S E L E C T M E D I C A L H O L D I N G S C O R P O R A T I O N
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Our Mission
S E L E C T M E D I C A L W I L L P R O V I D E A N E X C E P T I O N A L
P A T I E N T C A R E E X P E R I E N C E T H A T P R O M O T E S H E A L I N G
A N D R E C O V E R Y I N A C O M P A S S I O N A T E E N V I R O N M E N T .
20 years of growth
L E A R N M O R E A T >> S E L E C T M E D I C A L H O L D I N G S . C O M
A N N U A L R E P O R T
4 7 1 4 G E T T Y S B U R G R O A D , M E C H A N I C S B U R G , P A 1 7 0 5 5
A D I V E R S E N E T W O R K D E L I V E R I N G
E X C E P T I O N A L R E S U L T S F O R 2 0 Y E A R S
long -term acute care
rehabilitati on ho s pi ta ls
After retiring, Julie Dombo was excited to pursue her twin
passions of weight lifting and race walking.
Her plans changed, however, when she was caught in an
armed robbery at a store in her hometown. She survived
several close-range gunshot wounds but lost 2/3 of her lung
and, due to complications, her hands and feet. Signifi cant
medical intervention saved her life.
After stabilizing, she began her next stage of recovery at
Select Specialty Hospital – Wichita. She learned to breathe
and perform everyday tasks as a quadruple amputee. During
her two-month stay, she found comfort and healing with
caregivers who supported her, as well as her family.
“Select Specialty is where I began my new life,” she said.
Grammy Award-winning singer the Rev. Stefanie R.
Minatee travelled the world with the renowned Jubilation
Choir, sharing her musical gifts. But last year, a massive
stroke threatened to silence her powerful voice.
With a range of physical, cognitive and emotional
challenges, Rev. Minatee feared never fully regaining her
independence. She put her faith in God, she said, and the
Kessler Institute for Rehabilitation. Her team of experts
helped her recover her “mind, body and spirit.”
“This journey has taught me the importance of patience
and perseverance, hard work and hope. The next stage of
my life is fi nally here,” she said.
Rev. Minatee returned to the choir, touring and sharing
her gift with the world.
is the newest addition to the
Select Medical family. This
wholly owned subsidiary brings
a nationwide network of outpatient physical
rehabilitation centers into our company. In addition, it off ers
a range of services including general orthopedics, spinal care,
neurological rehabilitation, orthotics and prosthetics services.
B O A R D O F D I R E C T O R S
Robert A. Ortenzio
Executive Chairman & Co-Founder
Bryan C. Cressey
Founder & Partner
William H. Frist
Former Majority Leader of the United States Senate
Select Medical Holdings Corporation
Cressey & Company
Partner, Cressey & Company
Rocco A. Ortenzio
James E. Dalton, Jr.
Vice Chairman & Co-Founder
Retired CEO
Thomas A. Scully
General Partner
Select Medical Holdings Corporation
Quorum Health Group, Inc.
Welsh, Carson, Anderson & Stowe
Russell L. Carson
Founder
James S. Ely III
Founder & Chief Executive Offi cer
Leopold Swergold
Managing Member
Welsh, Carson, Anderson & Stowe
PriCap Advisors, LLC
Anvers Management Company, LLC
E X E C U T I V E O F F I C E R S
Robert A. Ortenzio
Martin F. Jackson
Executive Chairman & Co-Founder
Executive Vice President
& Chief Financial Offi cer
Scott A. Romberger
Senior Vice President, Controller
& Chief Accounting Offi cer
Rocco A. Ortenzio
John A. Saich
Robert G. Breighner, Jr.
Vice Chairman & Co-Founder
Executive Vice President
Vice President, Compliance and Audit Services
& Chief Human Resources Offi cer
& Corporate Compliance Offi cer
David S. Chernow
Michael E. Tarvin
President & Chief Executive Offi cer
Executive Vice President,
General Counsel & Secretary
C O R P O R A T E I N F O R M A T I O N
Corporate Headquarters
Stockholder Inquiries
Select Medical Holdings Corporation
Joel T. Veit
Register & Stock Transfer Agent
Stockholder correspondence
4714 Gettysburg Road
Senior Vice President & Treasurer
should be mailed to:
Mechanicsburg, PA 17055-5036
4714 Gettsyburg Road
717.972.1100
Mechanicsburg, PA 17055-5036
Computershare
P.O. Box 30170
717.972.1100 | ir@selectmedical.com
College Station, TX 77842-3170
Independent Registered Public
Stock Exchange
Accounting Firm
PricewaterhouseCoopers LLP
Penn National Insurance Plaza
2 N. 2nd Street, Suite 1100
Harrisburg, PA 17101
NYSE
Symbol: SEM
Internet Address
selectmedicalholdings.com
Overnight correspondence
should be mailed to:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845-3170
S E L E C T M E D I C A L
I M P R O V I N G Q U A L I T Y O F L I F E
2 0 1 6 A N N U A L R E P O R T
C4
A D I V E R S E N E T W O R K D E L I V E R I N G
E X C E P T I O N A L R E S U L T S F O R 2 0 Y E A R S
outpatient rehabilitation
occupational medi c ine
Ben is a young boy with Pearson Syndrome. This rare
condition causes signifi cant health issues, including loss
of muscle strength.
His mother, Melissa, thought physical therapy would help.
When one center gave up on Ben, as the disease was
degenerative and progressive, she reached out to NovaCare
Huber Heights in Ohio and connected with our pediatric
care team.
After a workplace fall, Martha Smith needed help for the
pain and stiff ness she was experiencing. Her employer’s
Workers’ Compensation program referred her to Concentra
in the Austin area.
Her physical therapist took special care to evaluate her,
she said, even though she was his fi nal patient of the day.
The extra time narrowed down her ailments and delivered
personalized care that brought relief.
Ben is now gaining strength, endurance and balance.
Melissa used the center’s PT services herself following
surgery on a torn Achilles.
“Let me say, that I haven’t felt this good for a while,”
Martha said. “I am happier because I feel I have good
solutions to my problem.”
“The Huber Heights team has been an answer to my
prayers,” she said.
She’s made a copy of her PT’s business card and hands
them out to friends who need physical therapy.
FACILITIES NATIONWIDE
MORE THAN 500
25
3,458
EMPLOYEES
YEARS OF EXPERIENCE IN OUTPATIENT
PHYSICAL REHABILITATION CARE
IN28
STATES
2 0 1 6 A N N U A L R E P O R T
1
A L E T T E R F R O M L E A D E R S H I P
Select Medical made a commitment 20 years ago to deliver an exceptional patient care experience that pro-
motes healing and recovery in a compassionate environment. We have honored that promise every day since
1997, by helping to define the nation’s standard of excellence in specialized hospital and rehabilitative care.
Today, we are nearly 41,500 employees strong treating tens of thousands of patients a year in our 103 long-
term acute care hospitals, 20 acute medical rehabilitation hospitals, 1,611 outpatient rehabilitation clinics
and 300 Concentra occupational medicine centers.
Growing With Intent
Select Medical has a two-decade track record of strategic growth, with 2016 marking another year of new
joint ventures, acquisitions and service expansions across the organization. We also achieved better balance
of the company’s business portfolio of hospital care and outpatient services. Consequently, our payment
mix is now weighted toward commercial payors.
Our specialty hospitals, operating as long-term acute care hospitals (LTACHs), fully transitioned to new
patient criteria rules this year. The division’s leadership, combined with preeminent clinical expertise in
treating high-acuity patients, positioned the company to lead the industry in meeting the newly defined
standards. These mandated changes were significant, and we continue to focus on achieving normalized
operations to gain a larger share of patients in this uniquely specialized market in 2017 and beyond.
This year, the specialty hospital division successfully opened the California Rehabilitation Institute, our
joint venture with UCLA Health and Cedars-Sinai, as well as TriHealth Rehabilitation Hospital in Cincinnati.
Additionally, Cleveland Clinic Rehabilitation Hospital, a 2015 joint venture with Cleveland Clinic, continued
to build momentum. As we enter 2017, we are poised to continue our growth trajectory supported by new
partnerships with some of the nation’s premier health systems.
With the successful integration of Concentra, our largest acquisition in company history, we continued to
further enhance opportunities in occupational medicine. In March, we acquired Physiotherapy Associates
and expanded our national outpatient footprint by more than 500 clinics. These two significant acquisitions
allowed us to realize and leverage meaningful synergies across our national care network.
Cultivating A Culture With Purpose
Select Medical’s success is attributed to our ability to attract the best talent possible to care for our patients.
Our employees are guided daily by fundamental principles that are part of “The Select Medical Way.”
These core values and cultural behaviors serve as the foundation for every member of the Select Medical
family to deliver an exceptional patient experience, and for the company to deliver an exceptional employee
experience. It is this strong sense of purpose that motivates our team to connect and fulfill our mission.
The company’s employee-driven CARES (Caring and Responsive Employees of Select) initiative also raised
money for dozens of charities. This effort, combined with ongoing corporate support for national organizations
such as American Cancer Society, American Heart Association, Special Olympics and Junior Achievement,
made a significant social impact for millions of people.
2
SELECT MEDICAL IMPROVING QUALITY OF LIFE Looking Ahead With Optimism
Our strong leadership, successful partnerships and unmatched clinical expertise have been the catalyst
for growth during the past 20 years. We are highly optimistic that the future holds even more promise for
expansion, innovation and impact. This, in turn, sharpens our competitive edge, market position and patient
outcomes to drive overall performance and stockholder value.
We sincerely thank you for your support and recognition of who we are and what we do. Together, we truly
are improving the quality of life in the communities we serve.
Sincerely,
Robert Ortenzio
Executive Chairman & Co-Founder
Rocco Ortenzio
Vice Chairman & Co-Founder
David S. Chernow
President & Chief Executive Offi cer
Improving quality of life.
2 0 1 6 A N N U A L R E P O R T
3
FI NANCIA L HIGHLIGHTS
SELECT MEDICAL HOLD IN G S CO RP O RAT IO N
(In thousands, except per share data)
2016
2015
2014
2013
2012
FOR THE YEARS ENDED
Net operating revenues
Income from operations
Net income attributable to Select Medical
Holdings Corporation
Income per common share, fully diluted
Dividends per share
Cash flow from operations
SEGMENT INFORMATION
Net operating revenues
Specialty hospitals
$ 4,286,021
$ 3,742,736 $ 3,065,017
$ 2,975,648 $ 2,948,969
299,847
274,790
284,476
301,436
336,859
115,411
0.87
—
130,736
120,627
114,390
148,230
0.99
0.10
0.91
0.40
0.82
0.30
1.05
1.50
346,603
208,415
170,642
192,523
298,682
$ 2,289,482
$ 2,346,781
$ 2,244,899
$ 2,198,121
$ 2,197,529
Outpatient rehabilitation
995,374
810,009
819,397
777,177
751,317
Concentra(1)
Other
1,000,624
585,222
541
724
721
350
123
Total Net Operating Revenues
$ 4,286,021
$ 3,742,736
$ 3,065,017
$ 2,975,648
$ 2,948,969
Adjusted EBITDA
Specialty hospitals
Outpatient rehabilitation
Concentra(1)
Other
$ 281,511
$ 327,623
$ 341,787
$ 353,843
$ 381,354
129,830
143,009
98,220
48,301
97,584
90,313
87,024
(88,543)
(74,979)
(75,499)
(71,295)
(62,531)
Total Adjusted EBITDA(2)
$ 465,807
$ 399,165
$ 363,872
$ 372,861
$ 405,847
BALANCE SHEET SNAPSHOT AT YEAR-END
Cash and cash equivalents
$ 99,029
$ 14,435
$ 3,354
$ 4,319
$ 40,144
Working capital
Total assets
Total debt
Stockholders’ equity
236,433
19,869
133,220
82,878
80,397
4,944,395
4,388,678
2,924,809
2,817,622
2,761,361
2,698,989
2,385,896
1,552,976
1,445,275
1,470,243
815,725
859,253
739,515
786,234
717,048
The selected financial data for the company’s Concentra segment for the periods presented begins as of June 1, 2015, which is the date the Concentra acquisition was consummated.
Adjusted EBITDA is used by Select Medical to report its segment performance. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization,
gain (loss) on early retirement of debt, stock compensation expense, Concentra acquisition costs, Physiotherapy acquisition costs, non-operating gain (loss) and equity in earnings
(losses) of unconsolidated subsidiaries. Refer to Item 6 and Item 7 for further consideration of Adjusted EBITDA as a Non-GAAP measure.
(1)
(2)
4
SELECT MEDICAL IMPROVING QUALITY OF LIFE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
(cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file numbers: 001-34465 and 001-31441
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrants as specified in their Charter)
Delaware
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA
(Address of Principal Executive Offices)
20-1764048
23-2872718
(I.R.S. Employer
Identification Number)
17055
(Zip Code)
(717) 972-1100
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Select Medical Holdings Corporation,
Common Stock, $0.001 par value
Securities registered pursuant to Section 12(g) of the Act: NONE
New York Stock Exchange
Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.
Select Medical Holdings Corporation Yes (cid:1) No (cid:2)
Select Medical Corporation Yes (cid:2) No (cid:1)
Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past
90 days. Yes (cid:1) No (cid:2)
Indicate by check mark whether the registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrants were
required to submit and post such files). Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (cid:1)
Indicate by check mark whether the registrant, Select Medical Holdings Corporation, is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller
reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1)
Smaller reporting company (cid:2)
Accelerated filer (cid:2)
Non-accelerated filer (cid:2)
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act.(Check one):
Large accelerated filer (cid:2)
Accelerated filer (cid:2)
Smaller reporting company (cid:2)
Non-accelerated filer (cid:1)
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Act). Yes (cid:2) No (cid:1)
The aggregate market value of Holdings’ voting stock held by non-affiliates at June 30, 2016 (the last business day of Holdings’ most recently completed second fiscal
quarter) was approximately $1,148,804,276.42, based on the closing price per share of common stock on that date of $10.87 as reported on the New York Stock Exchange. Shares
of common stock known by the registrants to be beneficially owned by directors and officers of Holdings subject to the reporting and other requirements of Section 16 of the
Securities Exchange Act of 1934 are not included in the computation. The registrants, however, have made no determination that such persons are ‘‘affiliates’’ within the meaning
of Rule 12b-2 under the Securities Exchange Act of 1934.
The number of shares of Holdings’ Common Stock, $0.001 par value, outstanding as of February 1, 2017 was 132,683,690.
This Form 10-K is a combined annual report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation. Unless the
context indicates otherwise, any reference in this report to ‘‘Holdings’’ refers to Select Medical Holdings Corporation and any reference to ‘‘Select’’ refers to Select Medical
Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to ‘‘Concentra’’ refers to Concentra Inc., the indirect operating
subsidiary of Concentra Group Holdings, LLC (‘‘Concentra Group Holdings’’), and its subsidiaries. References to the ‘‘Company,’’ ‘‘we,’’ ‘‘us,’’ and ‘‘our’’ refer collectively to
Holdings, Select, and Concentra Group Holdings and its subsidiaries.
Listed hereunder are the documents, any portions of which are incorporated by reference and the Parts of this Form 10-K into which such portions are incorporated:
1.
The registrant’s definitive proxy statement for use in connection with the 2017 Annual Meeting of Stockholders to be held on or about May 2, 2017 to be filed within
120 days after the registrant’s fiscal year ended December 31, 2016, portions of which are incorporated by reference into Part III of this Form 10-K. Such definitive proxy
statement, except for the parts therein which have been specifically incorporated by reference, should not be deemed ‘‘filed’’ for the purposes of this form 10-K.
Documents Incorporated by Reference
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
Item
Page
PART I
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
. . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships, Related Transactions and Director Independence. . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15. Exhibits and Financial Statement Schedules.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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i
Forward-Looking Statements
PART I
This annual report on Form 10-K contains forward-looking statements within the meaning of the
federal securities laws. Statements that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Forward-looking statements include statements preceded by,
followed by or that include the words ‘‘may,’’ ‘‘could,’’ ‘‘would,’’ ‘‘should,’’ ‘‘believe,’’ ‘‘expect,’’
‘‘anticipate,’’ ‘‘plan,’’ ‘‘target,’’ ‘‘estimate,’’ ‘‘project,’’ ‘‘intend,’’ and similar expressions. These statements
include, among others, statements regarding our expected business outlook, anticipated financial and
operating results, our business strategy and means to implement our strategy, our objectives, the amount
and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans,
budgets, working capital needs, and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performance. These
statements are based on our management’s beliefs and assumptions, which in turn are based on currently
available information. Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding our services, the expansion of our services, competitive conditions, and
general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also
involve known and unknown risks and uncertainties, which could cause actual results to differ materially
from those contained in any forward-looking statement. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited to, the following:
(cid:127) changes in government reimbursement for our services due to the implementation of healthcare
reform legislation, deficit reduction measures, and/or new payment policies (including, for example,
the expiration of the moratorium limiting the full application of the 25 Percent Rule that would
reduce our Medicare payments for those patients admitted to a long term acute care hospital from a
referring hospital in excess of an applicable percentage admissions threshold) may result in a
reduction in net operating revenues, an increase in costs, and a reduction in profitability;
(cid:127) the impact of the Bipartisan Budget Act of 2013 (the ‘‘BBA of 2013’’), which established payment
limits for Medicare patients who do not meet specified criteria, may result in a reduction in net
operating revenues and profitability of our long term acute care hospitals;
(cid:127) the failure of our specialty hospitals to maintain their Medicare certifications may cause our net
operating revenues and profitability to decline;
(cid:127) the failure of our facilities operated as ‘‘hospitals within hospitals’’ to qualify as hospitals separate
from their host hospitals may cause our net operating revenues and profitability to decline;
(cid:127) a government investigation or assertion that we have violated applicable regulations may result in
sanctions or reputational harm and increased costs;
(cid:127) acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or
expose us to unforeseen liabilities;
(cid:127) our plans and expectations related to the acquisitions of Concentra and Physiotherapy Associates
Holdings, Inc. (‘‘Physiotherapy’’) and our ability to realize anticipated synergies;
(cid:127) private third-party payors for our services may adopt payment policies that could limit our future
net operating revenues and profitability;
(cid:127) the failure to maintain established relationships with the physicians in the areas we serve could
reduce our net operating revenues and profitability;
(cid:127) shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our
operating costs significantly or limit our ability to staff our facilities;
1
(cid:127) competition may limit our ability to grow and result in a decrease in our net operating revenues and
profitability;
(cid:127) the loss of key members of our management team could significantly disrupt our operations;
(cid:127) the effect of claims asserted against us could subject us to substantial uninsured liabilities; and
(cid:127) other factors discussed from time to time in our filings with the Securities and Exchange
Commission (the ‘‘SEC’’), including factors discussed under the heading ‘‘Risk Factors’’ of this
annual report on Form 10-K.
Except as required by applicable law, including the securities laws of the United States and the rules
and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking
statements, whether as a result of any new information, future events, or otherwise. You should not place
undue reliance on our forward-looking statements. Although we believe that the expectations reflected in
forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities
analysts, it is against our policy to disclose to securities analysts any material non-public information or
other confidential commercial information. Accordingly, stockholders should not assume that we agree
with any statement or report issued by any securities analyst irrespective of the content of the statement or
report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of the Company.
Item 1. Business.
Overview
We began operations in 1997, and based on number of facilities, are one of the largest operators of
specialty hospitals, outpatient rehabilitation clinics and occupational medicine centers in the United States.
As of December 31, 2016, we had operations in 46 states and the District of Columbia. As of December 31,
2016, we operated 123 specialty hospitals in 27 states, and 1,611 outpatient rehabilitation clinics in 37 states
and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, operated
300 medical centers in 38 states as of December 31, 2016. Concentra also provides contract services at
employer worksites and Department of Veterans Affairs community-based outpatient clinics, or ‘‘CBOCs.’’
We manage our Company through three business segments: specialty hospitals, outpatient
rehabilitation and Concentra. We had net operating revenues of $4,286.0 million for the year ended
December 31, 2016. Of this total, we earned approximately 54% of our net operating revenues from our
specialty hospitals segment, approximately 23% from our outpatient rehabilitation segment, and
approximately 23% from our Concentra segment. Our specialty hospitals segment consists of hospitals
designed to serve the needs of long term acute patients and hospitals designed to serve patients that
require intensive medical rehabilitation care. Patients are typically admitted to our specialty hospitals from
general acute care hospitals. These patients have specialized needs, with serious and often complex
medical conditions. Our outpatient rehabilitation segment consists of clinics that provide physical,
occupational, and speech rehabilitation services. Our Concentra segment consists of medical centers and
contract services provided at employer worksites and Department of Veterans Affairs CBOCs that deliver
occupational medicine, physical therapy, veteran’s healthcare, and consumer health services. See
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of
Operations’’ for financial information for each of our segments for the past three fiscal years. The financial
and statistical information related to the operation of our Concentra segment, and used for calculations in
the ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ section,
which is contained elsewhere herein, began as of June 1, 2015, which is the date the Concentra acquisition
was consummated.
2
Specialty Hospitals
We are a leading operator of specialty hospitals in the United States. As of December 31, 2016, we
operated 123 facilities throughout 27 states, including 103 long term acute care hospitals, or ‘‘LTCHs,’’ and
20 inpatient rehabilitation facilities, or ‘‘IRFs.’’ For the years ended December 31, 2014, 2015, and 2016,
approximately 57%, 55% and 50%, respectively, of the net operating revenues of our specialty hospitals
segment came from Medicare reimbursement. This percentage declined in 2016 as compared to the prior
year because of the changes we implemented at LTCHs operating under new Medicare patient criteria
which have resulted in lower Medicare patient volume. As of December 31, 2016, we operated a total of
5,237 available licensed beds and employed approximately 22,500 people in our specialty hospitals
segment, consisting primarily of registered nurses, respiratory therapists, physical therapists, occupational
therapists, and speech therapists.
We operate the majority of our specialty hospitals as a hospital within a hospital, or an ‘‘HIH.’’ A
specialty hospital that operates as an HIH leases space from a general acute care hospital, or ‘‘host
hospital,’’ and operates as a separately licensed hospital within the host hospital, or on the same campus as
the host hospital. In contrast, a free-standing specialty hospital does not operate on a host hospital campus.
We operated 123 specialty hospitals at December 31, 2016, of which 115 were owned and eight were
managed. Of the 115 specialty hospitals we owned, 78 were operated as HIHs and 37 were operated as
free-standing hospitals.
Patients are typically admitted to our specialty hospitals from general acute care hospitals. These
patients have specialized needs, with serious and often complex medical conditions such as respiratory
failure, neuromuscular disorders, traumatic brain and spinal cord injuries, strokes, non-healing wounds,
cardiac disorders, renal disorders, and cancer. Given their complex medical needs, these patients generally
require a longer length of stay than patients in a general acute care hospital and benefit from being treated
in a specialty hospital that is designed to meet their unique medical needs. For the year ended
December 31, 2016, the average length of stay for patients in our specialty hospitals was 24 days.
Below is a table that shows the distribution by medical condition (based on primary diagnosis) of
patients in our specialty hospitals for the periods indicated:
Medical Condition
Respiratory disorders . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neuromuscular disorders . . . . . . . . . . . . . . . . . . . . . . . .
Cardiac disorders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wound care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Infectious diseases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of Patients
Year Ended December 31,
2014
2015
2016
34%
33%
10%
5%
5%
13%
35%
33%
10%
5%
5%
12%
38%
31%
12%
4%
4%
11%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100% 100% 100%
Additionally, we continually seek to increase our admissions by demonstrating our quality of care and,
by doing so, expanding and improving our relationships with the physicians and general acute care
hospitals in the markets where we operate. We maintain a strong focus on the provision of high-quality
medical care within our facilities. Our specialty hospitals are accredited by the Joint Commission or the
Commission on Accreditation of Rehabilitation Facilities (‘‘CARF’’). As of December 31, 2016, all of the
123 specialty hospitals we operated were accredited by one or more of these accrediting organizations. The
Joint Commission and CARF are independent, not-for-profit organizations that establish standards related
to the operation and management of healthcare facilities. Each of our accredited facilities must regularly
demonstrate to a survey team conformance to the applicable standards.
3
When a patient is referred to one of our specialty hospitals by a physician, case manager, discharge
planner, health maintenance organization, or insurance company, we perform a clinical assessment of the
patient to determine if the patient meets criteria for admission. Based on the determinations reached in
this clinical assessment, an admission decision is made.
