarter endedDecember 31, 2022 . We have recorded total goodwill of$3.5 billion atDecember 31, 2022 , of which$1.2 billion related to our critical illness recovery hospital reporting unit,$442.2 million related to our rehabilitation hospital reporting unit,$665.0 million related to our outpatient rehabilitation reporting unit, and$1.2 billion related to theConcentra reporting unit. 64
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Operating Statistics
The following table sets forth operating statistics for each of our 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.
For the Year Ended
2020 2021 2022
Critical illness recovery hospital data:
Number of consolidated hospitals-start of period(1) 100 99 104
Number of hospitals acquired 1 6 2
Number of hospital start-ups - - 1
Number of hospitals closed/sold (2) (1) (4)
Number of consolidated hospitals-end of period(1) 99 104 103
Available licensed beds(3) 4,362 4,518 4,386
Admissions(3)(4) 37,456 37,921 36,594
Patient days(3)(5) 1,111,756 1,133,039 1,127,911
Average length of stay (days)(3)(6) 30 30 31
Revenue per patient day(3)(7) $ 1,858 $ 1,972 $ 1,973
Occupancy rate(3)(8) 71 % 71 % 69 %
Percent patient days-Medicare(3)(9) 45 % 38 % 39 %
Rehabilitation hospital data:
Number of consolidated hospitals-start of period(1) 19 19 20
Number of hospitals acquired 1 1 -
Number of hospital start-ups - - -
Number of hospitals closed/sold (1) - -
Number of consolidated hospitals-end of period(1) 19 20 20
Number of unconsolidated hospitals managed-end of period(2) 11 10 11
Total number of hospitals (all)-end of period 30 30 31
Available licensed beds(3) 1,311 1,361 1,391
Admissions(3)(4) 25,081 28,868 29,736
Patient days(3)(5) 370,833 414,701 430,547
Average length of stay (days)(3)(6) 15 14 15
Revenue per patient day(3)(7) $ 1,793 $ 1,868 $ 1,953
Occupancy rate(3)(8) 78 % 83 % 85 %
Percent patient days-Medicare(3)(9) 48 % 49 % 48 %
Outpatient rehabilitation data:
Number of consolidated clinics-start of period 1,461 1,503 1,572
Number of clinics acquired 17 33 30
Number of clinic start-ups 55 53 44
Number of clinics closed/sold (30) (17) (24)
Number of consolidated clinics-end of period 1,503 1,572 1,622
Number of unconsolidated clinics managed-end of period 285 309 306
Total number of clinics (all)-end of period 1,788 1,881 1,928
Number of visits(3)(10) 7,593,344 9,193,624 9,573,980
Revenue per visit(3)(11) $ 104 $ 102 $ 103
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For the Year Ended
2020 2021 2022
Concentra data:
Number of consolidated centers-start of period 521 517 518
Number of centers acquired 6 6 21
Number of center start-ups 1 2 4
Number of centers closed/sold (11) (7) (3)
Number of consolidated centers-end of period 517 518 540
Number of onsite clinics operated-end of period 134 134 147
Number of visits(3)(10) 10,627,904 12,052,724 12,579,468
Revenue per visit(3)(11) $ 123 $ 125 $ 127
_______________________________________________________________________________
(1)Represents the number of hospitals included in our consolidated financial
results at the end of each period presented.
(2)Represents the number of hospitals which are managed by us at the end of each
period presented. We have minority ownership interests in these businesses.
(3)Data excludes locations managed by the Company. For purposes of our
segment, onsite clinics are excluded.
(4)Represents the number of patients admitted to our hospitals during the
periods presented.
(5)Each patient day represents one patient occupying one bed for one day during
the periods presented.
(6)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. (7)Represents the average amount of revenue recognized for each patient day. Revenue 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. (8)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. (9)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.
(10)Represents the number of visits in which patients were treated at our
outpatient rehabilitation clinics and
presented. COVID-19 screening and testing services provided by our
segment are not included in these figures.
