SEM Q1 Earnings Call: Regulatory Headwinds and Mixed Division Performance Shape Outlook

Healthcare services company Select Medical (NYSE: SEM) missed Wall Street’s revenue expectations in Q1 CY2025 as sales rose 2.4% year on year to $1.35 billion. The company’s full-year revenue guidance of $5.4 billion at the midpoint came in 1.6% below analysts’ estimates. Its GAAP profit of $0.44 per share was 7.3% below analysts’ consensus estimates.

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StockStory’s Take

Select Medical’s first quarter results reflected the company’s ongoing transition following the Concentra spin, with divergent trends across its main business lines. Management attributed the quarter’s performance to robust growth in the inpatient rehabilitation division, which offset challenges in both outpatient and critical illness recovery hospital operations. CEO Robert Ortenzio cited severe weather events and Medicare reimbursement reductions as primary pressures on outpatient results, while regulatory changes and a delayed flu season weighed on the critical illness recovery segment.

Looking ahead, management’s guidance is shaped by ongoing regulatory uncertainty and shifting payer dynamics. The team expressed cautious optimism about inpatient rehabilitation expansion, noting a strong development pipeline and recent facility openings. However, they acknowledged persistent headwinds in the critical illness recovery segment, including higher outlier thresholds and the impact of the 20% transmittal rule. Management stated, "We are constantly having conversations both on the regulatory side with the new CMS administration and on the legislative side," underscoring the unpredictable reimbursement environment.

Key Insights from Management’s Remarks

Select Medical’s leadership focused on the mixed performance across its divisions and the external factors impacting results. Management highlighted division-specific drivers and detailed ongoing initiatives to mitigate recent headwinds and support future growth.

• Inpatient Rehab Outperformance: The inpatient rehabilitation division delivered double-digit revenue and EBITDA growth, supported by both increased daily rates and a robust pipeline of new facility openings and expansions. Management pointed to occupancy rates above 80% in mature hospitals and a multi-year plan to add 440 new beds.
• Regulatory Headwinds in Critical Illness Recovery: The critical illness recovery hospital segment faced regulatory challenges, particularly a sharp increase in the high cost outlier threshold and the 20% transmittal rule. Management estimated these changes accounted for two-thirds of the EBITDA decline for this segment, and noted ongoing discussions with the Centers for Medicare & Medicaid Services (CMS) to address these impacts.
• Outpatient Division Weather Disruption: Severe winter storms in key geographies and a 3% decline in Medicare reimbursement led to lower outpatient volumes and EBITDA. The division saw a late-quarter recovery, and management expects further improvements as technology and access initiatives progress.
• Technology and Margin Initiatives: Management emphasized ongoing investments in technology for the outpatient business, including a new software platform aimed at improving productivity and contract negotiations. Early benefits were observed, and management expects margin improvement as further releases are implemented.
• Strategic Capacity Management: The company continued to optimize its outpatient footprint by opening 10 new clinics and closing or consolidating 13 underperforming locations, aligning resources with market demand and supporting more efficient operations.

Drivers of Future Performance

Management’s outlook for the remainder of the year centers on regulatory and reimbursement trends, the pace of rehab expansion, and operational improvements in challenged segments.

• Regulatory Uncertainty Remains: The company’s earnings trajectory will depend on future CMS policy changes impacting critical illness recovery reimbursement, as well as ongoing advocacy to mitigate outlier threshold increases and transmittal rule effects.
• Rehabilitation Expansion Pipeline: A strong pipeline of new inpatient rehab facilities and bed additions is expected to drive segment growth, with management noting both signed projects and additional opportunities under evaluation.
• Margin Recovery Initiatives: Continued implementation of technology upgrades and productivity measures in the outpatient division are expected to support gradual margin improvement, although external factors such as weather and Medicare rates remain risks.

Top Analyst Questions

• Justin Bowers (Deutsche Bank): Asked about expected occupancy rates in new inpatient rehab facilities. Management guided for occupancy to remain above 85% in mature hospitals, even as new capacity comes online.
• Ben Hendrix (RBC Capital Markets): Inquired about mitigation strategies for regulatory headwinds in critical illness recovery hospitals. Management indicated active discussions with CMS and ongoing advocacy, but cautioned that policy changes may take time.
• William Sutherland (The Benchmark Company): Sought clarification on the magnitude and timing of high cost outlier impacts and start-up costs. Management confirmed that start-up losses remained consistent year over year, with most headwinds concentrated in the first six weeks of the quarter.
• William Sutherland (The Benchmark Company): Asked about outpatient margin improvement initiatives. Management described new technology rollouts and improved commercial contract rates as key drivers, with incremental benefits expected throughout the year.
• Anne Hines (Mizuho): Asked about potential acceleration in inpatient rehab expansion to diversify away from critical illness recovery. Management confirmed an acceleration beyond currently announced projects, citing a robust project pipeline and ongoing market evaluations.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) regulatory developments and any CMS decisions related to reimbursement for critical illness recovery, (2) progress on opening new inpatient rehab facilities and the pace at which they reach targeted occupancy, and (3) the effectiveness of technology and operational initiatives aimed at restoring outpatient division margins. Additionally, trends in patient volumes and reimbursement rates across all segments will remain key indicators of business momentum.

Select Medical currently trades at a forward P/E ratio of 13×. Should you load up, cash out, or stay put? Find out in our free research report.

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