Upon admission, an interdisciplinary team reviews a new patient’s condition. The interdisciplinary
team is composed of a number of clinicians and may include any or all of the following: an attending
physician; a specialty nurse; a physical, occupational, or speech therapist; a respiratory therapist; a
dietician; a pharmacist; and a case manager. Upon completion of an initial evaluation by each member of
the treatment team, an individualized treatment plan is established and implemented. The case manager
coordinates all aspects of the patient’s hospital stay and serves as a liaison with the insurance carrier’s case
management staff when appropriate. The case manager communicates progress, resource utilization, and
treatment goals between the patient, the treatment team, and the payor.
Each of our specialty hospitals has a multispecialty medical staff that is composed of physicians that
have completed the privileging and credentialing process required by that specialty hospital, and have been
approved by the governing board of that specialty hospital. Physicians on the medical staff of our specialty
hospitals are generally not directly employed by our specialty hospitals, but instead have staff privileges at
one or more hospitals. At each of our specialty hospitals, attending physicians conduct rounds on their
patients on a regular basis and consulting physicians provide consulting services based on the medical
needs of our patients. Our specialty hospitals also have on-call arrangements with physicians to ensure that
a physician is available to care for our patients. We staff our specialty hospitals with the number of
physicians and other medical practitioners that we believe is appropriate to address the varying needs of
our patients. When determining the appropriate composition of the medical staff of a specialty hospital, we
consider the size of the specialty hospital, services provided by the specialty hospital, if applicable, the size
and capabilities of the medical staff of the general acute care hospital that hosts that HIH, and if
applicable, the proximity of an acute care hospital to the free-standing specialty hospital. The medical staff
of each of our specialty hospitals meets the applicable requirements set forth by Medicare, the hospital’s
applicable accrediting organizations, and the state in which that specialty hospital is located.
Each of our specialty hospitals has an onsite management team consisting of a chief executive officer,
a chief nursing officer, and a director of business development. These teams manage local strategy and
day-to-day operations, including oversight of clinical care and treatment. They also assume primary
responsibility for developing relationships with the general acute care providers and clinicians in the local
areas we serve that refer patients to our specialty hospitals. We provide our hospitals with centralized
accounting, treasury, payroll, legal, operational support, human resources, compliance, management
information systems, and billing and collection services. The centralization of these services improves
efficiency and permits hospital staff to focus their time on patient care.
For a description of government regulations and Medicare payments made to our specialty hospitals
see ‘‘—Government Regulations’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Regulatory Changes.’’
Specialty Hospitals Strategy
The key elements of our specialty hospitals strategy are to:
Focus on Specialized Inpatient Services. We serve highly acute patients and patients with debilitating
injuries and rehabilitation needs that cannot be adequately cared for in a less medically intensive
environment, such as a skilled nursing facility. Generally, patients in our specialty hospitals require longer
stays and can benefit from more specialized clinical care than patients treated in general acute care
hospitals.
4
Provide High-Quality Care and Service. Our specialty hospitals serve a critical role in comprehensive
healthcare delivery. Through our specialized treatment programs and staffing models, we treat patients
with acute, complex and specialized medical needs. Our specialized treatment programs focus on specific
patient needs and medical conditions such as ventilator weaning programs, wound care protocols, and
rehabilitation programs for brain trauma and spinal cord injuries. Our staffing models ensure that patients
have the appropriate clinical resources over the course of their stay. We maintain quality assurance
programs to support and monitor quality of care standards and to meet regulatory requirements and
maintain Medicare certifications. We believe that we are recognized for providing quality care and service,
which helps develop brand loyalty in the local areas we serve.
Our treatment programs, which are continuously reassessed and updated, benefit patients because
they give our clinicians access to the best practices and protocols that we have found to be most effective in
treating various conditions such as respiratory failure, non-healing wounds, brain and spinal cord injuries,
strokes, and neuromuscular disorders. In addition, we combine or modify these programs to provide a
treatment plan tailored to meet our patients’ unique needs. We measure the outcomes and successes of our
patients’ recovery in order to provide the best possible patient care and service.
The quality of the patient care we provide is continually monitored using several measures, including
clinical outcomes data and analyses and patient satisfaction surveys. Quality measures from our specialty
hospitals are collected at our corporate offices and used to create monthly, quarterly and annual reports.
In order to benchmark ourselves against other hospitals, we collect our clinical and patient satisfaction
information and compare it to national standards and the results of other healthcare organizations. We
report to the states in which our hospitals are located certain quality measures that are required to be
reported under state laws. We also report to the Centers for Medicare & Medicaid Services, or ‘‘CMS,’’ the
quality data required to be reported by our specialty hospitals. See ‘‘—Government Regulations—Other
Medicare Regulations—Medicare Quality Reporting.’’
Reduce Operating Costs. We continually seek to improve operating efficiency and reduce costs at our
specialty hospitals by standardizing operations and centralizing key administrative functions. These
initiatives include:
(cid:127) centralizing administrative functions such as accounting, finance, treasury, payroll,
legal,
operational support, human resources, compliance, and billing and collection;
(cid:127) standardizing management information systems to assist in capturing the medical record,
accounting, billing, collections, and data capture and analysis; and
(cid:127) centralizing sourcing and contracting to receive discounted prices for pharmaceuticals, medical
supplies, and other commodities used in our operations.
Increase Commercial Volume. We have focused on continued expansion of our relationships with
commercial insurers to increase our volume of patients with commercial insurance in our specialty
hospitals. We believe that commercial payors seek to contract with our hospitals because we offer our
patients high-quality, cost-effective care at more attractive rates than general acute care hospitals. We also
offer commercial enrollees customized treatment programs not typically offered in general acute care
hospitals.
Develop Specialty Hospitals through Pursuing Joint Ventures with Large Health Care Systems. By
leveraging the experience of our senior management and development team, we believe that we are well
positioned to expand our portfolio of joint ventured operations. When we identify joint venture
opportunities, our development team conducts an extensive review of the area’s referral patterns and
commercial insurance rates to determine the general reimbursement trends and payor mix. Once
discussions commence with a health care system, we refine the specific needs of a joint venture, which
could include working capital, the construction of new space or the leasing and renovation of existing
5
space. A joint venture typically consists of us and the health care system contributing certain post acute
care businesses into a newly formed entity. We typically function as the manager and hold either a majority
or minority ownership interest. We bring clinical expertise and clinical programs that attract commercial
payors and implement our standardized resource management programs, which may improve the clinical
outcome and enhance the financial performance of the joint venture.
Pursue Opportunistic Acquisitions.
In addition to our development and joint venture initiatives, we
may grow our network of specialty hospitals through opportunistic acquisitions. When we acquire a
specialty hospital or a group of specialty hospitals, a team of our professionals is responsible for
formulating and executing an integration plan. We seek to improve financial performance at such facilities
by adding clinical programs that attract commercial payors, centralizing administrative functions, and
implementing our standardized resource management programs.
Outpatient Rehabilitation
We believe that we are the largest operator of outpatient rehabilitation clinics in the United States
based on number of facilities, with 1,611 facilities throughout 37 states and the District of Columbia as of
December 31, 2016. Our outpatient rehabilitation clinics are typically located in a medical complex or
retail location. On March 4, 2016, we acquired Physiotherapy, a national provider of outpatient physical
rehabilitation care offering a wide range of services. On March 31, 2016, we sold our contract therapy
businesses. Our outpatient rehabilitation segment employed approximately 9,900 people as of
December 31, 2016.
In our rehabilitation clinics, we provide physical, occupational, and speech rehabilitation programs
and services. We also provide certain specialized programs such as functional programs for work related
injuries, hand therapy, post-concussion rehabilitation, and athletic training services. The typical patient in
one of our rehabilitation clinics suffers from musculoskeletal impairments that restrict his or her ability to
perform normal activities of daily living. These impairments are often associated with accidents, sports
injuries, work related injuries, or post-operative orthopedic and other medical conditions. Our
rehabilitation programs and services are designed to help these patients minimize physical and cognitive
impairments and maximize functional ability. We also provide services designed to prevent short term
disabilities from becoming chronic conditions. Our rehabilitation services are provided by our
professionals including licensed physical therapists, occupational therapists, and speech-language
pathologists.
Outpatient rehabilitation patients are generally referred or directed to our clinics by a physician,
employer, or health insurer who believes that a patient, employee, or member can benefit from the level of
therapy we provide in an outpatient setting. In recent years a number of states have enacted laws that allow
individuals to seek outpatient physical rehabilitation services without a physician order. Currently, this
population of patients is not significant. In our outpatient rehabilitation segment, approximately 85% of
our net operating revenues come from commercial payors, including healthcare insurers, managed care
organizations and workers’ compensation programs, contract management services, and private pay
sources. We believe that our services are attractive to healthcare payors who are seeking to provide
high-quality and cost-effective care to their enrollees. The balance of our reimbursement is derived from
Medicare and other government sponsored programs.
For a description of government regulations and Medicare payments made to our outpatient
rehabilitation services see ‘‘—Government Regulations’’ and ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Regulatory Changes.’’
6
Outpatient Rehabilitation Strategy
The key elements of our outpatient rehabilitation strategy are to:
Provide High-Quality Care and Service. We are focused on providing a high level of service to our
patients throughout their entire course of treatment. To measure satisfaction with our service we have
developed surveys for both patients and physicians. Our clinics utilize the feedback from these surveys to
continuously refine and improve service levels. We believe that by focusing on quality care and offering a
high level of customer service we develop brand loyalty which allows us to strengthen our relationships
with referring physicians, employers, and health insurers to drive additional patient volume.
Increase Market Share. We strive to establish a leading presence within the local areas we serve. To
increase our presence, we seek to open new clinics in our existing markets. This allows us to realize
economies of scale, heightened brand loyalty, and workforce continuity. We also focus on increasing our
workers’ compensation and commercial/managed care payor mix.
Expand Rehabilitation Programs and Services. Through our local clinical directors of operations and
clinic managers within their service areas, we assess the healthcare needs of the areas we serve. Based on
these assessments, we implement additional programs and services specifically targeted to meet demand in
the local community. In designing these programs we benefit from the knowledge we gain through our
national network of clinics. This knowledge is used to design programs that optimize treatment methods
and measure changes in health status, clinical outcomes, and patient satisfaction.
Optimize Payor Contract Reimbursements. We review payor contracts scheduled for renewal and
potential new payor contracts to assure reasonable reimbursements for the services we provide. Before we
enter into a new contract with a commercial payor, we evaluate it with the aid of our contract management
system. We assess the reasonableness of the reimbursements by evaluating past and projected patient
volume and clinic capacity. We create a retention strategy for the top performing contracts and a
renegotiation strategy for contracts that do not meet our defined criteria. We believe that our national
footprint and our strong reputation enable us to negotiate favorable reimbursement rates with commercial
insurers.
Maintain Strong Community and Employee Relations. We believe that the relationships between our
employees and the referral sources in their communities are critical to our success. Our referral sources,
such as physicians and healthcare case managers, send their patients to our clinics based on three factors:
the quality of our care, the customer service we provide, and their familiarity with our therapists. We seek
to retain and motivate our therapists by implementing a performance-based bonus program, a defined
career path with the ability to be promoted from within, timely communication on company developments,
and internal training programs. We also focus on empowering our employees by giving them a high degree
of autonomy in determining local area strategy. We seek to identify therapists who are potential business
leaders. This management approach reflects the unique nature of each local area in which we operate and
the importance of encouraging our employees to assume responsibility for their clinic’s financial and
operational performance.
Pursue Opportunistic Acquisitions. We may grow our network of outpatient rehabilitation facilities
through opportunistic acquisitions such as Physiotherapy. We believe our size and centralized
infrastructure allow us to take advantage of operational efficiencies and improve financial performance at
acquired facilities.
Concentra
We believe that we are the largest provider of occupational health services in the United States based
on the number of facilities. As of December 31, 2016, we operated 300 medical centers, 107 onsite clinics
at employer worksites, and 32 CBOCs throughout 43 states. We deliver occupational medicine, consumer
7
health, physical therapy, and veteran’s healthcare services in our medical centers, onsite clinics located at
the workplaces of our employer customers and our CBOCs. Our Concentra segment employed
approximately 7,500 people as of December 31, 2016.
We offer a range of occupational and consumer health services through our medical centers and
onsite clinics. Occupational health services include workers’ compensation injury care as well as employer
services, clinical testing, wellness programs, and preventative care. Our services at the CBOCs include
primary care, specialty care, subspecialty care, mental health, and pharmacy benefits. Consumer health
consists of non-employer, patient-directed treatment of injuries, and illnesses. Our consumer service
offerings include urgent care, wellness programs, and preventative care.
services,
Occupational medicine refers to the diagnosis and treatment of work-related injuries (workers’
compensation), compliance
including pre-employment,
such as preventive
fitness-for-duty, and post-accident physical examinations and substance abuse screening. Utilization is
driven by the needs of labor-intensive industries such as transportation, distribution/warehousing,
manufacturing, construction, health care, police/fire, and other occupations that have historically posed a
higher than average risk of workplace injury or that require a workplace physical. Workers’ compensation
is the form of insurance that provides medical coverage to employees with work-related illnesses or
injuries.
services,
Workers’ compensation is administered on a state-by-state basis and each state is responsible for
implementing and regulating its own workers’ compensation program. Because workers’ compensation
benefits are mandated by law and subject to extensive regulation, insurers, third-party administrators, and
employers do not have the same flexibility to alter benefits as they have with other health benefit
programs. In addition, because programs vary by state, it is difficult for insurance companies and multi-
state employers to adopt uniform policies to administer, manage and control the costs of benefits across
states. As a result, managing the cost of workers’ compensation requires approaches that are tailored to
the specific regulatory environments in which the employer operates. For the year ended December 31,
2016, approximately 54% of our Concentra segment operating revenues came from workers’
compensation.
Concentra Strategy
The key elements of our Concentra strategy are to:
Provide High-Quality Care and Service. We strive to provide a high level of service to our patients and
our employer customers. We measure and monitor patient and employer satisfaction and focus on
treatment programs to provide the best clinical outcomes in a consistent manner. Our programs and
services have proven that aggressive treatment and management of workers injuries can more rapidly
restore employees to better health which reduces workers’ compensation indemnity claim costs for our
employer customers.
Focus on Occupational Medicine. Our history as an industry leader in the provision of occupational
medicine services provides the platform for Concentra to grow this service offering. Complementary
service offerings help drive additional growth in this business line.
Pursue Direct Employer Relationships. We believe we provide occupational health services in a cost
effective manner to our employer customers. By establishing direct relationships with these customers we
seek to reduce overall costs of their workers’ compensation claims, while improving employee health, and
getting their employees back to work faster.
Increase Market Share. We strive to establish a leading presence within the local areas we serve. To
increase our presence, we seek to expand our services and programs, and to open new medical centers and
8
employer onsite locations in our existing markets. This allows us to realize economies of scale, heightened
brand loyalty, and workforce continuity.
Pursue Opportunistic Acquisitions. We may grow our network and expand our geographic reach
through opportunistic acquisitions. We believe our size and centralized infrastructure allow us to take
advantage of operational efficiencies and improve financial performance at acquired facilities.
Other
Other activities include our corporate services and certain other minority investments in other
healthcare related businesses. These include investments in companies that provide specialized technology,
services to healthcare entities and providers of complementary services.
Our Competitive Strengths
We believe that the success of our business model is based on a number of competitive strengths,
including our position as a leading operator in each of our business segments, proven financial
performance and strong cash flow, significant scale, experience in completing and integrating acquisitions
and partnering with large healthcare systems, ability to capitalize on consolidation opportunities, and an
experienced management team.
Leading Operator in Distinct but Complementary Lines of Business. We believe that we are a leading
operator in each of our business segments, based on number of facilities in the United States. Our
leadership position and reputation as a high-quality, cost-effective healthcare provider in each of our
business segments allows us to attract patients and employees, aids us in our marketing efforts to referral
sources, and helps us negotiate payor contracts. In our specialty hospitals segment, we operated 123
specialty hospitals in 27 states at December 31, 2016. In our outpatient rehabilitation segment, we
operated 1,611 outpatient rehabilitation clinics in 37 states and the District of Columbia at December 31,
2016. In our Concentra segment, we operated 300 medical centers in 38 states at December 31, 2016. With
these leading positions in the areas we serve, we believe that we are well-positioned to benefit from the
rising demand for medical services due to an aging population in the United States, which will drive growth
across our business segments.
Proven Financial Performance and Strong Cash Flow. We have established a track record of improving
the financial performance of our facilities due to our disciplined approach to revenue growth, expense
management, and focus on free cash flow generation. This includes regular review of specific financial
metrics of our business to determine trends in our revenue generation, expenses, billing, and cash
collection. Based on the ongoing analysis of such trends, we make adjustments to our operations to
optimize our financial performance and cash flow.
Significant Scale. By building significant scale in each of our business segments, we have been able to
leverage our operating costs by centralizing administrative functions at our corporate office.
Experience in Successfully Completing and Integrating Acquisitions. Since our inception in 1997
through 2016, we completed nine significant acquisitions for approximately $2.57 billion, which includes
$418.6 million paid to acquire Physiotherapy and $1.05 billion paid to acquire Concentra. We believe that
we have improved the operating performance of these businesses over time by applying our standard
operating practices and by realizing efficiencies from our centralized operations and management.
Experience in Partnering with Large Health Care Systems. Over the past several years we have
partnered with large health care systems to provide post-acute care services. We believe that we provide
operating expertise through our experience in operating specialty hospitals and outpatient rehabilitation
services to these ventures and have improved and expanded the level of post-acute care services provided
in these communities, as well as the financial performance of these operations.
9
Well-Positioned to Capitalize on Consolidation Opportunities. We believe that we are well-positioned
to capitalize on consolidation opportunities within each of our business segments and selectively augment
our internal growth. We believe that each of our business segments is fragmented, with many of the
nation’s LTCHs, IRFs outpatient rehabilitation facilities, and occupational medical centers are being
operated by independent operators lacking national or broad regional scope. With our geographically
diversified portfolio of facilities in the United States, we believe that our footprint provides us with a
wide-ranging perspective on multiple potential acquisition opportunities.
Experienced and Proven Management Team. Prior to co-founding our company with our current
Executive Chairman and Co-Founder, our Vice Chairman and Co-Founder founded and operated three
other healthcare companies focused on inpatient and outpatient rehabilitation services. In addition, our
senior management team has extensive experience in the healthcare industry. Our President and Chief
Executive Officer has more than two decades of management experience in the healthcare industry. Many
of our other executives, such as our Chief Financial Officer, our General Counsel, our Chief Human
Resources Officer, and our Chief Accounting Officer, have each served at our company for more than
17 years. In recent years, we have reorganized our operations to expand executive talent and ensure
management continuity.
Sources of Net Operating Revenues
The following table presents the approximate percentages by source of net operating revenue received
for healthcare services we provided for the periods indicated:
Net Operating Revenues by Payor Source
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial insurance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workers’ Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Private and other(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2014
2015
2016
44.5% 36.5% 30.0%
37.3% 34.1% 33.0%
5.4% 12.6% 17.2%
8.8% 12.8% 15.8%
4.0% 4.0% 4.0%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0% 100.0%
(1) Includes commercial healthcare insurance carriers, health maintenance organizations,
preferred provider organizations and managed care programs.
(2) Includes self-payors, management services and non-patient related payments. Self-pay
revenues represent less than 1% of total net operating revenues for all periods.
Government Sources
Medicare is a federal program that provides medical insurance benefits to persons age 65 and over,
some disabled persons, and persons with end-stage renal disease. Medicaid is a federal-state funded
program, administered by the states, which provides medical benefits to individuals who are unable to
afford healthcare. As of December 31, 2016, we operated 123 specialty hospitals, 122 of which were
certified as Medicare providers and one of which was in the process of obtaining its certification. Our
outpatient rehabilitation clinics regularly receive Medicare payments for their services. Our Concentra
segment receives payments from the Department of Veterans Affairs and other governmental programs.
Additionally, many of our specialty hospitals participate in state Medicaid programs. Amounts received
under the Medicare and Medicaid programs are generally less than the customary charges for the services
provided. In recent years there have been significant changes made to the Medicare and Medicaid
programs. Since a significant portion of our revenues come from patients under the Medicare program,
our ability to operate our business successfully in the future will depend in large measure on our ability to
10
adapt to changes in the Medicare program. See ‘‘—Government Regulations—Overview of U.S. and State
Government Reimbursements.’’
Non-Government Sources
Our non-government sources of net operating revenue include insurance companies, workers’
compensation programs, health maintenance organizations, preferred provider organizations, other
managed care companies and employers, as well as by patients directly. Patients are generally not
responsible for any difference between customary charges for our services and amounts paid by Medicare
and Medicaid programs, insurance companies, workers’ compensation programs, health maintenance
organizations, preferred provider organizations, and other managed care companies, but are responsible
for services not covered by these programs or plans, as well as for deductibles and co-insurance obligations
of their coverage. The amount of these deductibles and co-insurance obligations has increased in recent
years. Collection of amounts due from individuals is typically more difficult than collection of amounts due
from government or commercial payors.
Employees
As of December 31, 2016, we employed approximately 41,500 people throughout the United States.
Approximately 29,400 of our employees are full time and the remaining approximately 12,100 are
part-time employees. Our specialty hospitals segment employees totaled approximately 22,500, outpatient
rehabilitation segment employees totaled approximately 9,900, and Concentra segment employees totaled
approximately 7,500. The remaining approximately 1,600 employees performed corporate management,
administration, and other support services primarily at our Mechanicsburg, Pennsylvania headquarters.
Competition
We compete on the basis of the quality of the patient services we provide, the outcomes that we
achieve for our patients, and the prices we charge for our services. The primary competitive factors in the
specialty hospitals business include quality of services, charges for services, and responsiveness to the needs
of patients, families, payors, and physicians. Other companies operate specialty hospitals that compete with
our hospitals, including large operators of similar facilities, such as Kindred Healthcare Inc. and
HealthSouth Corporation, and rehabilitation units and stepdown units operated by acute care hospitals in
the markets we serve. The competitive position of any hospital is also affected by the ability of its
management to negotiate contracts with purchasers of group healthcare services, including private
employers, managed care companies, preferred provider organizations, and health maintenance
organizations. Such organizations attempt to obtain discounts from established hospital charges. The
importance of obtaining contracts with preferred provider organizations, health maintenance
organizations, and other organizations which finance healthcare, and its effect on a hospital’s competitive
position, vary from area to area, depending on the number and strength of such organizations.
Our outpatient rehabilitation clinics face a highly fragmented and competitive environment. The
primary competitors that provide outpatient rehabilitation services include physician-owned physical
therapy clinics, dedicated locally owned and managed outpatient rehabilitation clinics, and hospital or
university owned or affiliated ventures, as well as national and regional providers in select areas, including
Athletico Physical Therapy, ATI Physical Therapy, Drayer Physical Therapy Institute, U.S. Physical
Therapy, and Upstream Physical Therapy. Some of these competing clinics have longer operating histories
and greater name recognition in these communities than our clinics, and they may have stronger relations
with physicians in these communities on whom we rely for patient referrals. Because the barriers to entry
are not substantial and current customers have the flexibility to move easily to new healthcare service
providers, we believe that new outpatient physical therapy competitors can emerge relatively quickly.
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Our Concentra segment’s occupational health services, consumer health, and veteran’s healthcare
business face a highly fragmented and competitive environment. The primary competitors that provide
occupational health services have typically been independent physicians, hospital emergency departments,
and hospital-owned or hospital-affiliated medical facilities. Because the barriers to entry are not
substantial and its current customers have the flexibility to move easily to new healthcare service providers,
we believe that new competitors to Concentra can emerge relatively quickly. Furthermore, urgent care
clinics in the local communities Concentra serves provide services similar to those Concentra offers, and, in
some cases, competing facilities are more established or newer than Concentra’s, may offer a broader array
of services to patients than Concentra’s, and may have larger or more specialized medical staffs to treat
and serve patients. In the future, Concentra expects to encounter increased competition from hospital
owned clinics, payor affiliated clinics, retail pharmacy-owned clinics, and healthcare companies.