(11)Represents the average amount of revenue recognized for each patient visit. Revenue 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 ourConcentra segment, patient service revenue does not include onsite clinics or revenues generated from COVID-19 screening and testing services. 66
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Results of Operations
The following table outlines selected operating data as a percentage of revenue
for the periods indicated:
For the Year Ended
2020 2021 2022 Revenue 100.0 % 100.0 % 100.0 % Costs and expenses: Cost of services, exclusive of depreciation and amortization(1) 85.2 85.2 88.4 General and administrative 2.5 2.4 2.4 Depreciation and amortization 3.6 3.2 3.3 Total costs and expenses 91.3 90.8 94.1 Other operating income 1.6 2.3 0.5 Income from operations 10.3 11.5 6.4 Equity in earnings of unconsolidated subsidiaries 0.5 0.7 0.4 Gain on sale of businesses 0.2 0.0 - Interest income - 0.1 - Interest expense (2.7) (2.2) (2.7) Income before income taxes 8.3 10.1 4.1 Income tax expense 2.1 2.0 1.0 Net income 6.2 8.1 3.1 Net income attributable to non-controlling interests 1.5 1.6 0.6
Net income attributable to
Corporation
4.7 % 6.5 % 2.5 %
_______________________________________________________________________________
(1)Cost of services includes salaries, wages and benefits, operating supplies,
lease and rent expense, and other operating costs.
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The following table summarizes selected financial data by segment for the
periods indicated:
Year Ended December 31,
% Change % Change
2020 2021 2022 2020 - 2021 2021 - 2022
(in thousands, except percentages)
Revenue:
Critical illness recovery hospital $ 2,077,499 $ 2,246,772 $ 2,234,132 8.1 % (0.6) %
Rehabilitation hospital 734,673 849,340 916,763 15.6 7.9
Outpatient rehabilitation 919,913
1,084,361 1,125,282 17.9 3.8 Concentra 1,501,434 1,732,041 1,724,359 15.4 (0.4) Other(1) 298,194 292,001 333,002 (2.1) 14.0Total Company $ 5,531,713 $ 6,204,515 $ 6,333,538 12.2 % 2.1 % Income (loss) from operations:(2) Critical illness recovery hospital$ 290,896 $ 214,899 $ 49,779 (26.1) % (76.8) % Rehabilitation hospital 125,476 157,027 170,220 25.1 8.4 Outpatient rehabilitation 50,155 108,683 69,197 116.7 (36.3) Concentra 162,515 305,264 258,529 87.8 (15.3) Other(1) (61,385) (72,099) (144,442) N/M N/MTotal Company $ 567,657 $ 713,774 $ 403,283 25.7 % (43.5) % Adjusted EBITDA:(2) Critical illness recovery hospital$ 342,427 $ 267,993 $ 111,344 (21.7) % (58.5) % Rehabilitation hospital 153,203 184,704 198,034 20.6 7.2 Outpatient rehabilitation 79,164 138,275 101,860 74.7 (26.3) Concentra 252,892 389,616 334,337 54.1 (14.2) Other(1) (27,120) (33,229) (98,712) N/M N/MTotal Company $ 800,566 $ 947,359 $ 646,863 18.3 % (31.7) % Adjusted EBITDA margins:(2) Critical illness recovery hospital 16.5 % 11.9 % 5.0 % Rehabilitation hospital 20.9 21.7 21.6 Outpatient rehabilitation 8.6 12.8 9.1 Concentra 16.8 22.5 19.4 Other(1) N/M N/M N/MTotal Company 14.5 % 15.3 % 10.2 % Total assets: Critical illness recovery hospital$ 2,213,892 $ 2,304,116 $ 2,484,542 Rehabilitation hospital 1,148,617 1,194,136 1,200,767 Outpatient rehabilitation 1,302,110 1,348,316 1,371,123 Concentra 2,400,646 2,275,345 2,281,647 Other(1) 590,134 238,258 327,214Total Company $ 7,655,399 $ 7,360,171 $ 7,665,293 Purchases of property and equipment: Critical illness recovery hospital$ 49,726 $ 65,690 $ 79,524 Rehabilitation hospital 7,571 13,003 14,426 Outpatient rehabilitation 28,876 36,301 40,677 Concentra 50,114 46,787 45,983 Other(1) 10,153 18,756 9,762Total Company $ 146,440 $ 180,537 $ 190,372
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(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)For the years endedDecember 31, 2022 , 2021, and 2020, we recognized other operating income of$28.8 million ,$144.0 million , and$90.0 million , respectively. The impact of this income on the operating results of our segments and other activities is outlined within the tables presented under "Summary Financial Results." N/M Not meaningful. 68
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Year Ended
For the year endedDecember 31, 2022 , we had revenue of$6,333.5 million and income from operations of$403.3 million , as compared to revenue of$6,204.5 million and income from operations of$713.8 million for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , Adjusted EBITDA was$646.9 million , with an Adjusted EBITDA margin of 10.2%, as compared to Adjusted EBITDA of$947.4 million and an Adjusted EBITDA margin of 15.3% in the prior year. The most significant contributor to the decline in our financial performance for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was an increase in labor costs in our critical illness recovery hospital segment. Shortages in qualified healthcare professionals, particularly critical care nurses, resulted in an increased utilization of agency staffing at higher-than-historical rates. In an effort to reduce our reliance on