Select Medical Holdings Corp.'s Q3 Earnings Call: Contradictions on High-Cost Outlier, Margins, Medicare Reimbursement, and 20% Transmittal Rule Impact

Date of Call: October 31, 2025

Financials Results

• Revenue: $1.36B, up over 7% YOY (vs $1.27B prior year)
• EPS: $0.23 per share, up over 21% YOY (vs $0.19 prior year)

Guidance:

• Reaffirmed 2025 revenue guidance of $5.3B to $5.5B.
• Reaffirmed 2025 adjusted EBITDA guidance of $510M to $530M.
• Raised 2025 EPS guidance to $1.14 to $1.24.
• 2025 capital expenditures expected to be $180M to $200M (excludes capex subsequently contributed to nonconsolidated JVs).

Business Commentary:

• Revenue and Earnings Growth:
• Select Medical Holdings Corporation reported a revenue growth of over 7% to $1.36 billion compared to $1.27 billion in the prior year.
• Earnings per common share from continuing operations rose over 21% to $0.23 compared to $0.19 per share in the same quarter last year.

• The growth was driven by strong performance in the inpatient rehabilitation segment and adjusted EBITDA increases across several segments.

• Inpatient Rehabilitation Segment Performance:

• The company's inpatient rehab hospital division delivered a strong quarter with a 16% year-over-year increase in revenue to $328.6 million.
• Adjusted EBITDA increased by 13% to $68 million, while the average daily census rose by 11%.

• This was attributed to an increase in average patient census, higher patient days, and strategic additions of new inpatient rehabilitation facilities.

• Critical Illness Recovery Hospitals Impact:

• Revenue in the critical illness recovery hospital division increased by over 4% to $609.9 million.
• Adjusted EBITDA rose over 10% to $56.1 million, up from $50.8 million in the same quarter last year.

• The deferment of CMS's 20% transmittal rule resulted in a favorable revenue adjustment this quarter, contributing to the increased adjusted EBITDA margin.

• Outpatient Rehabilitation Segment Challenges:

• The outpatient rehab division saw a 4% increase in revenue to $325.4 million, driven by over 5% growth in patient visits.
• Adjusted EBITDA decreased by over 14% to $24.2 million, with a decline in net revenue per visit to $100 from $101 in the same quarter last year.
• The decrease in adjusted EBITDA margin was due to a reduction in Medicare reimbursement rates and an unfavorable shift in payer mix.

Sentiment Analysis:

Overall Tone: Neutral

• Management reported consolidated revenue and adjusted EBITDA growth (>7%) and raised EPS guidance while reaffirming revenue and EBITDA ranges, but flagged outpatient rate/mix weakness and regulatory headwinds (20% transmittal rule) that temper upside.

Q&A:

• Question from Benjamin Hendrix (RBC Capital Markets): I appreciate the opening commentary about the 20% transmittal delay. I wanted to see if you could focus a little bit on the ongoing impact of the high-cost outlier. What it's doing to the admission volume, occupancy and kind of what types of mitigation tactics you guys can employ to help offset that? And then just close with any development conversations in Washington.
  Response: Outlier threshold increases have reduced LTAC average daily census although admissions are up and LOS on affected patients is down ~1.5 days; mitigation is shifting patients downstream to inpatient rehab and management is actively engaging Washington—secured deferment of the 20% transmittal and continues advocacy for longer-term relief.

• Question from Justin Bowers (Deutsche Bank): So I'll just stick with 2 quick ones on LTAC. So number one, Bob and Tom, is there -- has there been any discussion with CMS or in D.C. about raising the targeted amount of payments or that 8% threshold to something higher in terms of like percentage of outlier patients? And then two, there's a lot of moving parts with reimbursement, but you did get an increase for 2026 and a modest increase for the HCO. Are the trends that we're seeing now as it relates to like length of stay in ADC, is it just -- is that a good way to think about sort of like how the business should trend on the go forward, absent any other big changes?
  Response: No clear, single policy fix—management is pursuing multiple regulatory and legislative levers with no visibility on CMS' path; CapEx split for 2025: maintenance roughly $100M–$105M of the $180M–$200M total, remainder is growth.

• Question from Ann Hynes (Mizuho Securities): I know you said in the prepared remarks that you had a revenue benefit from the delay of the 20% transmittal rule. What was the impact in the quarter from a revenue and EBITDA perspective?
  Response: The net benefit to Q3 (revenue and expense reversals) was about $12M–$15M to EBITDA; annual impact into next year is negligible, and outpatient softness prompted management to hold EBITDA guidance despite raising EPS guidance.