Government Regulations
General
The healthcare industry is required to comply with many complex laws and regulations at the federal,
state and local government levels. These laws and regulations require that hospitals and facilities
furnishing outpatient services (including outpatient rehabilitation clinics, Concentra medical centers,
onsite clinics and CBOCs) comply with various requirements and standards. These laws and regulations
include those relating to the adequacy of medical care, facilities and equipment, personnel, operating
policies and procedures and recordkeeping as well as standards for reimbursement, fraud and abuse
prevention and health information privacy and security. These laws and regulations are extremely complex,
often overlap and, in many instances, the industry does not have the benefit of significant regulatory or
judicial interpretation. If we fail to comply with applicable laws and regulations, we could suffer civil or
criminal penalties, including the loss of our licenses to operate and our ability to participate in the
Medicare, Medicaid and other federal and state healthcare programs.
Facility Licensure
Our healthcare facilities are subject to state and local licensing statutes and regulations ranging from
the adequacy of medical care to compliance with building codes and environmental protection laws. In
order to assure continued compliance with these various regulations, governmental and other authorities
periodically inspect our facilities, both at scheduled intervals and in response to complaints from patients
and others. While our facilities intend to comply with existing licensing standards, there can be no
assurance that regulatory authorities will determine that all applicable requirements are fully met at any
given time. In addition, the state and local licensing laws are subject to changes or new interpretations that
could impose additional burdens on our facilities. A determination by an applicable regulatory authority
that a facility is not in compliance with these requirements could lead to the imposition of corrective
action, assessment of fines and penalties, or loss of licensure, Medicare enrollment or certification or
accreditation. These consequences could have an adverse effect on our company.
Some states still require us to get approval under certificate of need regulations when we create,
acquire or expand our facilities or services, or alter the ownership of such facilities, whether directly or
indirectly. The certificate of need regulations vary from state to state, and are subject to change and new
interpretation. If we fail to show public need and obtain approval in these states for our new facilities or
changes to the ownership structure of existing facilities, we may be subject to civil or even criminal
penalties, lose our facility license or become ineligible for reimbursement.
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Professional Licensure, Corporate Practice and Fee-Splitting Laws
Healthcare professionals at our specialty hospitals and facilities furnishing outpatient services are
required to be individually licensed or certified under applicable state law. We take steps to ensure that our
employees and agents possess all necessary licenses and certifications.
Some states prohibit the ‘‘corporate practice of medicine,’’ which restricts business corporations from
practicing medicine through the direct employment of physicians or from exercising control over medical
decisions by physicians. Some states similarly prohibit the ‘‘corporate practice of therapy.’’ The laws
relating to corporate practice vary from state to state and are not fully developed in each state in which we
have facilities. Typically, however, professional corporations owned and controlled by
licensed
professionals are exempt from corporate practice restrictions and may employ physicians or therapists to
furnish professional services. Also, in some states hospitals are permitted to employ physicians.
Some states also prohibit entities from engaging in certain financial arrangements, such as
fee-splitting, with physicians or therapists. The laws relating to fee-splitting also vary from state to state
and are not fully developed. Generally, these laws restrict business arrangements that involve a physician
or therapist sharing medical fees with a referral source, but in some states these laws have been interpreted
to extend to management agreements between physicians or therapists and business entities under some
circumstances.
We believe that each of our facilities, licensed physicians, and therapists comply with any current
corporate practice and fee-splitting laws of the state in which they are located. In states where we are
prohibited by the corporate practice of medicine from directly employing licensed physicians, we typically
enter into management agreements with professional corporations that are owned by licensed physicians,
which, in turn, employ or contract with physicians who provide professional medical services in our
facilities. Under those management agreements, we perform only non-medical administrative services, do
not exercise control over the practice of medicine by the physicians and structure compensation to avoid
fee-splitting. In those states that apply the corporate practice of therapy prohibition, we either contract to
obtain therapy services from an entity permitted to employ therapists or we manage the physical therapy
practice owned by licensed therapists through which the therapy services are provided.
Although we believe that our facilities comply with corporate practice and fee-splitting laws, if new
regulations or judicial or administrative interpretations establish that our facilities do not comply with
these laws, we could be subject to civil and perhaps criminal penalties. In addition, if any of our facilities is
determined not to comply with corporate practice and fee-splitting laws, certain of our agreements relating
to the facility may be determined to be unenforceable, including our management agreements with the
professional corporations furnishing physician services or our payment arrangements with insurers or
employers. Future interpretations of corporate practice and fee-splitting laws, the enactment of new
legislation or the adoption of new regulations relating to these laws could cause us to have to restructure
our business operations or close our facilities in a particular state. Any such penalties, determinations of
unenforceability or interpretations could have a material adverse effect on our business.
Medicare Enrollment and Certification
In order to participate in the Medicare program and receive Medicare reimbursement, each facility
must comply with the applicable regulations of the United States Department of Health and Human
Services relating to, among other things, the type of facility, its equipment, its personnel and its standards
of medical care, as well as compliance with all applicable state and local laws and regulations. As of
December 31, 2016, 122 of the 123 specialty hospitals we operated were certified as Medicare providers
and one was in the process of obtaining its certification. In addition, we provide the majority of our
outpatient rehabilitation services through outpatient rehabilitation clinics certified by Medicare as
rehabilitation agencies or ‘‘rehab agencies.’’ Our Concentra medical centers furnishing outpatient services
are generally enrolled in Medicare as suppliers.
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Accreditation
Our specialty hospitals receive accreditation from The Joint Commission or CARF. As of
December 31, 2016, all of the 123 specialty hospitals we operated were accredited by The Joint
Commission. In addition, some of our IRFs have also received accreditation from CARF. Where required
under our contracts with the Department of Veterans Affairs, our facilities furnishing outpatient services
that operate as CBOCs are accredited by The Joint Commission or another healthcare accrediting
organization. See ‘‘—Government Regulations—Veterans Affairs.’’
Workers’ Compensation
Workers’ compensation is a state mandated, comprehensive insurance program that requires
employers to fund or insure medical expenses, lost wages and other costs resulting from work related
injuries and illnesses. Workers’ compensation benefits and arrangements vary from state to state, and are
often highly complex. In some states, payment for services covered by workers’ compensation programs are
subject to cost containment features, such as requirements that all workers’ compensation injuries be
treated through a managed care program, or the imposition of fee schedules or payment caps for services
furnished to injured employees. Some state workers’ compensation laws limit the ability of an employer to
select the providers furnishing care to injured employees. Several states require that physicians furnishing
non-emergency services to workers’ compensation patients must register with the applicable state agency
and undergo special continuing education and training. Workers’ compensation programs may also impose
other requirements that affect the operations of our facilities furnishing outpatient services. Net operating
revenues generated directly from workers’ compensation programs represented approximately 18% of our
net operating revenue from outpatient rehabilitation services, 1% of our net operating revenue from our
specialty hospitals and 54% of our net operating revenue from our Concentra segment for the year ended
December 31, 2016.
Our facilities furnishing outpatient services are reimbursed for services furnished to injured workers
by payors pursuant to the applicable state workers’ compensation statutes. Most of the states in which we
maintain operations reimburse providers for services payable under workers’ compensation laws pursuant
to a treatment-specific fee schedule with established maximum reimbursement levels. In states without
such fee schedules, healthcare providers are often reimbursed based on ‘‘usual and customary’’ fees
benchmarked by market data and negotiated by providers with payors and networks.
Inadequate increases to the applicable fee schedule amounts for our services, and changes in state
workers’ compensation laws, including cost containment initiatives, could have a negative impact on the
operations and financial performance of those facilities.
Veterans Affairs
As of December 31, 2016, we had 32 CBOCs, which were established to provide services to veterans
residing in catchment areas under agreements with the Department of Veterans Affairs. The awarding of
such agreements is regulated by laws related to federal government procurements generally, including the
Federal Acquisition Regulations. Our contracts with the Department of Veterans Affairs include
administrative and clinical services, performance standards, qualifications and other contractor
requirements and information and security requirements. In general, our facilities furnishing outpatient
services that are CBOCs provide outpatient primary care in exchange for a capitated monthly fee based on
the number of eligible patients then enrolled in that CBOC.
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Overview of U.S. and State Government Reimbursements
Medicare Program in General
The Medicare program reimburses healthcare providers for services furnished to Medicare
beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those
suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is
administered primarily by the Department of Health and Human Services and CMS. Net operating
revenues generated directly from the Medicare program represented approximately 45% for the year
ended December 31, 2014, 37% for the year ended December 31, 2015, and 30% for the year ended
December 31, 2016.
The Medicare program reimburses various types of providers, including LTCHs, IRFs, and outpatient
rehabilitation providers, using different payment methodologies. The Medicare reimbursement systems
specific to LTCHs, IRFs, and outpatient rehabilitation providers, as described below, are different than the
system applicable to general acute care hospitals. If any of our hospitals fail to comply with requirements
for payment under Medicare reimbursement systems for LTCHs or IRFs, as applicable, that hospital will
be paid under the system applicable to general acute care hospitals. For general acute care hospitals,
Medicare payments for inpatient care are made under the inpatient prospective payment system, or
‘‘IPPS,’’ under which a hospital receives a fixed payment amount per discharge (adjusted for area wage
differences) using Medicare severity diagnosis-related groups, or ‘‘MS-DRGs.’’ The general acute care
hospital MS-DRG payment rate is based upon the national average cost of treating a Medicare patient’s
condition, based on severity levels of illness, in that type of facility. Although the average length of stay
varies for each MS-DRG, the average stay of all Medicare patients in a general acute care hospital is
substantially less than the average length of stay in LTCHs and IRFs. Thus, the prospective payment
system for general acute care hospitals creates an economic incentive for those hospitals to discharge
medically complex Medicare patients to a post-acute care setting as soon as clinically possible. Effective
October 1, 2005, CMS expanded its post-acute care transfer policy under which general acute care
hospitals are paid on a per diem basis rather than the full MS-DRG rate if a patient is discharged early to
certain post-acute care settings, including LTCHs and IRFs. When a patient is discharged from selected
MS-DRGs to, among other providers, an LTCH or IRF, the general acute care hospital may be reimbursed
below the full MS-DRG payment if the patient’s length of stay is less than the geometric mean length of
stay for the MS-DRG.
Long Term Acute Care Hospital Medicare Reimbursement
The Medicare payment system for LTCHs is based on a prospective payment system specifically
applicable to LTCHs. The long term care hospital prospective payment system, or ‘‘LTCH-PPS,’’ was
established by CMS final regulations published on August 30, 2002, and applies to LTCHs for cost
reporting periods beginning on or after October 1, 2002. The policies and payment rates under LTCH-PPS
are subject to annual updates and revisions. Under LTCH-PPS, each patient discharged from an LTCH is
assigned to a distinct ‘‘MS-LTC-DRG,’’ which is a Medicare severity long-term care diagnosis-related
group for LTCHs, and an LTCH is generally paid a pre-determined fixed amount applicable to the
assigned MS-LTC-DRG (adjusted for area wage differences), subject to exceptions for short stay and high
cost outlier patients (described below). CMS assigns relative weights to each MS-LTC-DRG to reflect their
relative use of medical care resources. The payment amount for each MS-LTC-DRG is intended to reflect
the average cost of treating a Medicare patient assigned to that MS-LTC-DRG in an LTCH.
Standard Federal Rate
Payment under the LTCH-PPS is dependent on determining the patient classification, that is, the
assignment of the case to a particular MS-LTC-DRG, the weight of the MS-LTC-DRG, and the standard
federal payment rate. There is a single standard federal rate that encompasses both the inpatient operating
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costs, which includes a labor and non-labor component, and capital-related costs that CMS updates on an
annual basis. LTCH-PPS also includes special payment policies that adjust the payments for some patients
based on the patient’s length of stay, the facility’s costs, whether the patient was discharged and
readmitted, and other factors.
Patient Criteria
The BBA of 2013, enacted December 26, 2013, establishes a dual-rate LTCH-PPS for Medicare
patients discharged from an LTCH. Specifically, for Medicare patients discharged in cost reporting periods
beginning on or after October 1, 2015, LTCHs will be reimbursed at the LTCH-PPS standard federal
payment rate only if, immediately preceding the patient’s LTCH admission, the patient was discharged
from a ‘‘subsection (d) hospital’’ (generally, a short-term acute care hospital paid under IPPS) and either
the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU)
at the subsection (d) hospital, or the patient was assigned to an MS-LTC-DRG for cases receiving at least
96 hours of ventilator services in the LTCH. In addition, to be paid at the LTCH-PPS standard federal
payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to
psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria, the LTCH
will be paid a lower ‘‘site-neutral’’ payment rate, which will be the lower of: (i) the IPPS comparable
per-diem payment rate capped at the MS-DRG payment rate plus any outlier payments; or (ii) 100 percent
of the estimated costs for services.
The BBA of 2013 provides for a transition to the site-neutral payment rate for those patients not paid
at the LTCH-PPS standard federal payment rate. During the transition period (applicable to hospital cost
reporting periods beginning on or after October 1, 2015 and on or before September 30, 2017), a blended
rate will be paid for Medicare patients not meeting the new criteria that is equal to 50% of the site-neutral
payment rate amount and 50% of the standard federal payment rate amount. Thereafter, an LTCH will be
paid solely based on the site-neutral payment rate for Medicare patients not meeting the patient criteria.
For discharges in cost reporting periods beginning on or after October 1, 2017, only the site-neutral
payment rate will apply for Medicare patients not meeting the new criteria.
In addition, for cost reporting periods beginning on or after October 1, 2019, qualifying discharges
from an LTCH will continue to be paid at the LTCH-PPS standard federal payment rate, unless the
number of discharges for which payment is made under the site-neutral payment rate is greater than 50%
of the total number of discharges from the LTCH for that period. If the number of discharges for which
payment is made under the site-neutral payment rate is greater than 50%, then beginning in the next cost
reporting period all discharges from the LTCH will be reimbursed at the site-neutral payment rate. The
BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral payment
rate to be reinstated for payment under the dual-rate LTCH-PPS.
Payment adjustments, including the interrupted stay policy and the 25 Percent Rule (discussed below),
apply to LTCH discharges regardless of whether the case is paid at the standard federal payment rate or
the site-neutral payment rate. However, short stay outlier payment adjustments do not apply to cases paid
at the site-neutral payment rate. CMS calculates the annual recalibration of the MS-LTC-DRG relative
payment weighting factors using only data from LTCH discharges that meet the criteria for exclusion from
the site-neutral payment rate. In addition, CMS applies the IPPS fixed-loss amount for high cost outliers to
site-neutral cases, rather than the LTCH-PPS fixed-loss amount. CMS calculates the LTCH-PPS fixed-loss
amount using only data from cases paid at the LTCH-PPS payment rate, excluding cases paid at the
site-neutral rate. For fiscal year 2017, the IPPS fixed-loss amount is set at $23,573 and the LTCH-PPS
fixed-loss amount is $21,943.
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Short Stay Outlier Policy
CMS established a different payment methodology for Medicare patients with a length of stay less
than or equal to five-sixths of the geometric average length of stay for that particular MS-LTC-DRG,
referred to as a short stay outlier, or ‘‘SSO.’’ SSO cases are paid based on the lesser of: (i) 100% of the
average cost of the case; (ii) 120% of the MS-LTC-DRG specific per diem amount multiplied by the
patient’s length of stay; (iii) the full MS-LTC-DRG payment; or (iv) a per diem rate derived from blending
120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care
hospital IPPS.
The SSO rule also has a category referred to as a ‘‘very short stay outlier,’’ which applies to cases with
a length of stay that is less than the average length of stay plus one standard deviation for the same
MS-DRG under IPPS, referred to as the so-called ‘‘IPPS comparable threshold.’’ The LTCH payment for
very short stay outlier cases is equivalent to the general acute care hospital IPPS per diem rate.
High Cost Outliers
Some cases are extraordinarily costly, producing losses that may be too large for hospitals to offset.
Cases with unusually high costs, referred to as ‘‘high cost outliers,’’ receive a payment adjustment to reflect
the additional resources utilized. CMS provides an additional payment if the estimated costs for the
patient exceed the adjusted MS-LTC-DRG payment plus a fixed-loss amount that is established in the
annual payment rate update.
Interrupted Stays
An interrupted stay is defined as a case in which an LTCH patient, upon discharge, is admitted to a
general acute care hospital, IRF or skilled nursing facility/swing-bed and then returns to the same LTCH
within a specified period of time. If the length of stay at the receiving provider is equal to or less than the
applicable fixed period of time, it is considered to be an interrupted stay case and the case is treated as a
single discharge for the purposes of payment to the LTCH.
Freestanding, HIH and Satellite LTCHs
LTCHs may be organized and operated as freestanding facilities or as HIHs. As its name suggests, a
freestanding LTCH is not located on the campus of another hospital. For such purpose, ‘‘campus’’ means
the physical area immediately adjacent to a hospital’s main buildings, other areas and structures that are
not strictly contiguous to a hospital’s main buildings but are located within 250 yards of its main buildings,
and any other areas determined, on an individual case basis by the applicable CMS regional office, to be
part of a hospital’s campus. Conversely, an HIH is an LTCH that is located on the campus of another
hospital. An LTCH, whether freestanding or an HIH, that uses the same Medicare provider number of an
affiliated ‘‘primary site’’ LTCH is known as a ‘‘satellite.’’ Under Medicare policy, a satellite LTCH must be
located within 35 miles of its primary site LTCH and be administered by such primary site LTCH. A
primary site LTCH may have more than one satellite LTCH. CMS sometimes refers to a satellite LTCH
that is freestanding as a ‘‘remote location.’’
Facility Certification Criteria
The LTCH-PPS regulations define the criteria that must be met in order for a hospital to be certified
as an LTCH. To be eligible for payment under the LTCH-PPS, a hospital must be primarily engaged in
providing inpatient services to Medicare beneficiaries with medically complex conditions that require a
long hospital stay. In addition, by definition, LTCHs must meet certain facility criteria, including:
(i) instituting a review process that screens patients for appropriateness of an admission and validates the
patient criteria within 48 hours of each patient’s admission, evaluates regularly their patients for
continuation of care and assesses the available discharge options; (ii) having active physician involvement
with patient care that includes a physician available on-site daily and additional consulting physicians on
call; and (iii) having an interdisciplinary team of healthcare professionals to prepare and carry out an
individualized treatment plan for each patient.
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An LTCH must have an average inpatient length of stay for Medicare patients (including both
Medicare covered and non-covered days and Medicare Advantage Days) of greater than 25 days. LTCHs
that fail to exceed an average length of stay of 25 days during any cost reporting period may be paid under
the general acute care hospital IPPS if not corrected within established timeframes. CMS, through its
contractors, determines whether an LTCH has maintained an average length of stay of greater than 25 days
during each annual cost reporting period. LTCH cases paid at the site-neutral rate and Medicare
Advantage cases are excluded from the LTCH average length of stay calculation for cost reporting periods
that began on or after October 1, 2015.
Prior to qualifying under the payment system applicable to LTCHs, a new LTCH initially receives
payments under the general acute care hospital IPPS. The LTCH must continue to be paid under this
system for a minimum of six months while meeting certain Medicare LTCH requirements, the most
significant requirement being an average length of stay for Medicare patients (including both Medicare
covered and non-covered days) greater than 25 days.
25 Percent Rule
The ‘‘25 Percent Rule’’ is a downward payment adjustment that applies if the percentage of Medicare
patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the
LTCH or LTCH satellite is co-located with the referring hospital) exceeds the applicable percentage
admissions threshold during a particular cost reporting period. Specifically, the payment rate for only
Medicare patients above the percentage admissions threshold are subject to a downward payment
adjustment. For Medicare patients above the applicable percentage admissions threshold, the LTCH is
reimbursed at a rate equivalent to that under general acute care hospital IPPS, which is generally lower
than LTCH-PPS rates. Cases that reach outlier status in the referring hospital do not count toward the
admissions threshold and are paid under LTCH-PPS.
Current law, as amended by the 21st Century Cures Act, precludes CMS from applying the 25 Percent
Rule for freestanding LTCHs to cost reporting years beginning before July 1, 2016 and for discharges
occurring on or after October 1, 2016 and before October 1, 2017. In addition, current law applies higher
percentage admissions thresholds under the 25 Percent Rule for most HIHs for cost reporting years
beginning before July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before
October 1, 2017. For freestanding LTCHs the percentage admissions threshold is suspended during the
relief periods. For HIHs the percentage admissions threshold is raised from 25% to 50% during the relief
periods. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs
co-located with an MSA-dominant hospital the referral percentage was raised from 50% to 75%.
Grandfathered HIHs are exempt from the 25 Percent Rule regulations.
After the expiration of the statutory relief, as described above, our LTCHs (whether freestanding,
HIH or satellite) will be subject to a downward payment adjustment for any Medicare patients who were
admitted from a co-located or a non-co-located hospital and that exceed the applicable percentage
admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period.
These regulatory changes will have an adverse financial impact on the net operating revenues and
profitability of many of these hospitals for discharges on or after October 1, 2017.
Moratorium on New LTCHs, LTCH Satellite Facilities and LTCH beds
Current law imposes a moratorium on the establishment and classification of new LTCHs or LTCH
satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities through
September 30, 2017. There are three exceptions to the moratorium for projects that were under
development when the moratorium began on April 1, 2014. Only one exception needs to apply.
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Annual Payment Rate Update
Fiscal Year 2015. On August 22, 2014, CMS published the final rule updating policies and payment
rates for LTCH-PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or
after October 1, 2014 through September 30, 2015). The standard federal rate was set at $41,044, an
increase from the standard federal rate applicable during fiscal year 2014 of $40,607. The update to the
standard federal rate for fiscal year 2015 included a market basket increase of 2.9%, less a productivity
adjustment of 0.5%, less a reduction of 0.2% mandated by the Affordable Care Act, or the ‘‘ACA’’, and less
a budget neutrality adjustment of 1.266%. The fixed-loss amount for high cost outlier cases was set at
$14,972, an increase from the fixed-loss amount in the 2014 fiscal year of $13,314.
Fiscal Year 2016. On August 17, 2015, CMS published the final rule updating policies and payment
rates for the LTCH-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on
or after October 1, 2015 through September 30, 2016). The standard federal rate was set at $41,763, an
increase from the standard federal rate applicable during fiscal year 2015 of $41,044. The update to the
standard federal rate for fiscal year 2016 included a market basket increase of 2.4%, less a productivity
adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. The fixed-loss amount for high
cost outlier cases paid under LTCH-PPS was set at $16,423, an increase from the fixed-loss amount in the
2015 fiscal year of $14,972. The fixed-loss amount for high cost outlier cases paid under the site-neutral
payment rate described above was set at $22,538.
Fiscal Year 2017. On August 22, 2016, CMS published the final rule updating policies and payment
rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on
or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an
increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the
standard federal rate for fiscal year 2017 included a market basket increase of 2.8%, less a productivity
adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed-loss amount for high
cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed-loss amount in the
2016 fiscal year of $16,423. The fixed-loss amount for high cost outlier cases paid under the site-neutral
payment rate was set at $23,573, an increase from the fixed-loss amount in the 2016 fiscal year of $22,538.
Medicare Market Basket Adjustments
The ACA instituted a market basket payment adjustment to LTCHs. In fiscal years 2018 and 2019, the
market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of
2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment
reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to
result in less than a 0% payment update and payment rates that are less than the prior year.
Medicare Reimbursement of Inpatient Rehabilitation Facility Services
IRFs are paid under a prospective payment system specifically applicable to this provider type, which
is referred to as ‘‘IRF-PPS.’’ Under the IRF-PPS, each patient discharged from an IRF is assigned to a
case mix group, or ‘‘IRF-CMG,’’ containing patients with similar clinical conditions that are expected to
require similar amounts of resources. An IRF is generally paid a pre-determined fixed amount applicable
to the assigned IRF-CMG (subject to applicable case adjustments related to length of stay and facility level
adjustments for location and low income patients). The payment amount for each IRF-CMG is intended to
reflect the average cost of treating a Medicare patient’s condition in an IRF relative to patients with
conditions described by other IRF-CMGs. The IRF-PPS also includes special payment policies that adjust
the payments for some patients based on the patient’s length of stay, the facility’s costs, whether the patient
was discharged and readmitted and other factors.