agency staffing, we increased our recruitment of full-time staff in 2022, which resulted in increased sign-on and incentive bonuses and increased training and orientation costs. The Company has also focused on improving the retention of existing staff. These investments in our personnel began to contribute to improvements in the Adjusted EBITDA margin for the critical illness recovery hospital segment in the fourth quarter of 2022 as compared to the first three quarters of the year. Revenue Critical Illness Recovery Hospital Segment. Revenue was$2,234.1 million for the year endedDecember 31, 2022 , compared to$2,246.8 million for the year endedDecember 31, 2021 . Our patient days were 1,127,911 for the year endedDecember 31, 2022 , compared to 1,133,039 patient days for the year endedDecember 31, 2021 . Occupancy in our critical illness recovery hospitals was 69% for the year endedDecember 31, 2022 , compared to 71% for the year endedDecember 31, 2021 . Revenue per patient day was$1,973 for the year endedDecember 31, 2022 , compared to$1,972 for the year endedDecember 31, 2021 . We experienced an increase in our non-Medicare revenue per patient day during the year endedDecember 31, 2022 . Our Medicare revenue per patient day decreased during the year endedDecember 31, 2022 as a result of a decline in patient acuity, as well as the reinstatement of the 2.0% cut to Medicare payments due to sequestration. Rehabilitation Hospital Segment. Revenue increased 7.9% to$916.8 million for the year endedDecember 31, 2022 , compared to$849.3 million for the year endedDecember 31, 2021 . The increase in revenue was principally due to an increase in revenue per patient day. Our revenue per patient day increased 4.6% to$1,953 for the year endedDecember 31, 2022 , compared to$1,868 for the year endedDecember 31, 2021 . We experienced increases in both our non-Medicare and Medicare revenue per patient day during the year endedDecember 31, 2022 . Our patient days increased 3.8% to 430,547 days for the year endedDecember 31, 2022 , compared to 414,701 days for the year endedDecember 31, 2021 . Occupancy in our rehabilitation hospitals increased to 85% for the year endedDecember 31, 2022 , compared to 83% for the year endedDecember 31, 2021 . Outpatient Rehabilitation Segment. Revenue increased 3.8% to$1,125.3 million for the year endedDecember 31, 2022 , compared to$1,084.4 million for the year endedDecember 31, 2021 . The increase in revenue was primarily attributable to patient visits, which increased 4.1% to 9,573,980 for the year endedDecember 31, 2022 , compared to 9,193,624 visits for the year endedDecember 31, 2021 . The increase in visits resulted from the acquisition and development of clinics sinceDecember 31, 2021 , as well as improvement in volume in our clinics which operated during both the years endedDecember 31, 2022 and 2021. Our revenue per visit was approximately$103 for the year endedDecember 31, 2022 , compared to approximately$102 for the year endedDecember 31, 2021 , despite a decrease in Medicare reimbursement rates. Concentra Segment. Revenue was$1,724.4 million for the year endedDecember 31, 2022 , compared to$1,732.0 million for the year endedDecember 31, 2021 . The decrease is attributable to a decline in revenue generated from COVID-19 screening and testing services provided at our centers and onsite clinics located at employer worksites. These services contributed$20.9 million of revenue during the year endedDecember 31, 2022 , compared to$137.6 million during the year endedDecember 31, 2021 . The decline in revenue was partially offset by increases in both revenue per visit and patient visits. Revenue per visit increased to$127 for the year endedDecember 31, 2022 , compared to$125 for the year endedDecember 31, 2021 . We experienced a higher revenue per visit due to increases in the reimbursement rates payable pursuant to certain state fee schedules for workers' compensation visits, as well as increases in our employer services rates, during the year endedDecember 31, 2022 . Our patient visits increased 4.4% to 12,579,468 for the year endedDecember 31, 2022 , compared to 12,052,724 visits for the year endedDecember 31, 2021 . 69
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Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were$5,753.2 million , or 90.8% of revenue, for the year endedDecember 31, 2022 , compared to$5,432.1 million , or 87.6% of revenue, for the year endedDecember 31, 2021 . Our cost of services, a major component of which is labor expense, was$5,600.2 million , or 88.4% of revenue, for the year endedDecember 31, 2022 , compared to$5,285.1 million , or 85.2% of revenue, for the year endedDecember 31, 2021 . The increase in our operating expenses relative to our revenue was principally attributable to the incurrence of additional labor costs and other operating expenses within our critical illness recovery hospital and outpatient rehabilitation segments, as explained further within the "Adjusted