Select Medical's Q3 2025: Contradictions Emerge on Outpatient Rehab, Transmittal Rule Impact, and Regulatory Relief

Date of Call: October 28, 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:

• Revenue for 2025 reaffirmed at $5.3B–$5.5B
• Adjusted EBITDA for 2025 reaffirmed at $510M–$530M
• EPS guidance raised to $1.14–$1.24
• Capital expenditures expected $180M–$200M (excluding CapEx subsequently contributed to non-consolidating 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, with adjusted EBITDA increasing over 7% to $111.7 million.
• 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 a strong performance in the inpatient rehabilitation hospital division and a favorable regulatory update affecting the critical illness recovery hospital segment.

• Inpatient Rehabilitation Hospital Segment:

• Revenue increased by 16% year-over-year to $328.6 million, with adjusted EBITDA up by 13% to $68 million.
• The segment experienced a nearly 5% increase in revenue per patient day and an 11% increase in average daily census, contributing to an occupancy rate improvement to 83%.

• This performance was attributed to strategic development efforts and strong demand for rehabilitation services.

• Outpatient Rehabilitation Division Challenges:

• Revenue increased by 4% to $325.4 million, with over 5% growth in patient visits, but net revenue per visit decreased to $100 from $101.
• Adjusted EBITDA decreased by over 14% to $24.2 million, with a margin decline from 9.1% to 7.4%.

• The decrease in revenue per visit was driven by a reduction in Medicare reimbursement and an unfavorable shift in payer mix.

• Critical Illness Recovery Hospital Segment:

• Revenue increased by over 4% to $609.9 million, with adjusted EBITDA rising over 10% to $56.1 million.
• The segment experienced an occupancy rate of 65%, with admissions up by 2.1%.
• The favorable performance was due to a regulatory update that resulted in a revenue adjustment and better labor cost stabilization.

Sentiment Analysis:

Overall Tone: Positive

• Company reported consolidated revenue up >7% to $1.36B, adjusted EBITDA up >7% to $111.7M, EPS up >21% to $0.23; Board approved $0.0625/share dividend; management reaffirmed FY revenue and EBITDA guidance and raised EPS guidance.

Q&A:

• Question from Benjamin Hendrix (RBC Capital Markets): What is the ongoing impact of the high-cost outlier on admission volume and occupancy, what mitigation tactics are you employing, and any development conversations in Washington?
  Response: Higher fixed-loss threshold is reducing LTAC ability to take highest-acuity patients; mitigation is moving patients downstream to inpatient rehab (shorter LOS, admissions up) and active advocacy in D.C.; deferment of the 20% transmittal produced a favorable revenue adjustment.

• Question from Justin Bowers (Deutsche Bank): Has there been discussion with CMS about raising the 8% outlier pool target or other policy levers to provide relief?
  Response: Management is advocating multiple policy options (fixed-loss threshold, site-neutral, LOS requirements, outlier pool changes) but there is no clarity which CMS path is feasible; they are presenting a range of potential solutions.

• Question from Justin Bowers (Deutsche Bank): How much of this year’s CapEx is maintenance versus growth?
  Response: Maintenance CapEx is about $100–105M of the $180–200M projected; the remainder is growth/development.

• Question from Ann Hynes (Mizuho): What was the impact of the 20% transmittal delay on revenue and EBITDA this quarter and why didn’t you raise EBITDA guidance for the year?
  Response: The transmittal deferment produced a $12–15M net EBITDA benefit this quarter; management kept full-year EBITDA guidance unchanged because outpatient softness offset the benefit despite raising EPS guidance.

• Question from Joanna Jayjuk (BofA Securities): Given the delayed 20% transmittal, should we expect a much smaller headwind next year, what’s driving outpatient softness, and what is the expected Medicare therapy rate update for next year?
  Response: Management expects the 20% transmittal impact in 2026 to be roughly one-third of what it would have been in 2025; outpatient weakness was driven by a >3% Medicare rate cut and unfavorable payer mix this quarter; they estimate a modest Medicare therapy rate increase of ~1.75%–1.8% for next year.

• Question from Albert J. William Rice (UBS Investment Bank): What are rehab development startup costs and any change to facility sizing strategy; what are current labor trends and how should we view leverage going forward?
  Response: Annual startup losses run about $15–20M; typical rehab builds are ~60 beds though 80–100 beds will be considered where demand warrants; labor has stabilized (agency utilization ~15%, FTE wage increases below ~3%); net leverage at 3.4x is comfortable and capital allocation prioritizes development first.