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Facility Certification Criteria
Our rehabilitation hospitals must meet certain facility criteria to be classified as an IRF by the
Medicare program, including: (i) a provider agreement to participate as a hospital in Medicare; (ii) a
preadmission screening procedure; (iii) ensuring that patients receive close medical supervision and
furnish, through the use of qualified personnel, rehabilitation nursing, physical therapy, and occupational
therapy, plus, as needed, speech therapy, social or psychological services, and orthotic and prosthetic
services; (iv) a full-time, qualified director of rehabilitation; (v) a plan of treatment for each inpatient that
is established, reviewed, and revised as needed by a physician in consultation with other professional
personnel who provide services to the patient; and (vi) a coordinated multidisciplinary team approach in
the rehabilitation of each inpatient, as documented by periodic clinical entries made in the patient’s
medical record to note the patient’s status in relationship to goal attainment, and that team conferences
are held at least every two weeks to determine the appropriateness of treatment. Failure to comply with
any of the classification criteria may result in the denial of claims for payment or cause a hospital to lose its
status as an IRF and be paid under the prospective payment system that applies to general acute care
hospitals.
Patient Classification Criteria
Under the IRF certification criteria that has been in effect since 1983, in order to qualify as an IRF, a
hospital was required to satisfy certain operational criteria as well as demonstrate that, during its most
recent 12-month cost reporting period, it served an inpatient population of whom at least 75% required
intensive rehabilitation services for one or more of 10 conditions specified in the regulation. The SCHIP
Extension Act reduced the patient classification criteria compliance threshold to 60% (with comorbidities
counting toward this threshold), at which time the requirement became known as the ‘‘60% Rule.’’
Compliance with the 60% Rule is demonstrated through either medical review or the ‘‘presumptive’’
method, in which a patient’s diagnosis codes are compared to a ‘‘presumptive compliance’’ list.
Annual Payment Rate Update
Fiscal Year 2015. On August 6, 2014, CMS published the final rule updating policies and payment
rates for IRF-PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or
after October 1, 2014 through September 30, 2015). The standard payment conversion factor for
discharges for fiscal year 2015 was set at $15,198, an increase from the standard payment conversion factor
applicable during fiscal year 2014 of $14,846. The update to the standard payment conversion factor for
fiscal year 2015 included a market basket increase of 2.9%, less a productivity adjustment of 0.5%, and less
a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year
2015 to $8,848 from $9,272 established in the final rule for fiscal year 2014.
Fiscal Year 2016. On August 6, 2015, CMS published the final rule updating policies and payment
rates for IRF-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or
after October 1, 2015 through September 30, 2016). The standard payment conversion factor for
discharges for fiscal year 2016 was set at $15,478, an increase from the standard payment conversion factor
applicable during fiscal year 2015 of $15,198. The update to the standard payment conversion factor for
fiscal year 2016 included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less
a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year
2016 to $8,658 from $8,848 established in the final rule for fiscal year 2015.
Fiscal Year 2017. On August 5, 2016, CMS published the final rule updating policies and payment
rates for the IRF-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or
after October 1, 2016 through September 30, 2017). The standard payment conversion factor for
discharges for fiscal year 2017 was set at $15,708, an increase from the standard payment conversion factor
applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor for
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fiscal year 2017 included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less
a reduction of 0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year
2017 to $7,984 from $8,658 established in the final rule for fiscal year 2016.
Medicare Market Basket Adjustments
The ACA instituted a market basket payment adjustment for IRFs. In fiscal years 2018 and 2019, the
market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of
2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment
reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to
result in less than a 0% payment update and payment rates that are less than the prior year.
Medicare Reimbursement of Outpatient Rehabilitation Services
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare
physician fee schedule. For services provided in 2017 through 2019, a 0.5% update will be applied each
year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the Merit-Based
Incentive Payment System (‘‘MIPS’’). For services provided in 2020 through 2025, a 0.0% percent update
will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the
alternative payment models (‘‘APMs’’). In 2026 and subsequent years eligible professionals participating in
APMs that meet certain criteria would receive annual updates of 0.75%, while all other professionals
would receive annual updates of 0.25%.
Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance
in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use
of electronic health records. Under the MIPS requirements a provider’s performance is assessed according
to established performance standards and used to determine an adjustment factor that is then applied to
the professional’s payment for a year. Each year from 2019 through 2024, professionals who receive a
significant share of their revenues through an 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. The specifics of the MIPS
and APM adjustments beginning in 2019 and 2020, respectively, will be subject to future notice and
comment rule-making. For the year ended December 31, 2016, we received approximately 14% of our
outpatient rehabilitation net operating revenues from Medicare.
Therapy Caps
Outpatient therapy providers reimbursed under the Medicare physician fee schedule are subject to
annual limits for therapy expenses. Effective January 1, 2016, the annual limit on outpatient therapy
services was $1,960 for combined physical and speech language pathology services and $1,960 for
occupational therapy services. Effective January 1, 2017, the annual limit on outpatient therapy services is
$1,980 for combined physical and speech language pathology services and $1,980 for occupational therapy
services.
The annual limits for therapy expenses historically did not apply to services furnished and billed by
outpatient hospital departments. However, the Medicare Access and CHIP Reauthorization Act of 2015,
and prior legislation, extended the annual limits on therapy expenses in hospital outpatient department
settings through December 31, 2017. The application of annual limits to hospital outpatient department
settings will sunset on December 31, 2017 unless Congress extends it. We operated 1,611 outpatient
rehabilitation clinics at December 31, 2016, of which 195 are provider based outpatient rehabilitation
clinics operated as departments of the inpatient rehabilitation hospitals we operated.
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Under an exceptions process to the annual limit for therapy expenses, a Medicare enrollee (or person
acting on behalf of the Medicare enrollee) is able to request an exception from the therapy caps if the
provision of therapy services was deemed to be medically necessary. Therapy cap exceptions have been
available automatically for certain conditions and on a case by case basis upon submission of
documentation of medical necessity in other cases. The Medicare Access and CHIP Reauthorization Act
of 2015 extends the exceptions process for outpatient therapy caps through December 31, 2017. Unless
Congress extends the exceptions process, the therapy caps be applied without an exceptions process to all
outpatient therapy services beginning January 1, 2018, except those services furnished and billed by
outpatient hospital departments.
All therapy claims exceeding $3,700 are subject to a manual medical review process. The $3,700
threshold is applied to physical therapy and speech therapy services combined and separately applied to
occupational therapy. The Medicare Access and CHIP Reauthorization Act of 2015 extends the manual
medical review process through December 31, 2017.
Other Requirements for Payment
Historically, outpatient rehabilitation services have been subject to scrutiny by the Medicare program
for, among other things, medical necessity for services, appropriate documentation for services, supervision
of therapy aides and students, and billing for single rather than group therapy when services are furnished
to more than one patient. CMS has issued guidance to clarify that services performed by a student are not
reimbursed even if provided under ‘‘line of sight’’ supervision of the therapist. Likewise, CMS has
reiterated that Medicare does not pay for services provided by aides regardless of the level of supervision.
CMS also has issued instructions that outpatient physical and occupational therapy services provided
simultaneously to two or more individuals by a practitioner should be billed as group therapy services.
Specialty Hospital Medicaid Reimbursement
The Medicaid program is designed to provide medical assistance to individuals unable to afford care.
The program is governed by the Social Security Act of 1965, funded jointly by each individual state and the
federal government, and administered by state agencies. Medicaid payments are made under a number of
different systems, which include cost based reimbursement, prospective payment systems, or programs that
negotiate payment levels with individual hospitals. In addition, Medicaid programs are subject to statutory
and regulatory changes, administrative rulings, interpretations of policy by the state agencies, and certain
government funding limitations, all of which may increase or decrease the level of program payments to
our hospitals. Net operating revenues generated directly from the Medicaid program represented
approximately 7% of our specialty hospitals net operating revenues for the year ended December 31, 2016.
Other Healthcare Regulations
Medicare Quality Reporting
Our LTCHs and IRFs are subject to mandatory quality reporting requirements for fiscal year 2014
and each subsequent year. LTCHs and IRFs that do not submit the required quality data will be subject to
a 2% reduction in their annual payment update. The reduction can result in payment rates less than the
prior year. However, the reduction will not carry over into the subsequent fiscal years.
Our specialty hospitals are required to collect and report patient assessment data and clinical
measures on each Medicare beneficiary who receives inpatient services in our facilities. Specialty hospitals
began reporting this data on October 1, 2012. CMS began making this data available to the public on the
CMS website in December 2016. CMS is now adding cross-setting quality measures to compare quality and
resource data across post-acute settings pursuant to the Improving Medicare Post-Acute Care
Transformation Act of 2014 (IMPACT) (Pub. L. 113-185).
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Medicare Hospital Wage Index Adjustment
As part of the methodology for determining prospective payments to LTCHs and IRFs, CMS adjusts
the standard payment amounts for area differences in hospital wage levels by a factor reflecting the relative
hospital wage level in the geographic area of the hospital compared to the national average hospital wage
level. This adjustment factor is the hospital wage index. CMS currently defines hospital geographic areas
(labor market areas) based on the definitions of Core-Based Statistical Areas established by the Office of
Management and Budget. The ACA calls for CMS to develop and present to Congress a comprehensive
reform plan using Bureau of Labor Statistics data, or other data or methodologies, to calculate relative
wages for each geographic area involved. In the preamble to the proposed rule for LTCH-PPS for fiscal
year 2012, CMS solicited public comments on ways to redefine the geographic reclassification
requirements to more accurately define labor markets. To date, CMS has not presented a comprehensive
reform plan to Congress.
Physician-Owned Hospital Limitations
CMS regulations include a number of hospital ownership and physician referral provisions, including
certain obligations requiring physician-owned hospitals to disclose ownership or investment interests held
by the referring physician or his or her immediate family members. In particular, physician-owned
hospitals must furnish to patients, on request, a list of physicians or immediate family members who own or
invest in the hospital. Moreover, a physician-owned hospital must require all physician owners or investors
who are also active members of the hospital’s medical staff to disclose in writing their ownership or
investment interests in the hospital to all patients they refer to the hospital. CMS can terminate the
Medicare provider agreement of a physician-owned hospital if it fails to comply with these disclosure
provisions or with the requirement that a hospital disclose in writing to all patients whether there is a
physician on-site at the hospital, 24 hours per day, seven days per week.
Under the transparency and program integrity provisions of the ACA, the exception to the federal
self-referral law, or ‘‘Stark Law,’’ that permits physicians to refer patients to hospitals in which they have
an ownership or investment interest has been dramatically curtailed. Only hospitals, including specialty
hospitals, with physician ownership and a provider agreement in place on December 31, 2010 are exempt
from the general ban on self-referral. Existing physician-owned hospitals are prohibited from increasing
the percentage of physician ownership or investment interests held in the hospital after March 23, 2010. In
addition, physician-owned hospitals are prohibited from increasing the number of licensed beds after
March 23, 2010, unless meeting specific exceptions related to the hospital’s location and patient
population. In order to retain their exemption from the general ban on self-referrals, our physician-owned
hospitals are required to adopt specific measures relating to conflicts of interest, bona fide investments and
patient safety. As of December 31, 2016, we operated seven hospitals that are owned in-part by physicians.
Medicare Recovery Audit Contractors
CMS contracts with third-party organizations, known as Recovery Audit Contractors, or ‘‘RACs,’’ to
identify Medicare underpayments and overpayments, and to authorize RACs to recoup any overpayments.
The compensation paid to each RAC is based on a percentage of overpayment recoveries identified by the
RAC. CMS has selected and entered into contracts with four RACs, each of which has begun their audit
activities in specific jurisdictions. RAC audits of our Medicare reimbursement may lead to assertions that
we have been overpaid, require us to incur additional costs to respond to requests for records and pursue
the reversal of payment denials, and ultimately require us to refund any amounts determined to have been
overpaid. We cannot predict the impact of future RAC reviews on our results of operations or cash flows.
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Fraud and Abuse Enforcement
Various federal and state laws prohibit the submission of false or fraudulent claims, including claims
to obtain payment under Medicare, Medicaid, and other government healthcare programs. Penalties for
violation of these laws include civil and criminal fines, imprisonment, and exclusion from participation in
federal and state healthcare programs. In recent years, federal and state government agencies have
increased the level of enforcement resources and activities targeted at the healthcare industry. In addition,
the federal False Claims Act and similar state statutes allow individuals to bring lawsuits on behalf of the
government, in what are known as qui tam or ‘‘whistleblower’’ actions, alleging false or fraudulent
Medicare or Medicaid claims or other violations of the statute. The use of these private enforcement
actions against healthcare providers has increased dramatically in recent years, in part because the
individual filing the initial complaint is entitled to share in a portion of any settlement or judgment.
Revisions to the False Claims Act enacted in 2009 expanded significantly the scope of liability, provided for
new investigative tools, and made it easier for whistleblowers to bring and maintain False Claims Act suits
on behalf of the government. See ‘‘—Legal Proceedings.’’
From time to time, various federal and state agencies, such as the Office of Inspector General of the
Department of Health and Human Services, or ‘‘OIG,’’ issue a variety of pronouncements, including fraud
alerts, the OIG’s Annual Work Plan, and other reports, identifying practices that may be subject to
heightened scrutiny. These pronouncements can identify issues relating to LTCHs, IRFs, or outpatient
rehabilitation services or providers. For example, the OIG stated in its 2014 Work Plan that it would study
readmission patterns in LTCHs to determine whether LTCHs are billing Medicare for higher paying new
stays instead of interrupted stays and the extent to which co-located LTCHs readmit patients from the
providers with which they are co-located. The OIG issued a corresponding report in June 2014 in which it
recommended that CMS review existing safeguards to determine whether additional action is needed to
prevent inappropriate payments for interrupted stays, conduct additional analysis to determine the extent
to which financial incentives influence LTCHs’ readmission decisions, develop a system to enforce the
5-percent readmission threshold, take appropriate action regarding LTCHs exhibiting certain readmission
patterns, and take appropriate action on inappropriate payments and overpayments to co-located LTCHs
that exceed the 5-percent readmission threshold. Of these recommendations, CMS concurred with the
OIG’s recommendation that CMS review existing safeguards to determine whether additional action is
needed to prevent inappropriate payments for interrupted stays and take appropriate action on
inappropriate payments and overpayments to co-located LTCHs that exceed the 5-percent readmission
threshold. In the OIG’s 2015 and 2016 Work Plans, the OIG announced its intent to estimate the national
incidence of adverse and temporary harm events for Medicare beneficiaries receiving post-acute care in
IRFs and LTCHs. As part of this review, the OIG intends to identify factors contributing to these events,
determine the extent to which the events were preventable, and estimate the associated costs to Medicare.
In the 2016 Work Plan, the OIG also indicated it would review compliance with various aspects of IRF
PPS, including documentation required in support of claims paid by Medicare, Medicare outlier payments
to hospitals and whether CMS performed necessary reconciliations in a timely manner to enable Medicare
contractors to perform final settlement of the hospitals’ associated cost reports, and hospital compliance
with the Medicare provider-based rules. Our IRFs and LTCHs may be required to provide information
related to these reviews. We monitor government publications applicable to us to supplement and enhance
our compliance efforts.
We endeavor to conduct our operations in compliance with applicable laws, including healthcare fraud
and abuse laws. If we identify any practices as being potentially contrary to applicable law, we will take
appropriate action to address the matter, including, where appropriate, disclosure to the proper
authorities, which may result in a voluntary refund of monies to Medicare, Medicaid, or other
governmental healthcare programs.
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Remuneration and Fraud Measures
The federal anti-kickback statute prohibits some business practices and relationships under Medicare,
Medicaid, and other federal healthcare programs. These practices include the payment, receipt, offer, or
solicitation of remuneration in connection with, to induce, or to arrange for, the referral of patients
covered by a federal or state healthcare program. Violations of the anti-kickback law may be punished by a
criminal fine of up to $50,000 or imprisonment for each violation, or both, civil monetary penalties of
$50,000 and damages of up to three times the total amount of remuneration, and exclusion from
participation in federal or state healthcare programs.
The Stark Law prohibits referrals for designated health services by physicians under the Medicare and
Medicaid programs to other healthcare providers in which the physicians have an ownership or
compensation arrangement unless an exception applies. Sanctions for violating the Stark Law include civil
monetary penalties of up to $15,000 per prohibited service provided, assessments equal to three times the
dollar value of each such service provided, and exclusion from the Medicare and Medicaid programs and
other federal and state healthcare programs. The statute also provides a penalty of up to $100,000 for a
circumvention scheme. In addition, many states have adopted or may adopt similar anti-kickback or
anti-self-referral statutes. Some of these statutes prohibit the payment or receipt of remuneration for the
referral of patients, regardless of the source of the payment for the care. While we do not believe our
arrangements are in violation of these prohibitions, we cannot assure you that governmental officials
charged with the responsibility for enforcing the provisions of these prohibitions will not assert that one or
more of our arrangements are in violation of the provisions of such laws and regulations.
Provider-Based Status
The designation ‘‘provider-based’’ refers to circumstances in which a subordinate facility (e.g., a
separately certified Medicare provider, a department of a provider, or a satellite facility) is treated as part
of a provider for Medicare payment purposes. In these cases, the services of the subordinate facility are
included on the ‘‘main’’ provider’s cost report and overhead costs of the main provider can be allocated to
the subordinate facility, to the extent that they are shared. As of December 31, 2016, we operated 13
specialty hospitals that were treated as provider-based satellites of certain of our other facilities, 195 of the
outpatient rehabilitation clinics we operated were provider-based and are operated as departments of the
IRFs we operated, and we provide rehabilitation management and staffing services to hospital
rehabilitation departments that may be treated as provider-based. These facilities are required to satisfy
certain operational standards in order to retain their provider-based status.
Health Information Practices
The Health Insurance Portability and Accountability Act of 1996, or ‘‘HIPAA,’’ mandates the
adoption of standards for the exchange of electronic health information in an effort to encourage overall
administrative simplification and enhance the effectiveness and efficiency of the healthcare industry, while
maintaining the privacy and security of health information. Among the standards that the Department of
Health and Human Services has adopted or will adopt pursuant to HIPAA are standards for electronic
transactions and code sets, unique identifiers for providers (referred to as National Provider Identifier),
employers, health plans and individuals, security and electronic signatures, privacy, and enforcement. If we
fail to comply with the HIPAA requirements, we could be subject to criminal penalties and civil sanctions.
The privacy, security and enforcement provisions of HIPAA were enhanced by the Health Information
Technology for Economic and Clinical Health Act, or ‘‘HITECH,’’ which was included in the ARRA.
Among other things, HITECH establishes security breach notification requirements, allows enforcement
of HIPAA by state attorneys general, and increases penalties for HIPAA violations.
The Department of Health and Human Services has adopted standards in three areas in which we are
required to comply that affect our operations.
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Standards relating to the privacy of individually identifiable health information govern our use and
disclosure of protected health information and require us to impose those rules, by contract, on any
business associate to whom such information is disclosed.
Standards relating to electronic transactions and code sets require the use of uniform standards for
common healthcare transactions, including healthcare claims information, plan eligibility, referral
certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance
advice, plan premium payments, and coordination of benefits.
Standards for the security of electronic health information require us to implement various
administrative, physical, and technical safeguards to ensure the integrity and confidentiality of electronic
protected health information.
We maintain a HIPAA committee that is charged with evaluating and monitoring our compliance with
HIPAA. The HIPAA committee monitors regulations promulgated under HIPAA as they have been
adopted to date and as additional standards and modifications are adopted. Although health information
standards have had a significant effect on the manner in which we handle health data and communicate
with payors, the cost of our compliance has not had a material adverse effect on our business, financial
condition, or results of operations. We cannot estimate the cost of compliance with standards that have not
been issued or finalized by the Department of Health and Human Services.
In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient
and consumer privacy concerns, including unauthorized access or theft of personal information. State
statutes and regulations vary from state to state. Lawsuits, including class actions and action by state
attorneys general, directed at companies that have experienced a privacy or security breach also can occur.
Although our policies and procedures are aimed at complying with privacy and security requirements and
minimizing the risks of any breach of privacy or security, there can be no assurance that a breach of privacy
or security will not occur. If there is a breach, we may be subject to various penalties and damages and may
be required to incur costs to mitigate the impact of the breach on affected individuals.
Compliance Program
Our Compliance Program
We maintain a written code of conduct that provides guidelines for principles and regulatory rules that
are applicable to our patient care and business activities. The code is reviewed and amended as necessary
and is the basis for our company-wide compliance program. These guidelines are implemented by a
compliance officer, a compliance and audit committee, and employee education and training. We also have
established a reporting system, auditing and monitoring programs, and a disciplinary system as a means for
enforcing the code’s policies.
Compliance and Audit Committee
Our compliance and audit committee is made up of members of our senior management and in-house
counsel. The compliance and audit committee meets on a quarterly basis and reviews the activities, reports,
and operation of our compliance program. In addition, the HIPAA committee provides reports to the
compliance and audit committee. The vice president of compliance and audit services meets with the
compliance and audit committee on a quarterly basis to provide an overview of the activities and operation
of our compliance program.
Operating Our Compliance Program
We focus on integrating compliance responsibilities with operational functions. We recognize that our
compliance with applicable laws and regulations depends upon individual employee actions as well as
company operations. As a result, we have adopted an operations team approach to compliance. Our
26
corporate executives, with the assistance of corporate experts, designed the programs of the compliance
and audit committee. We utilize facility leaders for employee-level implementation of our code of conduct.
This approach is intended to reinforce our company-wide commitment to operate in accordance with the
laws and regulations that govern our business.
Compliance Issue Reporting
In order to facilitate our employees’ ability to report known, suspected, or potential violations of our
code of conduct, we have developed a system of reporting. This reporting, anonymous or attributable, may
be accomplished through our toll-free compliance hotline, compliance e-mail address, or our compliance
post office box. The compliance officer and the compliance and audit committee are responsible for
reviewing and investigating each compliance incident in accordance with the compliance and audit services
department’s investigation policy.
Compliance Monitoring and Auditing / Comprehensive Training and Education
Monitoring reports and the results of compliance for each of our business segments are reported to
the compliance and audit committee on a quarterly basis. We train and educate our employees regarding
the code of conduct, as well as the legal and regulatory requirements relevant to each employee’s work
environment. New and current employees are required to acknowledge and certify that the employee has
read, understood and has agreed to abide by the code of conduct. Additionally, all employees are required
to re-certify compliance with the code on an annual basis.
Policies and Procedures Reflecting Compliance Focus Areas
We review our policies and procedures for our compliance program from time to time in order to
improve operations and to ensure compliance with requirements of standards, laws, and regulations and to
reflect the ongoing compliance focus areas which have been identified by the compliance and audit
committee.
Internal Audit
In addition to and in support of the efforts of our compliance and audit department, we have an
internal audit function. The vice president of compliance and audit services manages the combined
compliance and audit department and meets with the audit and compliance committee of the board of
directors on a quarterly basis to discuss audit results and provide an overview of the activities and
operation of our compliance program.
Available Information
We are subject to the information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, file periodic reports, proxy statements, and other
information with the SEC. Such periodic reports, proxy statements and other information is available for
inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549,
or may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
www.sec.gov that contains reports, proxy statements and other information regarding issuers that file
electronically with the SEC.
Our website address is www.selectmedicalholdings.com and can be used to access free of charge,
through the investor relations section, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after
we electronically file such material with or furnish it to the SEC. The information on our website is not
incorporated as a part of this annual report.
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Executive Officers of the Registrant
The following table sets forth the names, ages and titles, as well as a brief account of the business
experience, of each person who was an executive officer of the Company as of January 1, 2016:
Name
Age
Position
Robert A. Ortenzio . . . . . . . . .
Rocco A. Ortenzio . . . . . . . . .
David S. Chernow . . . . . . . . . .
Martin F. Jackson . . . . . . . . . .
John A. Saich . . . . . . . . . . . . .
Michael E. Tarvin . . . . . . . . . .
Scott A. Romberger . . . . . . . .
. . . . .
Robert G. Breighner, Jr.
President and Chief Executive Officer
59 Executive Chairman and Co-Founder
84 Vice Chairman and Co-Founder
59
62 Executive Vice President and Chief Financial Officer
48 Executive Vice President and Chief Human Resources Officer
56 Executive Vice President, General Counsel and Secretary
56
48 Vice President, Compliance and Audit Services and Corporate
Senior Vice President, Controller and Chief Accounting Officer
Compliance Officer
Robert A. Ortenzio has served as our Executive Chairman and Co-Founder since January 1, 2014.