EBITDA" discussion. General and administrative expenses were$153.0 million , or 2.4% of revenue, for the year endedDecember 31, 2022 , compared to$147.0 million , or 2.4% of revenue, for the year endedDecember 31, 2021 . Other Operating Income For the year endedDecember 31, 2022 , we had other operating income of$28.8 million , compared to$144.0 million for the year endedDecember 31, 2021 . The other operating income recognized is primarily related to the recognition of payments received under theProvider Relief Fund for health care related expenses and lost revenues attributable to COVID-19. Additionally, during the year endedDecember 31, 2022 , our critical illness recovery hospital segment recognized$4.4 million of other operating income related to the settlement of a business interruption insurance claim. During the year endedDecember 31, 2021 , our critical illness recovery hospital segment recognized$19.9 million of other operating income related to the outcome of litigation with CMS.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA was$111.3 million for the year endedDecember 31, 2022 , compared to$268.0 million for the year endedDecember 31, 2021 . Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 5.0% for the year endedDecember 31, 2022 , compared to 11.9% for the year endedDecember 31, 2021 . The declines in Adjusted EBITDA and Adjusted EBITDA margin during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , were principally due to increased labor costs from our efforts to hire additional full-time staff and improve retention of existing employees. This led to increases in sign-on and incentive bonuses, education and orientation costs, and an increase in administrative nursing hours during the onboarding process. As a result of these hiring efforts, our usage of higher-cost contract labor declined throughout the year endedDecember 31, 2022 . Our contract registered nursing hours as a percentage of our total registered nursing hours were 18.1%, 21.9%, 32.9%, 37.5%, and 37.5% for the three months endedDecember 31, 2022 ,September 30, 2022 ,June 30, 2022 ,March 31, 2022 , andDecember 31, 2021 , respectively. The decrease in our other operating income also contributed to the declines in Adjusted EBITDA and Adjusted EBITDA margin. Our critical illness recovery hospitals segment recognized$4.4 million of other operating income during the year endedDecember 31, 2022 , compared to$19.9 million during the year endedDecember 31, 2021 , as described further above under "Other Operating Income." Rehabilitation Hospital Segment. Adjusted EBITDA increased 7.2% to$198.0 million for the year endedDecember 31, 2022 , compared to$184.7 million for the year endedDecember 31, 2021 . Our Adjusted EBITDA margin for the rehabilitation hospital segment was 21.6% for the year endedDecember 31, 2022 , compared to 21.7% for the year endedDecember 31, 2021 . The increase in Adjusted EBITDA was driven by increases in our revenue per patient day and patient volumes, as described further above under "Revenue." The increase was partially offset by the incurrence of additional labor costs during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . Outpatient Rehabilitation Segment. Adjusted EBITDA was$101.9 million for the year endedDecember 31, 2022 , compared to$138.3 million for the year endedDecember 31, 2021 . Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 9.1% for the year endedDecember 31, 2022 , compared to 12.8% for the year endedDecember 31, 2021 . Our Adjusted EBITDA and Adjusted EBITDA margin were affected by increases in both labor costs and other operating expenses for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The increase in labor costs was attributable to a decrease in clinical productivity, partially due to disruptions in our workforce caused by COVID-19, and increased contract labor usage. The increase in other operating expenses was primarily comprised of travel and other expenses returning to pre-pandemic levels and investments in our electronic medical records system. 70
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Concentra Segment. Adjusted EBITDA was$334.3 million for the year endedDecember 31, 2022 , compared to$389.6 million for the year endedDecember 31, 2021 . Our Adjusted EBITDA margin for theConcentra segment was 19.4% for the year endedDecember 31, 2022 , compared to 22.5% for the year endedDecember 31, 2021 . The declines in Adjusted EBITDA and Adjusted EBITDA margin during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , were primarily caused by a decline in revenue generated from COVID-19 screening and testing services, as discussed above under "Revenue." The decrease in our other operating income also contributed to the declines in Adjusted EBITDA and Adjusted EBITDA margin. OurConcentra segment recognized$0.3 million of other operating income during the year endedDecember 31, 2022 , compared to$35.0 million during the year endedDecember 31, 2021 , as described further above under "Other Operating Income."