• Question from Joanna Gajuk (BofA Securities): On the 20% transmittal goal delay in implementation. So because of the more recent cost reports will be used, should we think about the, I guess, the headwind much smaller than that $12 million to $15 million you saw in first half of '25? ... And on the outpatient rehab, what exactly is happening? Is it just payer mix/geography or managed care behavior? And what is your estimate for the Medicare therapy rate update next year?
  Response: Yes—impact in 2026 is expected to be much smaller (roughly a third of what would have hit in 2025); outpatient weakness was driven by sustained Medicare pressure plus an unfavorable geographic/payer mix this quarter; management estimates a modest Medicare therapy rate increase around ~1.75%–1.8% for next year and expects mix to improve with scheduling/productivity investments.

• Question from Albert Rice (UBS): First, maybe just to ask you on the rehab IRF development pipeline. Do you have a sense of what the relative start-up costs that you experienced this year and how that might compare to next year? Is that number going to be a tailwind -- headwind for you? And your biggest peer in that segment is talking about potentially changing the footprint model a little bit, smaller facilities, et cetera, to go into a new market. Are you -- anything going on in your approach to the sizing of these development locations that's worth calling out?
  Response: Expect consistent start-up losses of roughly $15M–$20M per year; core strategy remains partnership-focused with typical builds at ~60 beds, though management will consider larger 80–100 bed hospitals where market demand justifies it.

• Question from Justin Bowers (Deutsche Bank) [follow-up]: I just wanted to follow up on PT. So Mike, what percentage of your MA rates are pegged to the Medicare fee schedule? And then the follow-up to that would be, do you have a sense of -- I mean, Medicare has been a headwind for quite a few years now. Any sense of what kind of drag that's been on EBITDA in the division over the last few years? And then what can you do to get this back to double-digit margins?
  Response: About 80% of Medicare Advantage is tied to the Part B fee schedule; cumulative Medicare cuts over the past ~4–5 years have cost roughly $65M to the bottom line; management plans to regain margin via productivity improvements and systems/scheduling enhancements.

Contradiction Point 1

High-Cost Outlier Impact on LTAC

It highlights differing perspectives on the impact of regulatory changes on the LTAC segment, which affects admissions, occupancy, and financial performance.

How is the high-cost outlier affecting admissions, occupancy, and mitigation tactics? - Ben Hendrix (RBC Capital Markets)

2025Q3: The high-cost outlier impacts LTAC segments, reducing ADC due to accommodating fewer acutely ill patients. - [Thomas Mullin](CEO)

What’s your outlook for occupancy in the remainder of the year given the new capacity coming online? - Justin Bowers (Deutsche Bank)

2025Q1: The regulatory impact was higher than anticipated, particularly the high-cost outlier threshold and the 20% transmittal rule. - [Martin Jackson](CFO)

Contradiction Point 2

Outpatient Rehab Margins

It reveals differing explanations for the decline in outpatient rehab margins, which impacts the company's financial performance.

What impact did the 20% transmittal rule delay have on Q2 revenue and EBITDA? What's driving the softness in outpatient rehab? - Ann Hynes (Mizuho Securities)

2025Q3: Outpatient margins decline due to Medicare cuts and payer mix shifts. - [Michael Malatesta](CFO)

Can you provide an update on initiatives to improve outpatient rehab margins? - William Sutherland (The Benchmark Company)

2025Q1: We are implementing technology changes and seeing improvements in managed care commercial rates, contributing to 4% to 6% contracting increases. - [Martin Jackson](CFO)

Contradiction Point 3

Impact of Medicare Reimbursement Changes

It involves changes in the company's ability to manage through and adapt to changes in the Medicare reimbursement structure, which directly impacts revenue and profitability.

What percentage of MA rates are pegged to Medicare, and what has been the impact on EBITDA from Medicare rate cuts? How can margins be improved? - Justin Bowers (Deutsche Bank AG)

2025Q3: Approximately 80% of MA rates are linked to Medicare. Drag over 4-5 years is $65 million. - [Michael Malatesta](CFO)

How are you handling changes in the Medicare reimbursement structure, especially the high-cost outlier threshold? - Joanna Gajuk (Bank of America)

2024Q4: Operators have effectively managed through significant increases in the high-cost outlier threshold, with improvements seen in both 2024 and 2025. - [Martin Jackson](CFO)

Contradiction Point 4

20% Transmittal Rule Impact

It involves the impact of the 20% transmittal rule delay on revenue and EBITDA, which is critical for financial forecasting and investor expectations.

What was the impact of the 20% transmittal rule delay on Q3 revenue and EBITDA? What factors are causing outpatient rehab performance to weaken? - Ann Hynes (Mizuho Securities)

2025Q3: The delay impact was $12-$15 million for revenue and EBITDA. - [Michael Malatesta](CFO)

What progress has been made on the 20% transmittal impact, and will the critical illness business show improved margins in 4Q '25? - Joaquin Eduardo Arriagada Martinez (Bank of America Securities)

2025Q2: The 20% transmittal impact was a surprise but is now factored into guidance. - [Michael Malatesta](CFO)