Mr. Ortenzio served as our Chief Executive Officer from January 1, 2005 until December 31, 2013 and.
Mr. Ortenzio served as our President and Chief Executive Officer from September 2001 to January 1,
2005. Mr. Ortenzio also served as our President and Chief Operating Officer from February 1997 to
September 2001. Mr. Ortenzio co-founded the Company and has served as a director since February 1997.
Mr. Ortenzio also serves on the board of directors of Concentra Group Holdings. He was an Executive
Vice President and a director of Horizon/CMS Healthcare Corporation from July 1995 until July 1996. In
1986, Mr. Ortenzio co-founded Continental Medical Systems, Inc., and served in a number of different
capacities, including as a Senior Vice President from February 1986 until April 1988, as Chief Operating
Officer from April 1988 until July 1995, as President from May 1989 until August 1996 and as Chief
Executive Officer from July 1995 until August 1996. Before co-founding Continental Medical
Systems, Inc., he was a Vice President of Rehab Hospital Services Corporation. Mr. Ortenzio is the son of
Rocco A. Ortenzio, our Vice Chairman and Co-Founder.
Rocco A. Ortenzio has served as our Vice Chairman and Co-Founder since January 1, 2014.
Mr. Ortenzio served as our Executive Chairman from September 2001 until December 2013. From
February 1997 to September 2001, Mr. Ortenzio served as our Chief Executive Officer. Mr. Ortenzio
co-founded the Company and has served as a director since February 1997. In 1986, he co-founded
Continental Medical Systems, Inc., and served as its Chairman and Chief Executive Officer until July 1995.
In 1979, Mr. Ortenzio founded Rehab Hospital Services Corporation, and served as its Chairman and
Chief Executive Officer until June 1986. In 1969, Mr. Ortenzio founded Rehab Corporation and served as
its Chairman and Chief Executive Officer until 1974. Mr. Ortenzio is the father of Robert A. Ortenzio, our
Executive Chairman and Co-Founder.
David S. Chernow has served as our President and Chief Executive Officer since January 1, 2014.
Mr. Chernow has served as our President and previously held various additional executive officer titles
since September 2010. Mr. Chernow served as a director of the Company from January 2002 until
February 2005 and from August 2005 until September 2010. From May 2007 to February 2010,
Mr. Chernow served as the President and Chief Executive Officer of Oncure Medical Corp., one of the
largest providers of free-standing radiation oncology care in the United States. From July 2001 to June
2007, Mr. Chernow served as the President and Chief Executive Officer of JA Worldwide, a nonprofit
the education of young people about business (formerly, Junior
organization dedicated
Achievement, Inc.). From 1999 to 2001, he was the President of the Physician Services Group at US
Oncology, Inc. Mr. Chernow co-founded American Oncology Resources in 1992 and served as its Chief
Development Officer until the time of the merger with Physician Reliance Network, Inc., which created US
Oncology, Inc. in 1999.
to
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Martin F. Jackson has served as our Executive Vice President and Chief Financial Officer since
February 2007. He served as our Senior Vice President and Chief Financial Officer from May 1999 to
February 2007. Mr. Jackson also serves on the board of directors of Concentra Group Holdings.
Mr. Jackson previously served as a Managing Director in the Health Care Investment Banking Group for
CIBC Oppenheimer from January 1997 to May 1999. Prior to that time, he served as Senior Vice
President, Health Care Finance with McDonald & Company Securities, Inc. from January 1994 to January
1997. Prior to 1994, Mr. Jackson held senior financial positions with Van Kampen Merritt, Touche Ross,
Honeywell and L’Nard Associates.
John A. Saich has served as our Executive Vice President and Chief Human Resources Officer since
December 15, 2010. He served as our Senior Vice President, Human Resources from February 2007 to
December 2010. He served as our Vice President, Human Resources from November 1999 to January
2007. He joined the Company as Director, Human Resources and HRIS in February 1998. Previously,
Mr. Saich served as Director of Benefits and Human Resources for Integrated Health Services in 1997 and
as Director of Human Resources for Continental Medical Systems, Inc. from August 1993 to January 1997.
Michael E. Tarvin has served as our Executive Vice President, General Counsel and Secretary since
February 2007. He served as our Senior Vice President, General Counsel and Secretary from November
1999 to February 2007. He served as our Vice President, General Counsel and Secretary from February
1997 to November 1999. He was Vice President—Senior Counsel of Continental Medical Systems from
February 1993 until February 1997. Prior to that time, he was Associate Counsel of Continental Medical
Systems from March 1992. Mr. Tarvin was an associate at the Philadelphia law firm of Drinker Biddle &
Reath, LLP from September 1985 until March 1992.
Scott A. Romberger has served as our Senior Vice President and Controller since February 2007. He
served as our Vice President and Controller from February 1997 to February 2007. In addition, he has
served as our Chief Accounting Officer since December 2000. Prior to February 1997, he was Vice
President—Controller of Continental Medical Systems from January 1991 until January 1997. Prior to that
time, he served as Acting Corporate Controller and Assistant Controller of Continental Medical Systems
from June 1990 and December 1988, respectively. Mr. Romberger is a certified public accountant and was
employed by a national accounting firm from April 1985 until December 1988.
Robert G. Breighner, Jr. has served as our Vice President, Compliance and Audit Services since August
2003. He served as our Director of Internal Audit from November 2001 to August 2003. Previously,
Mr. Breighner was Director of Internal Audit for Susquehanna Pfaltzgraff Co. from June 1997 until
November 2001. Mr. Breighner held other positions with Susquehanna Pfaltzgraff Co. from May 1991 until
June 1997.
Item 1A. Risk Factors.
In addition to the factors discussed elsewhere in this Form 10-K, the following are important factors which
could cause actual results or events to differ materially from those contained in any forward-looking statements
made by or on behalf of us.
Risks Related to our Business
If there are changes in the rates or methods of government reimbursements for our services, our net operating
revenues and profitability could decline.
Approximately 45% of our net operating revenues for the year ended December 31, 2014, 37% of our
net operating revenues for the year ended December 31, 2015, and 30% of our net operating revenues for
the year ended December 31, 2016, came from the highly regulated federal Medicare program.
In recent years, through legislative and regulatory actions, the federal government has made
substantial changes to various payment systems under the Medicare program. President Obama signed into
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law comprehensive reforms to the healthcare system, including changes to the methods for, and amounts
of, Medicare reimbursement. Additional reforms or other changes to these payment systems, including
modifications to the conditions on qualification for payment, bundling payments to cover both acute and
post-acute care or the imposition of enrollment limitations on new providers, may be proposed or could be
adopted, either by Congress or CMS. If revised regulations are adopted, the availability, methods, and
rates of Medicare reimbursements for services of the type furnished at our facilities could change. Some of
these changes and proposed changes could adversely affect our business strategy, operations, and financial
results. In addition, there can be no assurance that any increases in Medicare reimbursement rates
established by CMS will fully reflect increases in our operating costs.
We conduct business in a heavily regulated industry, and changes in regulations, new interpretations of existing
regulations or violations of regulations may result in increased costs or sanctions that reduce our net operating
revenues and profitability.
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:
(i) facility and professional licensure, including certificates of need; (ii) conduct of operations, including
financial relationships among healthcare providers, Medicare fraud and abuse, and physician self-referral;
(iii) addition of facilities and services and enrollment of newly developed facilities in the Medicare
program; (iv) payment for services; and (v) safeguarding protected health information.
Both federal and state regulatory agencies inspect, survey and audit our facilities to review our
compliance with these laws and regulations. While our facilities intend to comply with existing licensing,
Medicare certification requirements and accreditation standards, there can be no assurance that these
regulatory authorities will determine that all applicable requirements are fully met at any given time. A
determination by any of these regulatory authorities that a facility is not in compliance with these
requirements could lead to the imposition of requirements that the facility takes corrective action,
assessment of fines and penalties, or loss of licensure, Medicare certification or accreditation. These
consequences could have an adverse effect on our company.
In addition, there have been heightened coordinated civil and criminal enforcement efforts by both
federal and state government agencies relating to the healthcare industry. The ongoing investigations
relate to, among other things, various referral practices, cost reporting, billing practices, physician
ownership, and joint ventures involving hospitals. In the future, different interpretations or enforcement of
these laws and regulations could subject us to allegations of impropriety or illegality or could require us to
make changes in our facilities, equipment, personnel, services, and capital expenditure programs. These
changes may increase our operating expenses and reduce our operating revenues. If we fail to comply with
these extensive laws and government regulations, we could become ineligible to receive government
program reimbursement, suffer civil or criminal penalties, or be required to make significant changes to
our operations. In addition, we could be forced to expend considerable resources responding to any related
investigation or other enforcement action.
Full implementation of the Medicare 25 Percent Rule applicable to LTCHs will have an adverse effect on our
future net operating revenues and profitability.
Under the 25 Percent Rule, the Medicare payment rate for LTCHs is subject to a downward payment
adjustment if the percentage of Medicare patients discharged from an LTCH who were admitted from a
referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring
hospital) exceeds an applicable percentage admissions threshold during a particular cost reporting period.
Cases admitted to an LTCH in excess of the applicable percentage admissions threshold are reimbursed at
a rate equivalent to that under IPPS. IPPS rates are generally lower than LTCH-PPS rates. Cases that
reach outlier status in the discharging hospital do not count toward the admission threshold and are paid
under LTCH-PPS.
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LTCHs that are operated as HIHs or as HIH ‘‘satellites,’’ are subject to payment reductions for those
Medicare patients admitted from their host hospitals in excess of the applicable percentage admissions
threshold and from other referring hospitals in excess of the applicable percentage admissions threshold.
LTCHs that are operated as freestanding facilities are subject to a payment reduction for those Medicare
patients admitted from other referring hospitals in excess of the applicable admissions threshold.
Grandfathered HIHs are excluded from the Medicare percentage admissions threshold regulations. For
cost reporting periods beginning on or after October 1, 2016, one percentage threshold applies to the
LTCH as a whole (regardless of HIH or freestanding status) for each referring hospital (all locations).
Current law provides relief in the form of higher percentage admissions thresholds for specific
categories of LTCHs that previously obtained relief under the Medicare, Medicaid, and SCHIP Extension
Act of 2007 (MMSEA) (Pub. L. 110-173), as amended. Full implementation of the Medicare percentage
admissions thresholds under the 25 Percent Rule will not go into effect for all LTCHs, except
grandfathered HIHs, until discharges on or after October 1, 2017. See ‘‘Business—Government
Regulations—Overview of U.S. and State Government Reimbursements—Long Term Acute Care Hospital
Medicare Reimbursement—25 Percent Rule.’’
Because these rules are complex and are based on the volume of Medicare admissions from other
referring hospitals as a percent of our overall Medicare admissions, we cannot predict with any certainty
the impact on our future net operating revenues and profitability of compliance with these regulations. We
expect many of our LTCHs will experience an adverse financial impact when full implementation of the
Medicare percentage admissions thresholds goes into effect. Our LTCHs have cost reporting periods that
commence on various dates throughout the calendar year. Therefore, the application of the lower
percentage admissions thresholds could be staggered, depending on how CMS implements the new
statutory relief. In any event, the regular percentage admissions thresholds would not be in effect for all of
our affected LTCHs until October 1, 2017 at the earliest, and we would not experience potential payment
adjustments at the regular percentage thresholds until after Medicare cost reports are filed for cost
reporting periods that include October 1, 2017.
If our LTCHs fail to maintain their certifications as LTCHs or if our facilities operated as HIHs fail to qualify
as hospitals separate from their host hospitals, our net operating revenues and profitability may decline.
As of December 31, 2016, we operated 103 LTCHs, all of which are currently certified by Medicare as
LTCHs. LTCHs must meet certain conditions of participation to enroll in, and seek payment from, the
Medicare program as an LTCH, including, among other things, maintaining an average length of stay for
Medicare patients in excess of 25 days. An LTCH that fails to maintain this average length of stay for
Medicare patients in excess of 25 days during a single cost reporting period is generally allowed an
opportunity to show that it meets the length of stay criteria during a subsequent cure period. If the LTCH
can show that it meets the length of stay criteria during this cure period, it will continue to be paid under
the LTCH-PPS. If the LTCH again fails to meet the average length of stay criteria during the cure period,
it will be paid under the general acute care IPPS at rates generally lower than the rates under the
LTCH-PPS. Such LTCHs may not be able to be re-classified as LTCHs until the moratorium is over on
September 30, 2017.
Similarly, our HIHs must meet conditions of participation in the Medicare program, which include
additional criteria establishing separateness from the hospital with which the HIH shares space. If our
LTCHs or HIHs fail to meet or maintain the standards for certification as LTCHs, they will receive
payment under the general acute care hospitals IPPS which is generally lower than payment under the
system applicable to LTCHs. Payments at rates applicable to general acute care hospitals would result in
our LTCHs receiving significantly less Medicare reimbursement than they currently receive for their
patient services.
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Implementation of additional patient or facility criteria for LTCHs that limit the population of patients eligible
for our hospitals’ services or change the basis on which we are paid could adversely affect our net operating revenue
and profitability.
The BBA of 2013 establishes a dual-rate LTCH-PPS by adding a ‘‘site-neutral’’ payment rate for
Medicare patients who do not meet specified criteria. Specifically, for Medicare patients discharged in cost
reporting periods beginning on or after October 1, 2015, LTCHs are reimbursed under LTCH-PPS only if,
immediately preceding the patient’s LTCH admission, the patient was discharged from a ‘‘subsection (d)
hospital’’ (generally, a short-term acute care hospital paid under IPPS) and either the patient’s stay
included at least three days in an intensive care unit (ICU) or coronary care unit (CCU), or the patient was
assigned to an MS-LTC-DRG for cases receiving at least 96 hours of ventilator services in the LTCH. In
addition, to be paid at the LTCH-PPS standard federal payment rate, the patient’s discharge from the
LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any
Medicare patient who does not meet these new criteria, the LTCH will be paid a ‘‘site-neutral’’ payment
rate, which will be the lower of: (i) the IPPS comparable per-diem payment rate capped at the MS-DRG
payment rate plus any outlier payments, or (ii) 100 percent of the estimated costs for services. For cost
reporting periods beginning on or after October 1, 2019, payment for all discharges from an LTCH in the
future may be subject to the site-neutral payment limitation unless the number of discharges for which
payment is made under the LTCH-PPS payment rate is greater than 50% of the total number of discharges
for the LTCH for that period. Reinstatement of payment under the dual-rate LTCH-PPS may be available,
but CMS has not yet published details on this reinstatement process. The application of the new
site-neutral payment rates under LTCH-PPS may reduce our operating revenues.
We cannot predict whether Congress or CMS will adopt additional patient-level criteria in the future
or, if adopted, how such criteria would affect our LTCHs. Implementation of additional patient or facility
criteria that may limit the population of patients eligible for our LTCHs’ services or change the basis on
which we are paid could adversely affect our net operating revenues and profitability. See ‘‘Business—
Government Regulations—Overview of U.S. and State Government Reimbursements—Long Term Acute
Care Hospital Medicare Reimbursement.’’
Decreases in Medicare reimbursement rates received by our outpatient rehabilitation clinics may reduce our
future net operating revenues and profitability.
Our outpatient rehabilitation clinics receive payments from the Medicare program under a fee
schedule. The Medicare Access and CHIP Reauthorization Act of 2015 requires that payments under the
fee schedule be adjusted starting in 2019 based on performance in a new Merit-Based Incentive Payment
System and, beginning in 2020, incentives for participation in alternative payment models. The specifics of
the Merit-Based Incentive Payment System and incentives for participation in alternative payment models
will be subject to future notice and comment rule-making. It is unclear what impact, if any, the Merit-
Based Incentive Payment System and incentives for participation in alternative payment models will have
on our business and operating results, but any resulting decrease in payment may reduce our future net
operating revenues and profitability.
Outpatient therapy services reimbursed under the Medicare physician fee schedule are subject to
annual limits. Under an exceptions process to the annual limits, a Medicare enrollee (or person acting on
behalf of the Medicare enrollee) is able to request an exception from the therapy caps if the provision of
therapy services is deemed to be medically necessary. Therapy cap exceptions are available automatically
for certain conditions and on a case by case basis upon submission of documentation of medical necessity.
The exception process has been extended by Congress several times. Most recently, the Medicare Access
and CHIP Reauthorization Act of 2015 extends the exceptions process for outpatient therapy caps through
December 31, 2017. The exception process will expire on December 31, 2017 unless further extended by
Congress. There can be no assurance that Congress will extend it further. To date, the implementation of
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the therapy caps has not had a material adverse effect on our business. However, if the exception process is
not renewed, our future net operating revenues and profitability may decline.
The nature of the markets that Concentra serves may constrain its ability to raise prices at rates sufficient to
keep pace with the inflation of its costs.
Rates of reimbursement for work-related injury or illness visits in Concentra’s occupational health
services business are established through a legislative or regulatory process within each state that
Concentra serves. Currently, 32 states have fee schedules pursuant to which all healthcare providers are
uniformly reimbursed. The fee schedules are determined by each state and generally prescribe the
maximum amounts that may be reimbursed for a designated procedure. In the states without fee schedules,
healthcare providers are generally reimbursed based on usual, customary and reasonable rates charged in
the particular state in which the services are provided. Given that Concentra does not control these
processes, it may be subject to financial risks if individual jurisdictions reduce rates or do not routinely
raise rates of reimbursement in a manner that keeps pace with the inflation of Concentra’s costs of service.
In Concentra’s veteran’s healthcare business, reimbursement rates are generally set according to the
capitated monthly rate based on the number of then enrolled patients at that CBOC. Evolving legislative
and regulatory changes aimed at improving veteran’s access to care in the wake of Department of Veterans
Affairs scandals (none of which involved Concentra’s CBOCs) could result in fewer patients enrolling in
CBOCs. Federal legislation that permits certain veterans to receive their health care outside of the
Department of Veterans Affairs facilities, for example, may reduce demand for services at some of
Concentra’s CBOCs. Moreover, changes in the methods, manner or amounts of compensation payable for
Concentra’s services, including, amounts reimbursable to the CBOCs under its agreements with the
Department of Veterans Affairs, due to legislative or other changes or shifting budget priorities could
result in lower reimbursement for services provided at Concentra’s CBOCs. Concentra may receive lower
payments from the Veterans Health Administration if fewer eligible veterans are considered to live within
the catchments of its CBOCs. These trends could have an adverse effect on our financial condition and
results of operations.
If our IRFs fail to comply with the 60% Rule or admissions to our IRFs are limited due to changes to the
diagnosis codes on the presumptive compliance list, our net operating revenues and profitability may decline.
As of December 31, 2016, we operated 20 IRFs, 19 of which are currently certified by Medicare as
IRFs and one which is in the process of obtaining its certification. IRFs must meet certain conditions of
participation to enroll in, and seek payment from, the Medicare program as an IRF. Among other things,
at least 60% of the IRF’s total inpatient population must require treatment for one or more of
13 conditions specified by regulation. This requirement is now commonly referred to as the ‘‘60% Rule.’’
Compliance with the 60% Rule is demonstrated through a two step process. The first step is the
‘‘presumptive’’ method, in which patient diagnosis codes are compared to a ‘‘presumptive compliance’’ list.
IRFs that fail to demonstrate compliance with the 60% Rule using this presumptive test may demonstrate
compliance through a second step involving an audit of the facility’s medical records to assess compliance.
Effective October 1, 2015, CMS removed a number of diagnosis codes from the presumptive
compliance list. By removing diagnosis codes from the presumptive compliance list our facilities may be
required to demonstrate compliance with the 60% Rule through medical record reviews. If an IRF does
not demonstrate compliance with the 60% Rule by either the presumptive method or through a review of
medical records, then the facility’s classification as an IRF may be terminated at the start of its next cost
reporting period causing the facility to be paid as a general acute care hospital under IPPS. If our IRFs fail
to demonstrate compliance with the 60% Rule through either method and are classified as general acute
care hospitals, our net operating revenue and profitability may be adversely affected.
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As a result of post-payment reviews of claims we submit to Medicare for our services, we may incur additional
costs and may be required to repay amounts already paid to us.
We are subject to regular post-payment inquiries, investigations, and audits of the claims we submit to
Medicare for payment for our services. These post-payment reviews include medical necessity reviews for
Medicare patients admitted to our specialty hospitals, and audits of Medicare claims under the Recovery
Audit Contractor program. These post-payment reviews may require us to incur additional costs to
respond to requests for records and to pursue the reversal of payment denials, and ultimately may require
us to refund amounts paid to us by Medicare that are determined to have been overpaid.
Our facilities are subject to extensive federal and state laws and regulations relating to the privacy of
individually identifiable information.
HIPAA required the United States Department of Health and Human Services to adopt standards to
protect the privacy and security of individually identifiable health information. The department released
final regulations containing privacy standards in December 2000 and published revisions to the final
regulations in August 2002. The privacy regulations extensively regulate the use and disclosure of
individually identifiable health information. The regulations also provide patients with significant new
rights related to understanding and controlling how their health information is used or disclosed. The
security regulations require healthcare providers to implement administrative, physical and technical
practices to protect the security of individually identifiable health information that is maintained or
transmitted electronically. HITECH, which was signed into law in February 2009, enhanced the privacy,
security, and enforcement provisions of HIPAA by, among other things, establishing security breach
notification requirements, allowing enforcement of HIPAA by state attorneys general, and increasing
penalties for HIPAA violations. Violations of HIPAA or HITECH could result in civil or criminal
penalties.
In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient
and consumer privacy concerns, including unauthorized access or theft of patient’s identifiable health
information. State statutes and regulations vary from state to state. Lawsuits, including class actions and
action by state attorneys general, directed at companies that have experienced a privacy or security breach
also can occur.
In the conduct of our business, we process, maintain, and transmit sensitive data, including our
patient’s individually identifiable health information. We have developed a comprehensive set of policies
and procedures in our efforts to comply with HIPAA and other privacy laws. Our compliance officer,
privacy officer, and information security officer are responsible for implementing and monitoring
compliance with our privacy and security policies and procedures at our facilities. We believe that the cost
of our compliance with HIPAA and other federal and state privacy laws will not have a material adverse
effect on our business, financial condition, results of operations, or cash flows. However, there can be no
assurance that a breach of privacy or security will not occur. If there is a breach, we may be subject to
various lawsuits, penalties and damages and may be required to incur costs to mitigate the impact of the
breach on affected individuals.
We may be adversely affected by a security breach of our, or our third-party vendor’s, information technology
systems, such as a cyber attack, which may cause a violation of HIPAA or HITECH and subject us to potential legal
and reputational harm.
In the normal course of business, our information technology systems hold sensitive patient
information including patient demographic data, eligibility for various medical plans including Medicare
and Medicaid, and protected health information, which is subject to HIPAA and HITECH. Additionally,
we utilize those same systems to perform our day-to-day activities, such as receiving referrals, assigning
medical teams to patients, documenting medical information, maintaining an accurate record of all
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transactions, processing payments, and maintaining our employee’s personal information. We also contract
with third-party vendors to maintain and store our patient’s individually identifiable health information.
Numerous state and federal laws and regulations address privacy and information security concerns
resulting from our access to our patient’s and employee’s personal information.
Our information technology systems and those of our vendors that process, maintain, and transmit
such data are subject to computer viruses, cyber attacks, or breaches. We adhere to policies and procedures
designed to ensure compliance with HIPAA and other privacy and information security laws and require
our third-party vendors to do so as well. If, however, we or our third-party vendors experience a breach,
loss, or other compromise of unsecured protected health information or other personal information, such
an event could result in significant civil and criminal penalties, lawsuits, reputational harm, and increased
costs to us, any of which could have a material adverse effect on our financial condition and results of
operations.
Furthermore, while our information technology systems, and those of our third-party vendors, are
maintained with safeguards protecting against cyber attacks, including passive intrusion protection,
firewalls, and virus detection software, these safeguards do not ensure that a significant cyber attack could
not occur. A cyber attack that bypasses our information technology security systems, or those of our third-
party vendors, could cause the loss of protected health information, or other data subject to privacy laws,
the loss of proprietary business information, or a material disruption to our or a third-party vendor’s
information technology business systems resulting in a material adverse effect on our business, financial
condition, results of operations, or cash flows. In addition, our future results could be adversely affected
due to the theft, destruction, loss, misappropriation or release of protected health information, other
confidential data or proprietary business information, operational or business delays resulting from the
disruption of information technology systems and subsequent clean-up and mitigation activities, negative
publicity resulting in reputation or brand damage with clients, members, or industry peers, or regulatory
action taken as a result of such incident.