Depreciation and Amortization
Depreciation and amortization expense was
2021
Income from Operations For the year endedDecember 31, 2022 , we had income from operations of$403.3 million , compared to$713.8 million for the year endedDecember 31, 2021 . The increase in labor costs and other operating expenses experienced within our critical illness recovery hospital and outpatient rehabilitation segments were the primary cause of the decrease in income from operations, as discussed above under "Adjusted EBITDA." The decrease in our other operating income also contributed to the decline in income from operations. We recognized other operating income of$28.8 million during the year endedDecember 31, 2022 , compared to$144.0 million for the year endedDecember 31, 2021 , as described further under "Other Operating Income."
Equity in Earnings of Unconsolidated Subsidiaries
For the year endedDecember 31, 2022 , we had equity in earnings of unconsolidated subsidiaries of$26.4 million , compared to$44.4 million for the year endedDecember 31, 2021 . The earnings of the rehabilitation businesses in which we are a minority owner were adversely affected by a decrease inProvider Relief Fund payments recognized as income and increases in labor costs and other operating expenses for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . Gain on Sale of Businesses
We recognized a gain of
The gain resulted from the sale of a
Interest
Our term loan is subject to an interest rate cap, which limits the one-month LIBOR rate to 1.0% on$2.0 billion of principal outstanding under the term loan. The one-month LIBOR rate was 4.39% atDecember 31, 2022 , compared to 0.10% atDecember 31, 2021 . The one-month LIBOR rate first exceeded 1.0% inJune 2022 and the interest rate cap has since mitigated our exposure to increases in the one-month LIBOR rate. Interest expense was$169.1 million for the year endedDecember 31, 2022 , compared to$136.0 million for the year endedDecember 31, 2021 . The increase in interest expense was caused by the borrowings we made under our revolving facility during the year endedDecember 31, 2022 , as well an increase in the one-month LIBOR rate, as described further above.
For the year ended
million
Income Taxes
We recorded income tax expense of$62.6 million for the year endedDecember 31, 2022 , which represented an effective tax rate of 24.0%. We recorded income tax expense of$129.8 million for the year endedDecember 31, 2021 , which represented an effective tax rate of 20.6%. For the year endedDecember 31, 2022 , the higher effective tax rate resulted from a greater proportion of our income being generated in states with higher tax rates, the effect of a change inPennsylvania's corporate income tax rate on our net deferred tax asset, and a greater effect of nondeductible expenses on our income before income taxes.
Refer to Note 19 - Income Taxes of the notes to our consolidated financial
statements included herein for the reconciliations of the statutory federal
income tax rate to our effective income rate for the years ended
2022
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Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was$39.0 million for the year endedDecember 31, 2022 , compared to$97.7 million for the year endedDecember 31, 2021 . The reduction in net income attributable to non-controlling interests was principally due to a change in our ownership interest ofConcentra Group Holdings Parent. InDecember 2021 , we acquired substantially all of the outstanding membership interests of Concentra Group Holdings Parent. The reduction in net income attributable to non-controlling interests was also due to a decline in the net income of our less than wholly owned subsidiaries. Many of these subsidiaries were impacted by increases in labor costs during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . 72
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Liquidity and Capital Resources
Cash Flows for the Years Ended
In the following, we discuss cash flows from operating activities, investing
activities, and financing activities.