• Question from Justin Bowers (Deutsche Bank): What percent of Medicare Advantage is pegged to the Medicare fee schedule, how large has the Medicare drag been, and what levers to return outpatient to double-digit margins?
  Response: About 80% of Medicare Advantage is tied to the Part B fee schedule; cumulative Medicare rate cuts represent roughly a $65M impact over the past five years; management plans to restore margins via productivity gains and investments in scheduling/front-end systems.

Contradiction Point 1

Outpatient Rehab Business Performance and Expectations

It involves differing expectations for the outpatient rehab business performance and the drivers behind these changes, which are crucial for understanding segment performance and future growth.

Can you explain the softness in the outpatient segment and its drivers? - Ann Hynes(Mizuho)

2025Q3: The outpatient segment faced a 3% Medicare rate decrease with a decline in reimbursement and a shift in payer mix. - Robert Ortenzio(Executive Chairman)

How will the outpatient rehab business evolve for the remainder of the year, and where might EBITDA margins settle? - Justin D. Bowers(Deutsche Bank AG)

2025Q2: Outpatient is expected to continue to improve, with scheduling initiatives to take effect later this year and into 2026. We should approach or slightly exceed previously mentioned 10% EBITDA margin. - Michael F. Malatesta(CFO)

Contradiction Point 2

Impact of 20% Transmittal Rule and Revenue Expectations

It relates to the expected impact of the 20% transmittal rule on revenue, which is a significant factor in financial forecasting and investor expectations.

What was the impact of the delay in the 20% transmittal rule on revenue and EBITDA? - Ann Hynes(Mizuho)

2025Q3: The net impact of the delay included a revenue increase of approximately $12 million to $15 million, contributing to adjusted EBITDA. - Robert Ortenzio(Executive Chairman)

What is the current status of repealing the 20% transmittal rule, and what are the next steps? - Joaquin Eduardo Arriagada Martinez(BofA Securities)

2025Q2: We are certainly going to feel it in the second half, particularly in Q3 and Q4, and there will be a very pronounced impact on the front half of 2026. - Robert A. Ortenzio(Co-Founder & Executive Chairman)

Contradiction Point 3

Impact of High-Cost Outlier and Transmittal Rule

It highlights differing perspectives on the impact and mitigation strategies regarding the high-cost outlier and transmittal rule, which significantly affect the company's financial performance.

What is the impact of the high-cost outlier on admission volume, occupancy, and mitigation strategies? - Benjamin Hendrix (RBC Capital Markets)

2025Q3: The high-cost outlier affects our LTAC business, with the threshold increasing significantly. It impacts our average daily census (ADC) but admissions are up as we transition acutely ill patients to inpatient rehab facilities. Average patient length of stay has decreased by 1.5 days. - Tom Mullen(CEO)

Do you have updates on mitigation strategies for high-cost outliers and transmittal rules? - Benjamin Hendrix (RBC Capital Markets)

2025Q1: High-cost outliers tend to be higher in Q1 due to the acuity of patients. We expect this to drop as the year progresses. - Martin Jackson(Senior Executive Vice President of Strategic Finance and Operations)

Contradiction Point 4

Regulatory Relief and Conversations in Washington

It involves differing statements about the current regulatory environment and the progress made in conversations with CMS and committees, which are crucial for the company's regulatory strategy.

Has there been any discussion with CMS or in D.C. about increasing the target payment amount? - Justin Bowers (Deutsche Bank)

2025Q3: The regulatory environment is challenging due to the outlier pool's legislative mandate. CMS has to push up the fixed loss threshold to stay below 8%, affecting LTACs like us. The 20% transmittal rule delay is a relief, but more is needed to support the treatment of high-acuity patients. - Robert Ortenzio(Executive Chairman)

What advocacy is in place with CMS to offset outlier and transmittal rule pressures? - Ann Hynes (Mizuho)

2025Q1: We engage with CMS on regulatory policy. The new CMS team was recently installed, so their focus is broad, and we are working to get our concerns addressed. - Robert Ortenzio(Executive Chairman)

Contradiction Point 5

Outpatient Rehab Revenue and Rate Increases

It concerns differing statements about outpatient rehab revenue expectations and rate increases, which directly impact the company's financial projections and operational strategies.

Can you explain the softness in the outpatient segment and its drivers? - Ann Hynes (Mizuho)

2025Q3: The outpatient segment faced a 3% Medicare rate decrease with a decline in reimbursement and a shift in payer mix. There has been pressure on rates and a mix shift, both of which are being addressed. - Robert Ortenzio(Executive Chairman)

What initiatives are in place in outpatient rehab to improve margins? - William Sutherland (The Benchmark Company)

2025Q1: We have implemented new technologies and seen benefits. On the contracting side, we expect 4% to 6% increases in commercial rates. - Martin Jackson(Senior Executive Vice President of Strategic Finance and Operations)