We may be adversely affected by negative publicity which can result in increased governmental and regulatory
scrutiny and possibly adverse regulatory changes.
Negative press coverage can result in increased governmental and regulatory scrutiny and possibly
adverse regulatory changes. Adverse publicity and increased governmental scrutiny can have a negative
impact on our reputation with referral sources and patients and on the morale and performance of our
employees, both of which could adversely affect our businesses and results of operations.
Future acquisitions or expansions may use significant resources, may be unsuccessful and could expose us to
unforeseen liabilities.
As part of our growth strategy, we may pursue acquisitions of specialty hospitals, outpatient
rehabilitation clinics and other related healthcare facilities and services, and increase the number of
Concentra medical centers, onsite clinics, and CBOCs that Concentra operates. These acquisitions or
expansions may involve significant cash expenditures, debt incurrence, additional operating losses and
expenses, and compliance risks that could have a material adverse effect on our financial condition and
results of operations.
We may not be able to successfully integrate acquired businesses into ours, and therefore we may not
be able to realize the intended benefits from an acquisition or expansion. If we fail to successfully integrate
acquisitions and expansions into our operations, our financial condition and results of operations may be
materially adversely affected. Acquisitions could result in difficulties integrating acquired operations,
technologies, and personnel into our business. Such difficulties may divert significant financial,
operational, and managerial resources from our existing operations and make it more difficult to achieve
our operating and strategic objectives. We may fail to retain employees or patients acquired through
35
acquisitions, which may negatively impact the integration efforts. Acquisitions could also have a negative
impact on our results of operations if it is subsequently determined that goodwill or other acquired
intangible assets are impaired, thus resulting in an impairment charge in a future period. Further
expansions may require substantial financial resources and management attention, and diverting these
resources may negatively affect our financial results.
In addition, acquisitions and expansions involve risks that the acquired businesses or expanded
operations will not perform in accordance with expectations; that we may become liable for unforeseen
financial or business liabilities, including liabilities for failure to comply with healthcare regulations; that
the expected synergies associated with acquisitions or expansions will not be achieved; and that business
judgments concerning the value, strengths and weaknesses of businesses acquired or expanded operations
will prove incorrect, which could have an material adverse effect on our financial condition and results of
operations.
Risks associated with our potential international operations.
We intend to expand our operations into other countries. International operations are subject to risks
that may materially adversely affect our business, results of operations and financial condition. The risks
that our potential international operations would be subject to include, among other things: difficulties and
costs relating to staffing and managing foreign operations; fluctuations in the value of foreign currencies;
repatriation of cash from our foreign operations to the United States; foreign countries may impose
additional withholding taxes or otherwise tax our foreign income; separate operating and financial systems;
disaster recovery; and unexpected regulatory, economic, and political changes in foreign markets. In
addition to the foregoing, our potential international operations will face risks associated with complying
with laws governing our foreign business operations, including the United States Foreign Corrupt Practices
Act and applicable regulatory requirements.
Future joint ventures may use significant resources, may be unsuccessful and could expose us to unforeseen
liabilities.
As part of our growth strategy, we may partner with large health care systems to provide post acute
care services. These joint ventures may involve significant cash expenditures, debt incurrence, additional
operating losses and expenses, and compliance risks that could have a material adverse effect on our
financial condition and results of operations.
A joint venture involves the combining of corporate cultures and mission. As a result, we may not be
able to successfully operate a joint venture, and therefore we may not be able to realize the intended
benefits. If we fail to successfully execute a joint venture relationship, our financial condition and results of
operations may be materially adversely affected. A new joint venture could result in difficulties in
combining operations, technologies, and personnel. Such difficulties may divert significant financial,
operational and managerial resources from our existing operations and make it more difficult to achieve
our operating and strategic objectives. We may fail to retain employees or patients as a result of the
integration efforts.
A joint venture is operated through a board of directors that contains representatives of Select and
other parties to the joint venture. We may not control the board or some actions of the board may require
supermajority votes. As a result, the joint venture may elect certain actions that could have adverse effects
on our financial condition and results of operations.
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If we fail to compete effectively with other hospitals, clinics, medical centers and healthcare providers in the
local areas we serve, our net operating revenues and profitability may decline.
The healthcare business is highly competitive, and we compete with other hospitals, rehabilitation
clinics, medical centers, and other healthcare providers for patients. If we are unable to compete effectively
in the specialty hospital, outpatient rehabilitation, and occupational health services businesses, our ability
to retain customers and physicians, or maintain or increase our revenue growth, price flexibility, control
over medical cost trends, and marketing expenses may be compromised and our net operating revenues
and profitability may decline.
Many of our specialty hospitals operate in geographic areas where we compete with at least one other
hospital that provides similar services.
Our outpatient rehabilitation clinics face competition from a variety of local and national outpatient
rehabilitation providers, including physician-owned physical therapy clinics, dedicated locally owned and
managed outpatient rehabilitation clinics, and hospital or university owned or affiliated ventures, as well as
national and regional providers in select areas. Other competing outpatient rehabilitation clinics in local
areas we serve may have greater name recognition and longer operating histories than our clinics. The
managers of these competing clinics may also have stronger relationships with physicians in their
communities, which could give them a competitive advantage for patient referrals. Because the barriers to
entry are not substantial and current customers have the flexibility to move easily to new healthcare service
providers, we believe that new outpatient physical therapy competitors can emerge relatively quickly.
Concentra’s primary competitors have typically been independent physicians, hospital emergency
departments, and hospital-owned or hospital-affiliated medical facilities. Because the barriers to entry in
Concentra’s geographic markets are not substantial and its current customers have the flexibility to move
easily to new healthcare service providers, new competitors to Concentra can emerge relatively quickly.
The markets for Concentra’s consumer health and veteran’s healthcare businesses are also fragmented and
competitive. If Concentra’s competitors are better able to attract patients or expand services at their
facilities than Concentra is, Concentra may experience an overall decline in revenue. Similarly, competitive
pricing pressures from our competitors could cause Concentra to lose existing or future CBOC contracts
with the Department of Veterans Affairs, which may also cause Concentra to experience an overall decline
in revenue.
Future cost containment initiatives undertaken by private third-party payors may limit our future net operating
revenues and profitability.
Initiatives undertaken by major insurers and managed care companies to contain healthcare costs
affect our profitability. These payors attempt to control healthcare costs by contracting with hospitals and
other healthcare providers to obtain services on a discounted basis. We believe that this trend may
continue and may limit reimbursements for healthcare services. If insurers or managed care companies
from whom we receive substantial payments reduce the amounts they pay for services, our profit margins
may decline, or we may lose patients if we choose not to renew our contracts with these insurers at lower
rates.
If we fail to maintain established relationships with the physicians in the areas we serve, our net operating
revenues may decrease.
Our success is partially dependent upon the admissions and referral practices of the physicians in the
communities our hospitals and our outpatient rehabilitation clinics serve, and our ability to maintain good
relations with these physicians. Physicians referring patients to our hospitals and clinics are generally not
our employees and, in many of the local areas that we serve, most physicians have admitting privileges at
other hospitals and are free to refer their patients to other providers. If we are unable to successfully
37
cultivate and maintain strong relationships with these physicians, our hospitals’ admissions and clinics’
businesses may decrease, and our net operating revenues may decline.
We could experience significant increases to our operating costs due to shortages of healthcare professionals or
union activity.
Our specialty hospitals are highly dependent on nurses, our outpatient rehabilitation division is highly
dependent on therapists for patient care, and Concentra is highly dependent upon the ability of its
affiliated professional groups to recruit and retain qualified physicians and other licensed providers. The
market for qualified healthcare professionals is highly competitive. We have sometimes experienced
difficulties in attracting and retaining qualified healthcare personnel. We cannot assure you we will be able
to attract and retain qualified healthcare professionals in the future. Additionally, the cost of attracting and
retaining qualified healthcare personnel may be higher than we anticipate, and as a result, our profitability
could decline.
In addition, United States healthcare providers are continuing to see an increase in the amount of
union activity. Though we cannot predict the degree to which we will be affected by future union activity,
there are continuing legislative proposals that could result in increased union activity. We could experience
an increase in labor and other costs from such union activity.
Our business operations could be significantly disrupted if we lose key members of our management team.
Our success depends to a significant degree upon the continued contributions of our senior officers
and other key employees, and our ability to retain and motivate these individuals. We currently have
employment agreements in place with three executive officers and change in control agreements and/or
non-competition agreements with several other officers. Many of these individuals also have significant
equity ownership in our company. We do not maintain any key life insurance policies for any of our
employees. The loss of the services of certain of these individuals could disrupt significant aspects of our
business, could prevent us from successfully executing our business strategy, and could have a material
adverse effect on our results of operations.
In conducting our business, we are required to comply with applicable laws regarding fee-splitting and the
corporate practice of medicine.
Some states prohibit the ‘‘corporate practice of medicine’’ that restricts business corporations from
practicing medicine through the direct employment of physicians or from exercising control over medical
decisions by physicians. Some states similarly prohibit the ‘‘corporate practice of therapy.’’ The laws
relating to corporate practice vary from state to state and are not fully developed in each state in which we
have facilities. Typically, however, professional corporations owned and controlled by
licensed
professionals are exempt from corporate practice restrictions and may employ physicians or therapists to
furnish professional services. Also, in some states hospitals are permitted to employ physicians.
Some states also prohibit entities from engaging in certain financial arrangements, such as
fee-splitting, with physicians or therapists. The laws relating to fee-splitting also vary from state to state
and are not fully developed. Generally, these laws restrict business arrangements that involve a physician
or therapist sharing medical fees with a referral source, but in some states these laws have been interpreted
to extend to management agreements between physicians or therapists and business entities under some
circumstances.
We believe that the Company’s current and planned activities do not constitute fee-splitting or the
unlawful corporate practice of medicine as contemplated by these state laws. However, there can be no
assurance that future interpretations of such laws will not require structural and organizational
modification of our existing relationships with the practices. If a court or regulatory body determines that
we have violated these laws or if new laws are introduced that would render our arrangements illegal, we
38
could be subject to civil or criminal penalties, our contracts could be found legally invalid and
unenforceable (in whole or in part), or we could be required to restructure our contractual arrangements
with our affiliated physicians and other licensed providers.
If the frequency of workplace injuries and illnesses continues to decline, Concentra’s results may be negatively
affected.
Approximately 54% of Concentra’s revenue in 2016 was generated from the treatment or review of
workers’ compensation claims. In the past decade, the number of workers’ compensation claims has
decreased, which Concentra primarily attributes to improvements in workplace safety, improved risk
management by employers, and changes in the type and composition of jobs. During the economic
downturn, the number of employees with workers’ compensation insurance substantially decreased.
Although the number of covered employees has increased more in recent years as the employment rate has
increased, adverse economic conditions can cause the number of covered employees to decline which can
cause further declines in workers’ compensation claims. In addition, because of the greater access to health
insurance and the fact that the United States economy has continued to shift from a manufacturing-based
to a service-based economy along with general improvements in workplace safety, workers are generally
healthier and less prone to work injuries. Increases in employer-sponsored wellness and health promotion
programs, spurred in part by the ACA, have led to fitter and healthier employees who may be less likely to
injure themselves on the job. Concentra’s business model is based, in part, on its ability to expand its
relative share of the market for the treatment and review of claims for workplace injuries and illnesses. If
workplace injuries and illnesses decline at a greater rate than the increase in total employment or if total
employment declines at a greater rate than the increase in incident rates, the number of claims in the
workers’ compensation market will decrease and may adversely affect Concentra’s business.
If Concentra loses several significant employer customers, its results may be adversely affected.
Concentra’s results may decline if it loses several significant employer customers. One or more of
Concentra’s significant employer customers could be acquired. Additionally, Concentra could lose
significant employer customers due to competitive pricing pressures or other reasons. The loss of several
significant employer customers could cause a material decline in Concentra’s profitability and operating
performance.
Significant legal actions could subject us to substantial uninsured liabilities.
Physicians, hospitals, and other healthcare providers have become subject to an increasing number of
legal actions alleging malpractice, product liability, or related legal theories. Many of these actions involve
large claims and significant defense costs. We are also subject to lawsuits under federal and state
whistleblower statutes designed to combat fraud and abuse in the healthcare industry. These whistleblower
lawsuits are not covered by insurance and can involve significant monetary damages and award bounties to
private plaintiffs who successfully bring the suits. See ‘‘Legal Proceedings’’ and Note 16 in our audited
consolidated financial statements.
We currently maintain professional malpractice liability insurance and general liability insurance
coverages under a combination of policies with a total annual aggregate limit of $35.0 million. Our
insurance for the professional liability coverage is written on a ‘‘claims-made’’ basis and our commercial
general liability coverage is maintained on an ‘‘occurrence’’ basis. These coverages apply after a
self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million
per occurrence for general liability claims. We review our insurance program annually and may make
adjustments to the amount of insurance coverage and self-insured retentions in future years. In addition,
our insurance coverage does not generally cover punitive damages and may not cover all claims against us.
See ‘‘Business—Government Regulations—Other Healthcare Regulations.’’
39
Concentration of ownership among our existing executives and directors may prevent new investors from
influencing significant corporate decisions.
Our executives and directors, beneficially own, in the aggregate, approximately 19.9% of Holdings’
outstanding common stock as of February 1, 2017. As a result, these stockholders have significant control
over our management and policies and are able to exercise influence over all matters requiring stockholder
approval, including the election of directors, amendment of our certificate of incorporation, and approval
of significant corporate transactions. The directors elected by these stockholders are able to make
decisions affecting our capital structure, including decisions to issue additional capital stock, implement
stock repurchase programs, and incur indebtedness. This influence may have the effect of deterring hostile
takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of
our other stockholders to approve transactions that they may deem to be in their best interest.
Risks Related to our Capital Structure
If WCAS and the other members of Concentra Group Holdings exercise their Put Right, it may have an adverse
effect on our liquidity. Additionally, we may not have adequate funds to pay amounts due in connection with the Put
Right, if exercised, in which case we would be required to issue Holdings’ common stock to purchase interests of
Concentra Group Holdings and our stockholders’ ownership interest will be diluted.
Pursuant to the Amended and Restated Limited Liability Company Agreement of Concentra Group
Holdings, WCAS and the other members of Concentra Group Holdings have a put right (the ‘‘Put Right’’)
with respect to their equity interests in Concentra Group Holdings. If a Put Right is exercised by WCAS,
Select will be obligated to purchase up to 331⁄3% of the equity interests of Concentra Group Holdings that
WCAS purchased on June 1, 2015, at a purchase price based on a valuation of Concentra Group Holdings
performed by an investment bank to be mutually agreed between Select and WCAS, which valuation will
be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon
multiple of EBITDA. Select has the right to elect to pay the purchase price in cash or in shares of
Holdings’ common stock. WCAS may first exercise its Put Right after June 1, 2018, and then may exercise
its Put Right again annually during each fiscal year thereafter. If WCAS exercises its Put Right, the other
members of Concentra Group Holdings may elect to sell to Select, on the same terms as WCAS, a
percentage of their equity interests of Concentra Group Holdings that such member purchased on June 1,
2015, up to but not exceeding the percentage of its initial equity interests that WCAS has determined to
sell to Select in the exercise of its Put Right plus the same percentage of the equity interests that such
member had the right to sell but declined to sell in connection with any previous put exercise by WCAS.
Furthermore, WCAS and the other members of Concentra Group Holdings have a put right with
respect to their equity interest in Concentra Group Holdings that may only be exercised in the event
Holdings or Select experiences a change of control that has not been previously approved by WCAS and
which results in change in the senior management of Select (an ‘‘SEM COC Put Right’’). If an SEM COC
Put Right is exercised by WCAS, Select will be obligated to purchase all (but not less than all) of the equity
interests in Concentra Group Holdings of WCAS and each other member of Concentra Group Holdings,
at a purchase price based on a valuation of Concentra Group Holdings performed by an investment bank
to be mutually agreed between Select and WCAS, which valuation will be based on certain precedent
transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA.
We may not have sufficient funds, borrowing capacity or other capital resources available to pay for
the interests of Concentra Group Holdings in cash if WCAS and the other members of Concentra Group
Holdings exercise the Put Right or the SEM COC Put Right or may be prohibited from doing so under the
terms of our debt agreements. Such lack of available funds upon the exercising of the Put Right or the
SEM COC Put Right would force us to issue stock at a time we might not otherwise desire to do so in
order to purchase the interests of Concentra Group Holdings. To the extent that the interests of Concentra
Group Holdings are purchased by issuing shares of our common stock, the increase in the number of
40
shares of our common stock issued and outstanding may depress the price of our common stock and our
stockholders will experience dilution in their respective percentage ownership in us. In addition, shares
issued to purchase the interests in Concentra Group Holdings will be valued at the twenty-one trading day
volume-weighted average sales price of such shares for the period beginning ten trading days immediately
preceding the first public announcement of the Put Right or the SEM COC Put Right being exercised and
ending ten trading days immediately following such announcement. Because the value of the common
stock issued to purchase the interests in Concentra Group Holdings is, in part, determined by the sales
price of our common stock following the announcement that the Put Right or the SEM COC Put Right is
being exercised, which may cause the sales price of our common stock to decline, the amount of common
stock we may have to issue to purchase the interests in Concentra Group Holdings may increase, resulting
in further dilution to our existing stockholders.
Our substantial indebtedness may limit the amount of cash flow available to invest in the ongoing needs of our
business.
We have a substantial amount of indebtedness. As of December 31, 2016, Select had approximately
$2,067.4 million of total indebtedness excluding the debt at Concentra. Taking into account the
indebtedness under the Concentra credit facilities (as defined below), which is nonrecourse to Select, our
total indebtedness at December 31, 2016 was $2,699.0 million. For the year ended December 31, 2016,
Select paid cash interest, including cash interest paid by Concentra on Concentra’s indebtedness, of
$142.6 million. Our indebtedness could have important consequences to you. For example, it:
(cid:127) requires us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness, reducing the availability of our cash flow to fund working capital, capital
expenditures, development activity, acquisitions, and other general corporate purposes;
(cid:127) increases our vulnerability to adverse general economic or industry conditions;
(cid:127) limits our flexibility in planning for, or reacting to, changes in our business or the industries in which
we operate;
(cid:127) makes us more vulnerable to increases in interest rates, as borrowings under our senior secured
credit facilities are at variable rates;
(cid:127) limits our ability to obtain additional financing in the future for working capital or other purposes;
and
(cid:127) places us at a competitive disadvantage compared to our competitors that have less indebtedness.
Any of these consequences could have a material adverse effect on our business, financial condition,
results of operations, prospects, and ability to satisfy our obligations under our indebtedness. In addition,
there would be a material adverse effect on our business, financial condition, results of operations and cash
flows if we were unable to service our indebtedness or obtain additional financing, as needed.
See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources.’’
Our credit facilities and the indenture governing Select’s 6.375% senior notes require us to comply with certain
financial covenants and obligations, the default of which may result in the acceleration of certain of our
indebtedness.
In the case of an event of default under the agreements governing our indebtedness, the lenders under
these agreements could elect to declare all amounts borrowed, together with accrued and unpaid interest
and other fees, to be due and payable. If we are unable to obtain a waiver from the requisite lenders under
such circumstances, the lenders could exercise their rights as described above, then our financial condition
and results of operations could be adversely affected and we could become bankrupt or insolvent.
41
The Select credit facilities (as defined below) require Select to maintain a leverage ratio (based upon
the ratio of indebtedness to consolidated EBITDA as defined in the agreement), which is tested quarterly.
The Select credit facilities also prohibit Select from making capital expenditures in excess of $125.0 million
in any fiscal year (subject to a 50% carry-over provision). Failure to comply with these covenants would
result in an event of default under the Select credit facilities and, absent a waiver or an amendment from
the lenders, preclude Select from making further borrowings under its revolving facility and permit the
lenders to accelerate all outstanding borrowings under the Select credit facilities.
The Concentra credit agreement (as defined below) requires Concentra to maintain a leverage ratio
(based upon the ratio of indebtedness for money borrowed to consolidated EBITDA) of 5.75 to 1.00,
which is tested quarterly, but only if Revolving Exposure (as defined in the Concentra credit facilities (as
defined below)) exceeds 30% of Revolving Commitments (as defined in the Concentra credit facilities) on
such day. Failure to comply with this covenant would result in an event of default under the Concentra
revolving facility (as defined below) only and, absent a waiver or an amendment from the lenders, preclude
Concentra from making further borrowings under the Concentra revolving facility and permit the lenders
to accelerate all outstanding borrowings under the Concentra revolving facility. Upon such acceleration,
Concentra’s failure to comply with the financial covenant would result in an Event of Default (as defined
in the Concentra credit facilities) with respect to the Concentra term loan (as defined below).
The Concentra credit facilities also contain a number of 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. The
Concentra credit facilities contain events of default for non-payment of principal and interest when due
(subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of
default that would be triggered by a change of control.
As of December 31, 2016, Select was required to maintain its leverage ratio (its ratio of total
indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters) at less than 5.75 to
1.00. For the four consecutive fiscal quarters ended December 31, 2016, Select’s leverage ratio was 5.40 to
1.00.
While we have never defaulted on compliance with any of our financial covenants, our ability to
comply with these ratios in the future may be affected by events beyond our control. Inability to comply
with the required financial covenants could result in a default under our indebtedness. In the event of any
default under Select’s credit facilities, the lenders could elect to terminate borrowing commitments and
declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be
immediately due and payable. In the event of any default under Select’s indenture, the trustee or holders
of 25% of the notes could declare all outstanding 6.375% senior notes immediately due and payable.
Payment of interest on, and repayment of principal of, our indebtedness is dependent in part on cash flow
generated by our subsidiaries.
Payment of interest on, and repayment of principal of our indebtedness will be dependent in part
upon cash flow generated by our subsidiaries and their ability to make such cash available to us, by
dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or be permitted to, make
distributions to enable us to make payments in respect of our indebtedness. For example, as a general
matter, Concentra is restricted from paying dividends under the Concentra credit facilities and therefore
we cannot rely on Concentra’s cash flow to repay Select’s indebtedness. Each of our subsidiaries is a
distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability
to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries,
we may be unable to make required principal and interest payments on our indebtedness. In addition, any
payment of interest, dividends, distributions, loans, or advances by our subsidiaries to us could be subject
to restrictions on dividends or repatriation of distributions under applicable local law, monetary transfer
42
restrictions, and foreign currency exchange regulations in the jurisdictions in which the subsidiaries operate
or under arrangements with local partners. Furthermore, the ability of our subsidiaries to make such
payments of interest, dividends, distributions, loans, or advances may be contested by taxing authorities in
the relevant jurisdictions.
Despite our substantial level of indebtedness, we and our subsidiaries may be able to incur additional
indebtedness. This could further exacerbate the risks described above.
We and our subsidiaries may be able to incur additional indebtedness in the future. Although the
Select credit facilities and the Concentra credit facilities contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the
indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do
not prevent us or our subsidiaries from incurring obligations that do not constitute indebtedness. As of
December 31, 2016, Select had $190.3 million of availability under the Select revolving facility (as defined
below) (after giving effect to $39.7 million of outstanding letters of credit) and Concentra had $43.4 million
of availability under the Concentra revolving facility (after giving effect to $6.6 million of outstanding
letters of credit). In addition, to the extent new debt is added to us and our subsidiaries’ current debt
levels, the substantial leverage risks described above would increase.
Concentra’s inability to meet the conditions and payments under the Concentra credit facilities, although
non-recourse to Select, could jeopardize Select’s equity contribution to Concentra Group Holdings.
Select is not a party to the Concentra credit facilities and is not an obligor with respect to Concentra’s
debt under such agreements; however, if Concentra fails to meet its obligations and defaults on the
Concentra credit facilities, a portion of or all of Select’s equity investment in Concentra Group Holdings,
the indirect parent company of Concentra, could be at risk of loss.
We may be unable to refinance our debt on terms favorable to us or at all, which would negatively impact our
business and financial condition.