For the
Year Ended
2020 2021 2022
Cash flows provided by operating activities $ 1,028,073 $ 401,228 $ 284,825
Cash flows used in investing activities (115,353) (256,594) (226,339)
Cash flows used in financing activities (671,541) (647,385) (34,890)
Net increase (decrease) in cash and cash
equivalents 241,179 (502,751) 23,596
Cash and cash equivalents at beginning of period 335,882 577,061 74,310
Cash and cash equivalents at end of period $ 577,061
Operating activities provided$284.8 million ,$401.2 million , and$1,028.1 million of cash flows during the years endedDecember 31, 2022 , 2021, and 2020, respectively. The decrease in cash flows from operating activities for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was primarily due to a reduction in our operating income. As outlined below, our operating cash flows for the year endedDecember 31, 2020 benefited from the advance payments received under the Accelerated and Advance Payment Program as well as payments received under theProvider Relief Fund . We received$318.1 million of advance payments under the Accelerated and Advance Payment Program during the year endedDecember 31, 2020 . CMS recouped$83.8 million and$241.2 million of these payments during the years endedDecember 31, 2022 and 2021, respectively. During the years endedDecember 31, 2022 , 2021, and 2020, we received$23.8 million ,$43.1 million , and$172.6 million of payments under theProvider Relief Fund . These programs are described further in Note 22 - CARES Act of the notes to our consolidated financial statements.
Our days sales outstanding was 55 days at
will fluctuate based upon variability in our collection cycles and patient
volumes.
Investing activities used$226.3 million ,$256.6 million , and$115.4 million of cash flows for the years endedDecember 31, 2022 , 2021, and 2020, respectively. For the year endedDecember 31, 2022 , the principal uses of cash were$190.4 million for purchases of property and equipment and$44.3 million for investments in and acquisitions of businesses. The cash outflows were offset in part by proceeds received from the sale of assets of$8.3 million . For the year endedDecember 31, 2021 , the principal uses of cash were$180.5 million for purchases of property and equipment and$102.9 million for investments in and acquisitions of businesses. The cash outflows were offset in part by proceeds received from the sale of assets and business of$26.8 million . For the year endedDecember 31, 2020 , the principal uses of cash were$146.4 million for purchases of property and equipment and$52.2 million for investments in and acquisitions of businesses. We also received proceeds from the sale of assets and business of$83.3 million .
Financing activities used
repurchases of common stock,
stockholders, and
non-controlling interests. We had net borrowings of
revolving facility.
Financing activities used$647.4 million of cash flows for the year endedDecember 31, 2021 . The principal use of cash was$660.7 million for the purchase of additional membership interests of Concentra Group Holdings Parent. Other uses of cash included$79.5 million for repurchases of common stock,$73.1 million for distributions to and purchases of non-controlling interests, and$50.6 million of dividend payments to common stockholders. We had borrowings of$160.0 million under our revolving facility. Financing activities used$671.5 million of cash flows for the year endedDecember 31, 2020 . The principal use of cash was$576.4 million for the purchase of additional membership interests of Concentra Group Holdings Parent. We also used$39.8 million of cash for the mandatory prepayment of term loans under our credit facilities. 73
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Capital Resources
Working capital. We had net working capital of$116.2 million atDecember 31, 2022 , compared to a net working capital deficit of$133.6 million atDecember 31, 2021 . The reduction of the working capital deficit was primarily due to an increase in our accounts receivable, a reduction in our liability related to the payments we received under the Accelerated and Advance Payment Program, and an increase in the fair value of our interest rate cap contract, which we expect to realize during 2023. A significant component of our net working capital is our accounts receivable. Collection of these accounts receivable is our primary source of cash and is critical to our liquidity and capital resources. Most of our patients are subject to healthcare coverage through third party payor arrangements, including Medicare and Medicaid. It is our general policy to verify healthcare coverage prior to providing services. We have credit risk associated with our accounts receivable; however, we believe there is a remote possibility of default with these payors. Credit facilities. AtDecember 31, 2022 , Select had outstanding borrowings under its credit facilities consisting of a$2,103.4 million term loan (excluding unamortized original issue discounts and debt issuance costs of$9.1 million ). AtDecember 31, 2022 , Select had$148.5 million of availability under its revolving facility after giving effect to$445.0 million of outstanding borrowings and$56.5 million of outstanding letters of credit. On the last day of each calendar quarter, Select is required to pay each lender a commitment fee in respect of any unused commitments under the revolving facility, which is currently 0.50% per annum and subject to adjustment based on Select's leverage ratio, as specified in the credit agreement. As ofDecember 31, 2022 , 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 revolving facility, was 5.96 to 1.00. We will not be required to make a prepayment of borrowings as a result of excess cash flow for the year endedDecember 31, 2022 . Our credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. Our credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control. 6.250% senior notes. AtDecember 31, 2022 , Select had$1,225.0 million of 6.250% senior notes outstanding (excluding unamortized premium and debt issuance costs of$10.6 million ). The terms of the senior notes contains covenants that, among other things, limit Select's ability and the ability of certain of Select's subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select's restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications. Stock Repurchase Program. Holdings' board of directors has authorized a common stock repurchase program to repurchase up to$1.0 billion worth of shares of its common stock. The common stock repurchase program will remain in effect untilDecember 31, 2023 , 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 its revolving facility. During the year endedDecember 31, 2022 , Holdings repurchased 7,883,195 shares at a cost of approximately$185.1 million , or$23.48 per share, which includes transaction costs. Since the inception of the program throughDecember 31, 2022 , Holdings has repurchased 48,234,823 shares at a cost of approximately$600.3 million , or$12.45 per share, which includes transaction costs. OnAugust 16, 2022 ,Congress passed the Inflation Reduction Act of 2022, which enacted a 1% excise tax on stock repurchases that exceed$1.0 million , effectiveJanuary 1, 2023 . Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with large, 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. 74
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Liquidity
We believe our internally generated cash flows and borrowing capacity under our revolving facility will allow us to finance our operations in both the short and long term. As ofDecember 31, 2022 , we had cash and cash equivalents of$97.9 million and$148.5 million of availability under our revolving facility, after giving effect to$445.0 million of outstanding borrowings and$56.5 million of outstanding letters of credit.
Our material cash requirements from known contractual and other obligations
include:
i.Debt payments, including finance lease payments - Our expected principal
payments total
twelve months. We intend to refinance our long-term indebtedness before it
matures. Refer to Note 11 - Long-Term Debt and Notes Payable of the notes to our
consolidated financial statements included herein for additional information.
ii.Interest payments - Our expected interest payments on the 6.250% senior
notes, term loan, and revolving facility total
million
Interest payments for the 6.250% senior notes were calculated using the stated interest rate. Interest payments for the revolving facility were calculated using 6.4%, the interest rate in effect atDecember 31, 2022 . Interest payments on the portion of the term loan which is subject to the provisions of our interest rate cap agreement were calculated using a rate of 3.6%. Interest payments on principal not subject to the provisions of the interest rate cap agreement were calculated using a rate of 6.2%. Our interest rate cap contract is discussed further in Item 7A. "Quantitative and Qualitative Disclosures about Market Risk." iii.Operating lease payments - Our expected operating lease payments total$1,636.8 million , with$299.6 million payable within the next twelve months. Refer to Note 6 - Leases of the notes to our consolidated financial statements included herein for additional information. iv.Purchase, construction, and other commitments - Our expected payments related to purchase, construction, and other obligations total$289.6 million , with$106.6 million payable within the next twelve months. Our purchase obligations primarily relate to software licensing and support agreements which specify all significant contractual terms and are legally binding and enforceable. Our construction commitments are described further in Note 21 - Commitments and Contingencies. v.Insurance liabilities - Our expected payments related to our insurance liabilities, including those for workers' compensation and professional malpractice liabilities, total$192.3 million , with$88.3 million payable within the next twelve months. The amounts payable within the next twelve months are recorded in accrued other in the consolidated balance sheet as ofDecember 31, 2022 . The remaining amounts are recorded in other non-current liabilities. vi.Other current liabilities recorded in the consolidated balance sheet as ofDecember 31, 2022 , such as accounts payable and accrued expenses, which are not specifically identified above. 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.
Effects of Inflation
The healthcare industry is labor intensive and our largest expenses are labor related costs. Wage and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. We have recently experienced higher labor costs related to the current inflationary environment and competitive labor market. In addition, suppliers have passed along rising costs to us in the form of higher prices. We cannot predict our ability to pass along cost increases to our customers.
Recent Accounting Pronouncements
Refer to Note 1 - Organization and Significant Accounting Policies of the notes
to our consolidated financial statements included herein for information
regarding recent accounting pronouncements.
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