We are subject to risks normally associated with debt financing, including the risk that our cash flow
will be insufficient to meet required payments of principal and interest. While we intend to refinance all of
our indebtedness before it matures, there can be no assurance that we will be able to refinance any
maturing indebtedness, that such refinancing will be on terms as favorable to us as the terms of the
maturing indebtedness or, if the indebtedness cannot be refinanced, that we will be able to otherwise
obtain funds by selling assets or raising equity to make required payments on our maturing indebtedness.
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest
rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase.
If we are unable to refinance our indebtedness at or before maturity or otherwise meet our payment
obligations, our business and financial condition will be negatively impacted, and we may be in default
under our indebtedness. Any default under the Select senior secured credit facilities would permit lenders
to foreclose on our assets and would also be deemed a default under the indenture governing Select’s
6.375% senior notes, which may also result in the acceleration of that indebtedness.
See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources.’’
43
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We currently lease most of our facilities, including specialty hospitals, outpatient rehabilitation clinics,
medical centers, CBOCs, and our corporate headquarters. We own 25 of our specialty hospitals, one of our
outpatient rehabilitation clinics, and six of our medical centers throughout the United States. As of
December 31, 2016, we leased 90 of our specialty hospitals, 1,444 of our outpatient rehabilitation clinics,
294 of our medical centers, and 32 CBOCs throughout the United States.
We lease our corporate headquarters from companies owned by a related party affiliated with us
through common ownership or management. Our corporate headquarters is approximately 186,780 square
feet and is located in Mechanicsburg, Pennsylvania.
44
The following is a list by state of the number of facilities we operated as of December 31, 2016.
Specialty Hospitals
Long Term
Acute Care(2)
Inpatient
Rehabilitation(2)
Outpatient
Clinics(2)
Concentra
Medical
Centers(1)
Total
Facilities
Alabama . . . . . . . . . . . . . . . . . . . . . . . . . .
Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . .
Arkansas . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . .
Connecticut . . . . . . . . . . . . . . . . . . . . . . . .
Delaware . . . . . . . . . . . . . . . . . . . . . . . . .
District of Columbia . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . .
Hawaii
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iowa . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kentucky . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . .
Maine . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . .
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . .
Mississippi . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . .
Nebraska . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Hampshire . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . .
North Carolina . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . .
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . .
Rhode Island . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . .
South Dakota . . . . . . . . . . . . . . . . . . . . . .
Tennessee . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vermont . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . .
1
2
2
1
10
7
3
2
2
2
11
1
5
3
2
1
3
17
2
9
2
1
5
5
1
3
1
1
1
1
2
4
3
2
5
29
7
29
1
69
46
52
12
5
119
69
62
29
17
14
52
3
12
66
11
37
27
5
80
3
12
159
2
34
87
22
211
27
22
112
47
5
15
Total Company . . . . . . . . . . . . . . . . . . . . .
103
20
1,611
30
7
44
5
87
65
62
14
5
137
90
1
74
35
22
18
60
7
17
76
13
66
28
10
96
8
19
3
177
6
43
115
31
4
236
2
31
1
35
166
2
2
52
5
1
26
2,034
12
2
17
19
10
1
7
13
1
12
3
3
2
6
4
5
10
2
18
11
3
7
3
13
4
6
8
7
4
14
2
2
8
44
2
2
5
8
300
(1) The Company’s Concentra segment also had operations in the State of New York.
(2)
Includes managed long term acute care hospitals, inpatient rehabilitation hospitals, and outpatient clinics,
respectively.
45
Item 3. Legal Proceedings.
The Company is a party to various legal actions, proceedings, and claims (some of which are not
insured), and regulatory and other governmental audits and investigations in the ordinary course of its
business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and
regulatory and other governmental audits and investigations. These matters could potentially subject the
Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS
or other federal and state enforcement and regulatory agencies may conduct additional investigations
related to the Company’s businesses in the future that may, either individually or in the aggregate, have a
material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional
malpractice liability insurance and general liability insurance, subject to self-insured retention of
$2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for
general liability claims. The Company also maintains umbrella liability insurance covering claims which,
due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance
policies. These insurance policies also do not generally cover punitive damages and are subject to various
deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available
insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the
outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its
financial position, results of operations or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims
Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time
while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known
as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages
and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and
has been a defendant in these cases in the past, and may be named as a defendant in similar cases from
time to time in the future.
Evansville Litigation
On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint in United States of
America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select
Specialty Hospital—Evansville, LLC (‘‘SSH-Evansville’’), Select Employment Services, Inc., and
Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern
District of Indiana by private plaintiff-relators on behalf of the United States under the federal False
Claims Act. The plaintiff-relators are the former CEO and two former case managers at SSH-Evansville,
and the defendants currently include the Company, SSH-Evansville, a subsidiary of the Company serving
as common paymaster for its employees, and a physician who practices at SSH-Evansville. The plaintiff-
relators allege that, from 2006 until April 2012, SSH-Evansville discharged patients too early or held
patients too long, improperly discharged patients to and readmitted them from short stay hospitals,
up-coded diagnoses at admission, and admitted patients for whom long-term acute care was not medically
necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law.
The Second Amended Complaint replaces a prior complaint that was filed under seal on September 28,
2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on
January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the
government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015,
the United States Department of Justice notified the District Court of its decision not to intervene in the
case, and the District Court thereafter approved a case management plan imposing certain deadlines.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on
multiple grounds. One basis for the Motion to Dismiss was the False Claims Act’s public disclosure bar,
46
which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated
sources, unless the relator is an original source. The Affordable Care Act, enacted on March 23, 2010,
altered the public disclosure bar language of the False Claims Act by, among other things, giving the
United States the right to oppose dismissal of a case based on the public disclosure bar. In their Motion to
Dismiss, the defendants contended that the public disclosure bar applies because substantially the same
conduct as the plaintiff-relators have alleged had previously been publicly disclosed, including in a New
York Times article and a prior qui tam case. A second basis for the defendants’ Motion to Dismiss was that
the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal
Rules of Civil Procedure.
Then, based on the Affordable Care Act’s changes to the public disclosure bar language of the False
Claims Act, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure
bar for claims arising from conduct from and after March 23, 2010. The defendants filed briefs challenging
the United States’ contention that the statutory changes gives it an unfettered right to veto the applicability
of the public disclosure bar. On September 30, 2016, the District Court partially granted and partially
denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same
conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the
public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23,
2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United
States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and
therefore did not dismiss those claims based on the public disclosure bar. However, the District Court
ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay
manipulation and premature discharging of patients with the requisite particularity, and dismissed those
claims. The District Court declined to dismiss the plaintiff-relators’ claims arising from conduct from and
after March 23, 2010 relating to delayed discharging of patients and upcoding and the plaintiff-relators’
retaliation claims. The Company intends to vigorously defend this action, but at this time the Company is
unable to predict the timing and outcome of this matter.
Knoxville Litigation
On July 13, 2015, the United States District Court for the Eastern District of Tennessee unsealed a qui
tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select,
Select Specialty Hospital—Knoxville, Inc. (‘‘SSH-Knoxville’’), Select Specialty Hospital—North
Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after
the United States and the State of Tennessee notified the court on July 13, 2015 that each had decided not
to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a
respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of the federal
False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to
increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients
to increase Medicare reimbursements and decrease inspections; admitting patients who do not require
medically necessary care; performing unnecessary procedures and services; and delaying performance of
procedures to increase billing. The Complaint was served on some of the defendants during October 2015.
In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The
defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s
claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based
on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were
based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The
defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar,
and because the plaintiff-relator did not plead his claims with sufficient particularity.
In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed the
plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but
47
one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the
plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a
Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016,
the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings,
arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the
basis for the District Court’s dismissal. The Company intends to vigorously defend this action, but at this
time the Company is unable to predict the timing and outcome of this matter.
Wilmington Litigation
On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam
Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty
Hospital—Wilmington, Inc. (‘‘SSH-Wilmington’’), Select Specialty Hospitals, Inc., Select Employment
Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was
initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was
unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. In
the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a
former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware
False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical
records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. The
Complaint has not been served on the Select defendants. The Company intends to vigorously defend this
action if the plaintiff-relator pursues it, but at this time the Company is unable to predict the timing and
outcome of this matter.
Item 4. Mine Safety Disclosures.
None.
48
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
Equity Securities.
Market Information
Select Medical Holdings Corporation common stock is quoted on the New York Stock Exchange
under the symbol ‘‘SEM.’’ The following table sets forth, for the periods indicated, the high and low sales
prices of our common stock, reported by the New York Stock Exchange.
Fiscal Year Ended December 31, 2015
Market Prices
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15.75
$17.20
$16.51
$12.66
$12.10
$14.38
$10.41
$10.07
Fiscal Year Ended December 31, 2016
Market Prices
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12.10
$14.30
$13.61
$14.25
$ 7.33
$10.31
$10.08
$10.20
Holders
At the close of business on February 1, 2017, Holdings had 132,683,690 shares of common stock issued
and outstanding. As of that date, there were 118 registered holders of record. This does not reflect
beneficial stockholders who hold their stock in nominee or ‘‘street’’ name through brokerage firms.
Dividend Policy
On February 18, 2015, Holdings declared cash dividends of $0.10 per share. Such dividends were paid
on March 11, 2015 to stockholders of record as of the close of business on March 4, 2015.
Since the dividend described above, Holdings has not paid or declared any dividends on its common
stock. We do not anticipate paying any further dividends on Holdings’ common stock in the foreseeable
future. We intend to retain future earnings to finance the ongoing operations and growth of our business.
Any future determination relating to our dividend policy will be made at the discretion of our board of
directors and will depend on conditions at that time, including our financial condition, results of
operations, contractual restrictions, capital requirements, business prospects and other factors our board
of directors may deem relevant. Additionally, certain contractual agreements we are party to, including the
Select credit facilities and the Indenture governing Select’s 6.375% senior notes, restrict our capacity to
pay dividends.
Securities Authorized For Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under equity compensation plans, see
Part III ‘‘Item 12—Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.’’
49
Stock Performance Graph
The graph below compares the cumulative total stockholder return on $100 invested at the close of
the market on December 31, 2011, with dividends being reinvested on the date paid through and including
the market close on December 31, 2016 with the cumulative total return of the same time period on the
same amount invested in the Standard & Poor’s 500 Index (S&P 500) and the S&P Health Care Services
Select Industry Index (SPSIHP). The chart below the graph sets forth the actual numbers depicted on the
graph.
$250.00
$230.00
$210.00
$190.00
$170.00
$150.00
$130.00
$110.00
$90.00
$70.00
$50.00
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
SEM
SPSIHP
S&P 500
8FEB201721270220
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Select Medical Holdings Corporation
(SEM) . . . . . . . . . . . . . . . . . . . . . . . . .
$100.00
$127.32
$162.48
$207.50
$172.92
$192.38
S&P Health Care Services Select Industry
Index (SPSIHP) . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . .
$100.00
$100.00
$122.46
$115.88
$167.77
$153.01
$210.76
$173.69
$218.34
$176.07
$201.04
$196.78
Purchases of Equity Securities by the Issuer
Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to
$500.0 million worth of shares of its common stock. The program has been extended until December 31,
2017 and will remain in effect until then, unless further extended or earlier terminated by the board of
directors. Stock repurchases under this program may be made in the open market or through privately
negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings did
50
not repurchase shares during the three months ended December 31, 2016 under the authorized common
stock repurchase program.
The following table provides information regarding repurchases of our common stock during the three
months ended December 31, 2016:
Total Number of
Shares
Purchased(1)
Purchased as Part of Dollar Value of Shares that
Average Price Publically Announced
Paid Per Share
Plans or Programs
May Yet Be Purchased
Under Plans or Programs
Total Number of
Shares
Approximate
October 1 - October 31, 2016 . .
November 1 - November 30,
2016 . . . . . . . . . . . . . . . . . . .
December 1 - December 31,
2016 . . . . . . . . . . . . . . . . . . .
77,297
$12.80
—
—
—
—
Total
. . . . . . . . . . . . . . . . . . . .
77,297
$12.80
—
—
—
—
$185,249,048
185,249,048
185,249,048
$185,249,048
(1) Represents shares of common stock surrendered to us to satisfy tax withholding obligations associated
with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity
incentive plans.
Item 6. Selected Financial Data.
You should read the following selected historical consolidated financial data in conjunction with our
consolidated financial statements and the accompanying notes. Upon the consummation of the Concentra
and Physiotherapy acquisition, their financial results are consolidated with Select’s effective June 1, 2015
and March 4, 2016, respectively. You should also read ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations,’’ which is contained elsewhere herein. The selected
historical financial data as of December 31, 2012, 2013, 2014, 2015, and 2016 and for the years ended
December 31, 2012, 2013, 2014, 2015, and 2016 have been derived from consolidated financial statements
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The selected
historical consolidated financial data as of December 31, 2015 and 2016, and for the years ended
December 31, 2014, 2015, and 2016 have been derived from our consolidated financial information
included elsewhere herein. The selected historical consolidated financial data as of December 31, 2012,
51
2013 and 2014 and for the years ended December 31, 2012 and 2013 have been derived from our audited
consolidated financial information not included elsewhere herein.
Select Medical Holdings Corporation(1)
Year Ended December 31,
2012
2013
2014
2015
2016
(In thousands, except per share data)
Statement of Operations Data:
Net operating revenues . . . . . . . . . . . . . . . $2,948,969 $2,975,648 $3,065,017 $3,742,736 $4,286,021
Operating expenses(2)
3,840,863
2,548,799
. . . . . . . . . . . . . . . .
145,311
63,311
Depreciation and amortization . . . . . . . . .
2,609,820
64,392
3,362,965
104,981
2,712,187
68,354
Income from operations . . . . . . . . . . . . . .
Loss on early retirement of debt(3) . . . . . . .
Equity in earnings of unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Non-operating gain . . . . . . . . . . . . . . . . . .
Interest expense, net(4)
. . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to
non-controlling interests(5) . . . . . . . . . . .
Net income attributable to Select Medical
336,859
(6,064)
301,436
(18,747)
284,476
(2,277)
274,790
—
299,847
(11,626)
7,705
—
(94,950)
243,550
89,657
153,893
2,476
—
(87,364)
197,801
74,792
123,009
7,044
—
(85,446)
203,797
75,622
128,175
16,811
29,647
(112,816)
19,943
42,651
(170,081)
208,432
72,436
135,996
180,734
55,464
125,270
5,663
8,619
7,548
5,260
9,859
Holdings Corporation . . . . . . . . . . . . . . $ 148,230 $ 114,390 $ 120,627 $ 130,736 $ 115,411
Income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . $
1.05 $
1.05 $
0.82 $
0.82 $
0.91 $
0.91 $
1.00 $
0.99 $
0.88
0.87
Weighted average common shares
outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Data (at end of period):
Cash and cash equivalents . . . . . . . . . . . . . $
Working capital(6) . . . . . . . . . . . . . . . . . . .
Total assets(6) . . . . . . . . . . . . . . . . . . . . . .
Total debt(6) . . . . . . . . . . . . . . . . . . . . . . .
Total Select Medical Holdings Corporation
stockholders’ equity . . . . . . . . . . . . . . . .
138,767
139,042
136,879
137,047
129,026
129,465
127,478
127,752
127,813
127,968
40,144 $
80,397
2,761,361
1,470,243
4,319 $
82,878
2,817,622
1,445,275
3,354 $
133,220
2,924,809
1,522,976
14,435 $
19,869
4,388,678
2,385,896
99,029
236,433
4,944,395
2,698,989
717,048
786,234
739,515
859,253
815,725
52
Select Medical Corporation(1)
Year Ended December 31,
2012
2013
2014
2015
2016
(In thousands)
Statement of Operations Data:
Net operating revenues . . . . . . . . . . . . . . . $2,948,969 $2,975,648 $3,065,017 $3,742,736 $4,286,021
Operating expenses(2)
3,840,863
2,548,799
. . . . . . . . . . . . . . . .
145,311
63,311
Depreciation and amortization . . . . . . . . .
2,609,820
64,392
2,712,187
68,354
3,362,965
104,981
Income from operations . . . . . . . . . . . . . .
Loss on early retirement of debt(3) . . . . . . .
Equity in earnings of unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Non-operating gain . . . . . . . . . . . . . . . . . .
Interest expense, net(4)
. . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to
non-controlling interests(5) . . . . . . . . . . .
Net income attributable to Select Medical
336,859
(6,064)
301,436
(17,788)
284,476
(2,277)
274,790
—
299,847
(11,626)
7,705
—
(83,759)
254,741
93,574
161,167
2,476
—
(84,954)
201,170
75,971
125,199
7,044
—
(85,446)
203,797
75,622
128,175
16,811
29,647
(112,816)
19,943
42,651
(170,081)
208,432
72,436
135,996
180,734
55,464
125,270
5,663
8,619
7,548
5,260
9,859
Corporation . . . . . . . . . . . . . . . . . . . . . $ 155,504 $ 116,580 $ 120,627 $ 130,736 $ 115,411
Balance Sheet Data (at end of period):
Cash and cash equivalents . . . . . . . . . . . . . $
Working capital(6) . . . . . . . . . . . . . . . . . . .
Total assets(6) . . . . . . . . . . . . . . . . . . . . . .
Total debt(6) . . . . . . . . . . . . . . . . . . . . . . .
Total Select Medical Corporation
40,144 $
78,414
2,760,313
1,302,943
4,319 $
82,878
2,817,622
1,445,275
3,354 $
133,220
2,924,809
1,552,976
14,435 $
19,869
4,388,678
2,385,896
99,029
236,433
4,944,395
2,698,989
stockholders’ equity . . . . . . . . . . . . . . . .
881,317
786,234
739,515
859,253
815,725
(1) The results of Holdings are identical to those of Select for the years ending December 2014, 2015, and
2016. The amounts recognized as interest expense, net and income tax expense by Holdings and Select
differ for the years ended December 31, 2012 and 2013. The amounts recognized as loss on early
retirement of debt by Holdings and Select differ for the year ended December 31, 2013.
(2) Operating expenses include cost of services, general and administrative expenses, bad debt expenses,
and stock compensation expense.
(3) During the year ended December 31, 2012, we repurchased and retired an aggregate of $275.0 million
principal amount of Select’s outstanding 75⁄8% senior subordinated notes. A loss on early retirement
of debt of $6.1 million was recognized by Holdings and Select for the year ended December 31, 2012,
which included the write-off of unamortized debt issuance costs and call premiums.
During the year ended December 31, 2013, Select entered into a credit extension amendment on
February 20, 2013, the proceeds of which were used to redeem all of its outstanding 75⁄8% senior
subordinated notes, to finance Holdings’ redemption of all of its 10% senior floating rate, and to
repay a portion of the balance outstanding under the Select credit facilities. Additionally, on May 28,
2013, Select issued and sold $600.0 million aggregate principal amount of its 6.375% senior notes due
2021, the proceeds of which were used to pay a portion of the Select term loans then outstanding and
to pay related fees and expenses. A loss on early retirement of debt of $18.7 million and $17.8 million
for Holdings and Select, respectively, was recognized for the year ended December 31, 2013, which
included the write-off of unamortized debt issuance costs.
53
During the year ended December 31, 2014, Select amended its term loans under the Select credit
facilities. A loss on early retirement of debt of $2.3 million was recognized for unamortized debt
issuance costs, unamortized original issue discount and certain fees incurred related to term loan
modifications.
During the year ended December 31, 2016, the Company recognized a loss on early retirement debt of
$0.8 million relating to the repayment of series D tranche B term loans under the Select credit
facilities. Additionally, on September 26, 2016, Concentra prepaid the second lien term loan under the
Concentra credit facilities. The premium plus the expensing of unamortized deferred financing costs
and original issuance discount resulted in a loss on early retirement of debt of $10.9 million.
(4) Interest expense, net equals interest expense minus interest income.
(5) Reflects interests held by other parties in subsidiaries, limited liability companies and limited
partnerships owned and controlled by us.
(6) Reflects the retrospective adoption of ASU 2015-03 and ASU 2015-15. The balance sheet as of
December 31, 2015 was retrospectively conformed to reflect the adoption of the standard and
approximately $38.0 million of unamortized debt issuance costs were reclassified to be a direct
reduction of debt, rather than a component of other assets. The balance sheet data as of
December 31, 2012, 2013, and 2014 was not retrospectively conformed.
Non-GAAP Measure Reconciliation
The following table reconciles the relationship of Holdings’ net income and income from operations
to Adjusted EBITDA and should be referred to when we discuss Adjusted EBITDA. Refer to
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ for further
information on Adjusted EBITDA as a non-GAAP measure.
Select Medical Holdings Corporation
Year Ended December 31,
2012
2013
2014
2015
2016
(In thousands, except per share data)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $153,893 $123,009 $128,175 $135,996 $125,270
55,464
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . .
170,081
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
(42,651)
Non-operating gain . . . . . . . . . . . . . . . . . . . . . . . .
(19,943)
Equity in earnings of unconsolidated subsidiaries . .
— 11,626
Loss on early retirement of debt . . . . . . . . . . . . . .
72,436
112,816
— (29,647)
(16,811)
74,792
87,364
—
(2,476)
18,747
89,657
94,950
—
(7,705)
6,064
(7,044)
2,277
75,622
85,446
Income from operations . . . . . . . . . . . . . . . . . . . .
Stock compensation expense:
Included in general and administrative . . . . . . . .
Included in cost of services . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . .
Physiotherapy acquisition costs . . . . . . . . . . . . . . .
Concentra acquisition costs . . . . . . . . . . . . . . . . . .
336,859
301,436
284,476
274,790
299,847
3,538
2,139
63,311
—
—
5,276
1,757
64,392
—
—
9,027
2,015
68,354
—
—
11,633
3,046
104,981
—
4,715
14,607
2,806
145,311
3,236
—
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . $405,847 $372,861 $363,872 $399,165 $465,807
54
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read this discussion together with the ‘‘Selected Financial Data’’ and consolidated financial
statements and accompanying notes included elsewhere herein.
Overview
We began operations in 1997 and, based on number of facilities, are one of the largest operators of
specialty hospitals, outpatient rehabilitation clinics, and occupational medicine centers in the United
States. As of December 31, 2016, we had operations in 46 states and the District of Columbia. As of
December 31, 2016, we operated 123 specialty hospitals in 27 states and 1,611 outpatient rehabilitation
clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture
subsidiary, operated 300 medical centers in 38 states as of December 31, 2016. Concentra also provides
contract services at employer worksites and Department of Veterans Affairs community-based outpatient
clinics, or ‘‘CBOCs’’.
We manage our Company through three business segments: specialty hospitals, outpatient
rehabilitation, and Concentra. We had net operating revenues of $4,286.0 million for the year ended
December 31, 2016. Of this total, we earned approximately 54% of our net operating revenues from our
specialty hospitals segment, approximately 23% from our outpatient rehabilitation segment, and
approximately 23% from our Concentra segment. Patients are typically admitted to our specialty hospitals
from general acute care hospitals. These patients have specialized needs, with serious and often complex
medical conditions. Our outpatient rehabilitation segment consists of clinics that provide physical,
occupational, and speech rehabilitation services. Our Concentra segment consists of medical centers and
contract services provided at employer worksites and Department of Veterans Affairs CBOCs that deliver
occupational medicine, physical therapy, veteran’s healthcare, and consumer health services.
Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA income (loss) (‘‘Adjusted EBITDA’’) is
important to investors because Adjusted EBITDA is commonly used as an analytical indicator of
performance by investors within the healthcare industry. Adjusted EBITDA is used by management to
evaluate financial performance and determine resource allocation for each of our operating units.
Adjusted EBITDA is not a measure of financial performance under generally accepted accounting
principles (‘‘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
calculations, 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, Concentra acquisition
costs, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of
unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The table in ‘‘Selected Financial Data’’ reconciles the relationship of net income and income from
operations to Adjusted EBITDA and should be referred to when we discuss Adjusted EBITDA.
55
Summary Financial Results
Year Ended December 31, 2016
For the year ended December 31, 2016, our net operating revenues increased 14.5% to
$4,286.0 million, compared to $3,742.7 million for the year ended December 31, 2015. We had income
from operations for the year ended December 31, 2016 of $299.8 million, compared to $274.8 million for
the year ended December 31, 2015. The increases in our net operating revenues and income from
operations from the prior year were principally due to the acquisitions of Concentra on June 1, 2015 and
Physiotherapy on March 4, 2016. Net income was $125.3 million for the year ended December 31, 2016,
which includes a pre-tax non-operating gain of $42.7 million and a pre-tax loss on early retirement of debt
of $11.6 million. Net income was $136.0 million for the year ended December 31, 2015, which includes a
pre-tax non-operating gain of $29.6 million. Our Adjusted EBITDA for the year ended December 31, 2016
increased 16.7% to $465.8 million, compared to $399.2 million for the year ended December 31, 2015. Our
Adjusted EBITDA margin was 10.9% for the year ended December 31, 2016, compared to 10.7% for the
year ended December 31, 2015. Our increase in Adjusted EBITDA was principally due to the acquisitions
of Concentra and Physiotherapy, offset in part by Adjusted EBITDA losses of start-up hospitals, Adjusted
EBITDA losses of newly acquired specialty hospitals and specialty hospital closures. The increase in our
Adjusted EBITDA margin is principally due to cost reductions in our Concentra segment and the sale of
our contract therapy businesses on March 31, 2016, which operated at lower Adjusted EBITDA margins
compared to other segments, offset in part by Adjusted EBITDA losses incurred by our specialty hospitals
segment, as mentioned above.
Net income attributable to Holdings was $115.4 million for the year ended December 31, 2016,
compared to $130.7 million for the year ended December 31, 2015. The decrease in Holdings’ net income
was principally due to increased interest expense as a result of increases in our indebtedness used to
finance the acquisitions of Concentra and Physiotherapy and increases in our interest rates associated with
amendments of Select’s credit facilities, increased depreciation and amortization expense as a result of the
acquisitions of Concentra and Physiotherapy, and the loss on early retirement of debt related to our
prepayment of Concentra’s second lien term loan (as discussed below).
Cash flows provided from operations for Holdings increased to $346.6 million for the year ended
December 31, 2016, compared to $208.4 million for the year ended December 31, 2015.
Year Ended December 31, 2015
For the year ended December 31, 2015, our net operating revenues increased 22.1% to
$3,742.7 million compared to $3,065.0 million for the year ended December 31, 2014, principally due to the
addition of our Concentra segment and increases in net operating revenues in our specialty hospitals
segment. We had income from operations for the year ended December 31, 2015 of $274.8 million,
compared to $284.5 million for the year ended December 31, 2014. The decrease in our income from
operations was principally due to increases in operating expenses at our specialty hospitals as further
discussed under ‘‘Results of Operations.’’ Net income was $136.0 million for the year ended December 31,
2015, which includes a pre-tax non-operating gain of $29.6 million. Net income was $128.2 million for the
year ended December 31, 2014. Our Adjusted EBITDA for the year ended December 31, 2015 was
$399.2 million, compared to $363.9 million for the year ended December 31, 2014 and our Adjusted
EBITDA margin was 10.7% for the year ended December 31, 2015, compared to 11.9% for the year ended
December 31, 2014. Our increase in Adjusted EBITDA was principally due to the effects of the Concentra
acquisition, offset in part by increases in our specialty hospitals segment operating expenses discussed
above. The decrease in our Adjusted EBITDA margin is principally due to a decline in Adjusted EBITDA
from our specialty hospitals segment caused by the increases in operating expenses discussed above, and
the fact that incremental Adjusted EBITDA contributed by Concentra had a lower Adjusted EBITDA
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margin than our overall Adjusted EBITDA margin for the year ended December 31, 2014, thus reducing
the overall Adjusted EBITDA margin.
Net income attributable to Holdings was $130.7 million for the year ended December 31, 2015,
compared to $120.6 million for the year ended December 31, 2014. The increase in Holdings’ net income
was principally due to increases in our equity in earnings of unconsolidated subsidiaries and a gain on the
sale of an equity investment, offset in part by the decrease in our income from operations as discussed
above and increases in interest expense associated with Concentra indebtedness.
Cash flow from operations for Holdings provided $208.4 million and $170.6 million of cash for the
years ended December 31, 2015 and 2014, respectively.
Significant Events
Physiotherapy Acquisition
On March 4, 2016, Select acquired 100% of the issued and outstanding equity securities of
Physiotherapy for $406.3 million, net of $12.3 million of cash acquired. Select financed the acquisition
using a combination of cash on hand and proceeds from the series F tranche B term loans under the Select
credit facilities, as defined below. During the year ended December 31, 2016, $3.2 million of Physiotherapy
acquisition costs were recognized in general and administrative expense on the consolidated statements of
operations and comprehensive income.
Sale of Businesses
On March 31, 2016, Select sold its contract therapy businesses for $65.0 million, resulting in a
non-operating gain of $33.9 million.
Indebtedness
Select Credit Facilities
On March 4, 2016, Select entered into an additional credit extension amendment to Select’s senior
secured credit facility (the ‘‘Select credit facilities’’). Select amended the Select credit facilities in order to,
among other things, have the lenders named therein make available an aggregate of $625.0 million series F
tranche B term loans. Select used the proceeds of the series F tranche B term loans and cash on hand to
(i) refinance in full the series D tranche B term loans due December 20, 2016, (ii) consummate the
acquisition of Physiotherapy, and (iii) pay fees and expenses incurred in connection with the transactions.
During the year ended December 31, 2016, we recognized a loss on early retirement of debt of $0.8 million.
Concentra Credit Facilities
On September 26, 2016, Concentra entered a credit agreement amendment to its first lien credit
agreement (the ‘‘Concentra credit agreement’’) dated June 1, 2015. The Concentra credit agreement
initially provided for $500.0 million in first lien credit facilities composed of $450.0 million, seven-year term
loans (the ‘‘Concentra first lien term loan’’) and a $50.0 million, five-year revolving credit facility (the
‘‘Concentra revolving facility’’ and, together with the Concentra first lien term loan, the ‘‘Concentra credit
facilities’’). The credit agreement amendment provided an additional $200.0 million of first lien term loans
due June 1, 2022, the proceeds of which were used to prepay in full its $200.0 million eight-year second lien
term loan due June 1, 2023, and also amended certain restrictive covenants to give Concentra greater
operational flexibility. The reacquisition price of Concentra’s second lien term loan was $202.0 million, and
the prepayment resulted in a loss on early retirement of debt of $10.9 million during the year ended
December 31, 2016.
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Medicare Reimbursement of LTCH Services—Patient Criteria
As discussed below under ‘‘Regulatory Changes—Medicare Reimbursement of LTCH Services—Patient
Criteria,’’ new Medicare regulations, which establish new payment limits for Medicare patients discharged
from an LTCH who do not meet specified patient criteria, began to be phased in to our LTCHs in the
fourth quarter of 2015. As of December 31, 2016, all of our LTCHs are now operating under the new
payment rules.
New Specialty Hospitals
Select’s development of new specialty hospitals can result in start-up costs exceeding net operating
revenues, if any, causing Adjusted EBITDA losses during the start-up period. Adjusted EBITDA losses for
start-up hospitals were $21.8 million for the year ended December 31, 2016, compared to $16.8 million for
the year ended December 31, 2015.
Regulatory Changes
The Medicare program reimburses us 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. Net operating revenues generated directly from the Medicare program represented
approximately 45%, 37%, and 30% of our consolidated net operating revenues for the years ended
December 31, 2014, 2015, and 2016, respectively. The principal causes of the decrease in Medicare net
operating revenues as a percentage of our total net operating revenues are the acquisitions of Concentra
on June 1, 2015, and Physiotherapy on March 4, 2016, which both have a significantly lower relative
percentage of Medicare net operating revenues as compared to our historical business prior to the
acquisitions. Since the percentage of net operating revenues generated directly from the Medicare
program have been historically higher in our specialty hospitals segment as compared to our outpatient
rehabilitation and Concentra segments, we anticipate that the percentage of net operating revenues
generated directly from the Medicare program will continue to decrease to the extent growth in our
outpatient rehabilitation and Concentra segments outpaces growth in our specialty hospitals segment.
The Medicare program reimburses our LTCHs, IRFs and outpatient rehabilitation 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 summary 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.
Medicare Reimbursement of LTCH Services
There have been significant regulatory changes affecting LTCHs that have affected our net operating
revenues and, in some cases, caused us to change our operating models and strategies. We have been
subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare
payments to our LTCHs are made in accordance with LTCH-PPS. Proposed rules specifically related to
LTCHs are generally published in May, finalized in August and effective on October 1st of each year.
The following is a summary of significant changes to the Medicare prospective payment system for
LTCHs which have affected our results of operations, as well as the policies and payment rates for fiscal
year 2017 that may affect our future results of operations.
Fiscal Year 2015. On August 22, 2014, CMS published the final rule updating policies and payment
rates for LTCH PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or
after October 1, 2014 through September 30, 2015). The standard federal rate was set at $41,044, an
increase from the standard federal rate applicable during fiscal year 2014 of $40,607. The update to the
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standard federal rate for fiscal year 2015 included a market basket increase of 2.9%, less a productivity
adjustment of 0.5%, less a reduction of 0.2% mandated by the ACA, and less a budget neutrality
adjustment of 1.266%. The fixed loss amount for high cost outlier cases was set at $14,972, an increase
from the fixed loss amount in the 2014 fiscal year of $13,314.
Fiscal Year 2016. On August 17, 2015, CMS published the final rule updating policies and payment
rates for the LTCH PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on
or after October 1, 2015 through September 30, 2016). The standard federal rate was set at $41,763, an
increase from the standard federal rate applicable during fiscal year 2015 of $41,044. The update to the
standard federal rate for fiscal year 2016 included a market basket increase of 2.4%, less a productivity
adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. The fixed loss amount for high
cost outlier cases paid under LTCH PPS was set at $16,423, an increase from the fixed loss amount in the
2015 fiscal year of $14,972. The fixed loss amount for high cost outlier cases paid under the site neutral
payment rate described below was set at $22,538.
Fiscal Year 2017. On August 22, 2016, CMS published the final rule updating policies and payment
rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on
or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an
increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the
standard federal rate for fiscal year 2017 included a market basket increase of 2.8%, less a productivity
adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed-loss amount for high
cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed-loss amount in the
2016 fiscal year of $16,423. The fixed-loss amount for high cost outlier cases paid under the site-neutral
payment rate was set at $23,573, an increase from the fixed-loss amount in the 2016 fiscal year of $22,538.
Patient Criteria
The BBA of 2013, enacted December 26, 2013, establishes a dual-rate LTCH-PPS for Medicare
patients discharged from an LTCH. Specifically, for Medicare patients discharged in cost reporting periods
beginning on or after October 1, 2015, LTCHs will be reimbursed at the LTCH PPS standard federal
payment rate only if, immediately preceding the patient’s LTCH admission, the patient was discharged
from a ‘‘subsection (d) hospital’’ (generally, a short-term acute care hospital paid under IPPS) and either
the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU)
at the subsection (d) hospital, or the patient was assigned to an MS LTC DRG for cases receiving at least
96 hours of ventilator services in the LTCH. In addition, to be paid at the LTCH PPS standard federal
payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to
psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria, the LTCH
will be paid a lower ‘‘site neutral’’ payment rate, which will be the lower of: (i) the IPPS comparable per
diem payment rate capped at the MS DRG payment rate plus any outlier payments; or (ii) 100 percent of
the estimated costs for services.
The BBA of 2013 provides for a transition to the site-neutral payment rate for those patients not paid
at the LTCH-PPS standard federal payment rate. During the transition period (applicable to hospital cost
reporting periods beginning on or after October 1, 2015 and on or before September 30, 2017), a blended
rate will be paid for Medicare patients not meeting the new criteria that is equal to 50% of the site-neutral
payment rate amount and 50% of the standard federal payment rate amount. Thereafter, an LTCH will be
paid solely based on the site-neutral payment rate for Medicare patients not meeting the patient criteria.
For discharges in cost reporting periods beginning on or after October 1, 2017, only the site-neutral
payment rate will apply for Medicare patients not meeting the new criteria.
In addition, for cost reporting periods beginning on or after October 1, 2019, qualifying discharges
from an LTCH will continue to be paid at the LTCH-PPS standard federal payment rate, unless the
number of discharges for which payment is made under the site-neutral payment rate is greater than 50%
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of the total number of discharges from the LTCH for that period. If the number of discharges for which
payment is made under the site-neutral payment rate is greater than 50%, then beginning in the next cost
reporting period all discharges from the LTCH will be reimbursed at the site-neutral payment rate. The
BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral payment
rate to be reinstated for payment under the dual-rate LTCH-PPS.
Payment adjustments, including the interrupted stay policy and the 25 Percent Rule (discussed below),
apply to LTCH discharges regardless of whether the case is paid at the standard federal payment rate or
the site-neutral payment rate. However, short stay outlier payment adjustments do not apply to cases paid
at the site-neutral payment rate. CMS calculates the annual recalibration of the MS-LTC-DRG relative
payment weighting factors using only data from LTCH discharges that meet the criteria for exclusion from
the site-neutral payment rate. In addition, CMS applies the IPPS fixed-loss amount for high cost outliers to
site-neutral cases, rather than the LTCH-PPS fixed-loss amount. CMS calculates the LTCH-PPS fixed-loss
amount using only data from cases paid at the LTCH-PPS payment rate, excluding cases paid at the
site-neutral rate. For fiscal year 2017, the IPPS fixed-loss amount is set at $23,573 and the LTCH-PPS
fixed-loss amount is $21,943.
Medicare Market Basket Adjustments
The ACA instituted a market basket payment adjustment to LTCHs. In fiscal years 2018 and 2019, the
market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of
2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment
reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to
result in less than a 0% payment update and payment rates that are less than the prior year.
25 Percent Rule
The ‘‘25 Percent Rule’’ is a downward payment adjustment that applies if the percentage of Medicare
patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the
LTCH or LTCH satellite is co-located with the referring hospital) exceeds the applicable percentage
admissions threshold during a particular cost reporting period. Specifically, the payment rate for only
Medicare patients above the percentage admissions threshold are subject to a downward payment
adjustment. For Medicare patients above the applicable percentage admissions threshold, the LTCH is
reimbursed at a rate equivalent to that under general acute care hospital IPPS, which is generally lower
than LTCH-PPS rates. Cases that reach outlier status in the referring hospital do not count toward the
admissions threshold and are paid under LTCH-PPS.
Current law, as amended by the 21st Century Cures Act, precludes CMS from applying the 25 Percent
Rule for freestanding LTCHs to cost reporting years beginning before July 1, 2016 and for discharges
occurring on or after October 1, 2016 and before October 1, 2017. In addition, current law applies higher
percentage admissions thresholds under the 25 Percent Rule for most HIHs for cost reporting years
beginning before July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before
October 1, 2017. For freestanding LTCHs the percentage admissions threshold is suspended during the
relief periods. For HIHs the percentage admissions threshold is raised from 25% to 50% during the relief
periods. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs
co-located with an MSA-dominant hospital the referral percentage was raised from 50% to 75%.
Grandfathered HIHs are exempt from the 25 Percent Rule regulations.
After the expiration of the statutory relief, as described above, our LTCHs (whether freestanding,
HIH or satellite) will be subject to a downward payment adjustment for any Medicare patients who were
admitted from a co-located or a non-co-located hospital and that exceed the applicable percentage
admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period.
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These regulatory changes will have an adverse financial impact on the net operating revenues and
profitability of many of these hospitals for discharges on or after October 1, 2017.
Moratorium on New LTCHs, LTCH Satellite Facilities and LTCH beds
Current law imposes a moratorium on the establishment and classification of new LTCHs or LTCH
satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities through
September 30, 2017. There are three exceptions to the moratorium for projects that were under
development when the moratorium began on April 1, 2014. Only one exception needs to apply.
Medicare Reimbursement of Inpatient Rehabilitation Facility Services
The following is a summary of significant changes to the Medicare prospective payment system for
IRFs which have affected our results of operations, as well as the policies and payment rates for fiscal year
2017 that may affect our future results of operations.
Fiscal Year 2015. On August 6, 2014, CMS published the final rule updating policies and payment
rates for IRF-PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or
after October 1, 2014 through September 30, 2015). The standard payment conversion factor for
discharges for fiscal year 2015 was set at $15,198, an increase from the standard payment conversion factor
applicable during fiscal year 2014 of $14,846. The update to the standard payment conversion factor for
fiscal year 2015 included a market basket increase of 2.9%, less a productivity adjustment of 0.5%, and less
a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year
2015 to $8,848 from $9,272 established in the final rule for fiscal year 2014.
Fiscal Year 2016. On August 6, 2015, CMS published the final rule updating policies and payment
rates for IRF-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or
after October 1, 2015 through September 30, 2016). The standard payment conversion factor for
discharges for fiscal year 2016 was set at $15,478, an increase from the standard payment conversion factor
applicable during fiscal year 2015 of $15,198. The update to the standard payment conversion factor for
fiscal year 2016 included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less
a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year
2016 to $8,658 from $8,848 established in the final rule for fiscal year 2015.
Fiscal Year 2017. On August 5, 2016, CMS published the final rule updating policies and payment
rates for the IRF-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or
after October 1, 2016 through September 30, 2017). The standard payment conversion factor for
discharges for fiscal year 2017 was set at $15,708, an increase from the standard payment conversion factor
applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor for
fiscal year 2017 included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less
a reduction of 0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year
2017 to $7,984 from $8,658 established in the final rule for fiscal year 2016.
Medicare Market Basket Adjustments
The ACA instituted a market basket payment adjustment for IRFs. In fiscal years 2018 and 2019, the
market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of
2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment
reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to
result in less than a 0% payment update and payment rates that are less than the prior year.
61
Medicare Reimbursement of Outpatient Rehabilitation Services
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare
physician fee schedule. For services provided in 2017 through 2019, a 0.5% update will be applied each
year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the Merit-Based
Incentive Payment System (‘‘MIPS’’). For services provided in 2020 through 2025, a 0.0% percent update
will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the
alternative payment models (‘‘APMs’’). In 2026 and subsequent years eligible professionals participating in
APMs that meet certain criteria would receive annual updates of 0.75%, while all other professionals
would receive annual updates of 0.25%.
Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance
in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use
of electronic health records. Under the MIPS requirements a provider’s performance is assessed according
to established performance standards and used to determine an adjustment factor that is then applied to
the professional’s payment for a year. Each year from 2019 through 2024 professionals who receive a
significant share of their revenues through an 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. The specifics of the MIPS
and APM adjustments beginning in 2019 and 2020, respectively, will be subject to future notice and
comment rule-making. For the year ended December 31, 2016, we received approximately 14% of our
outpatient rehabilitation net operating revenues from Medicare.
Critical Accounting Matters
Contractual Adjustments
Net operating revenues include amounts estimated by us to be reimbursable by Medicare and
Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment
methods. In addition, we are reimbursed by non-governmental payors using a variety of payment
methodologies. Amounts we receive for treatment of patients covered by these programs are generally less
than the standard billing rates. Contractual allowances are calculated and recorded through our internally
developed systems. In our specialty hospitals segment, our billing system automatically calculates estimated
Medicare reimbursement and associated contractual allowances. For non-governmental payors in our
specialty hospitals segment, we either manually calculate the contractual allowance for each patient based
upon the contractual provisions associated with the specific payor or, where we have a relatively
homogeneous patient population, we monitor individual payors’ historical closed paid claims data and
apply those payment rates to the existing patient population. The net payments are converted into per
diem rates. The per diem rates are applied to unpaid patient days to determine the expected payment and
a contractual adjustment is recorded to adjust the recorded amount to agree with the expected payment.
Quarterly, we update our analysis of historical closed paid claims. In our outpatient rehabilitation and
Concentra segments, we perform provision testing, using internally developed systems, whereby we
monitor a payors’ historical paid claims data and compare it against the associated gross charges. This
difference is determined as a percentage of gross charges and is applied against gross billing revenue to
determine the contractual allowances for the period. Additionally, these contractual percentages are
applied against the gross receivables on the balance sheet to determine that adequate contractual reserves
are maintained for the gross accounts receivables reported on the balance sheet. We account for any
difference as additional contractual adjustments to gross revenues to arrive at net operating revenues in
the period that the difference is determined. We believe the processes used in recording our contractual
adjustments, as described above, have resulted in reasonable estimates determined on a consistent basis.
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Allowance for Doubtful Accounts
Substantially all of our accounts receivable are related to providing healthcare services to patients.
Collection of these accounts receivable is our primary source of cash and is critical to our financial
performance. Our primary collection risks relate to non-governmental payors who insure these patients
and deductibles, co-payments, and self-insured amounts owed by the patient. Deductibles, co-payments,
and self-insured amounts are an immaterial portion of our net accounts receivable balance. At
December 31, 2016, deductibles, co-payments, and self-insured amounts owed by patients accounted for
approximately 1.2% of our net accounts receivable balance before doubtful accounts. Our general policy is
to verify insurance coverage prior to the date of admission for a patient admitted to our specialty hospitals
or, in the case of our outpatient rehabilitation clinics and Concentra medical centers, we verify insurance
coverage prior to their first visit. Our estimate for the allowance for doubtful accounts is calculated by
applying a reserve allowance based upon the age of an account balance. This method is based on our
historical cash collections experience and write-off experience, and is periodically assessed in light of any
changes to such experience. Collections are impacted by the effectiveness of our collection efforts with
non-governmental payors and regulatory or administrative disruptions with the fiscal intermediaries that
pay our governmental receivables.
We estimate bad debts for total accounts receivable within each of our operating units. We believe our
policies have resulted in reasonable estimates determined on a consistent basis. We have historically
collected substantially all of our third-party insured receivables (net of contractual allowances) which
include receivables from governmental agencies. Historically, there has not been a material difference
between our bad debt allowances and the ultimate historical collection rates on accounts receivable. We
review our overall reserve adequacy by monitoring historical cash collections as a percentage of net
revenue less the provision for bad debts. Uncollected accounts are charged against the reserve when they
are turned over to an outside collection agency, or when management determines that the balance is
uncollectible, whichever occurs first.
The following table is an aging of our accounts receivable (after allowances for contractual
adjustments but before doubtful accounts) as of the dates indicated (in thousands):
Balance as of December 31,
2015
2016
Commercial insurance and other . . . . .
Medicare and Medicaid . . . . . . . . . . . .
$411,342
191,861
0 - 180 Days
Over 180
Days
$51,507
9,981
0 - 180 Days
$415,858
148,395
Over 180
Days
$59,218
14,068
Total accounts receivable . . . . . . . . . . .
$603,203
$61,488
$564,253
$73,286
The approximate percentage of total accounts receivable (after allowance for contractual adjustments
but before doubtful accounts) summarized by aging categories as of the dates indicated is as follows:
0 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91 to 180 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181 to 365 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 365 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81.1% 77.8%
9.6% 10.7%
4.8% 6.9%
4.5% 4.6%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0%
As of
December 31,
2015
2016
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The approximate percentage of total accounts receivable (after allowance for contractual adjustments
but before doubtful accounts) summarized by insured status as of the dates indicated is as follows:
As of
December 31,
2015
2016
Commercial insurance and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare and Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self-pay receivables (including deductibles and co-payments) . . . . . . .
68.5% 73.3%
30.3% 25.5%
1.2% 1.2%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0%
Insurance
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 for
which we will be ultimately responsible under an occurrence-based approach, whereby we estimate the
losses that will be incurred in a respective accounting period and accrue that estimated liability using
actuarial methods. We monitor these programs quarterly and revise our estimates as necessary to take into
account additional information. At December 31, 2016 and 2015, we recorded a liability of $147.4 million
and $157.4 million, respectively, for our estimated losses under these insurance programs.
Related Party Transactions
We are party to various rental and other agreements with related parties. Our payments to these
related parties amounted to $5.0 million, $4.7 million and $4.4 million for the years ended December 31,
2016, 2015, and 2014, respectively. Our future commitments are related to commercial office space we
lease for our corporate headquarters in Mechanicsburg, Pennsylvania. These future commitments as of
December 31, 2016 amount to $39.2 million through 2027. These transactions and commitments are
described more fully in the notes to our consolidated financial statements included herein. Our practice is
that any such transaction must receive the prior approval of both the audit and compliance committee of
the board of directors and a majority of non-interested members of the board of directors. It is our practice
that an independent third-party appraisal supporting the amount of rent for such leased space is obtained
prior to approving the related party lease of office space.
We also provide contracted services, principally employee leasing services, and charge management
fees to related parties affiliated through our equity investments. Net operating revenues generated from
the provision of contracted services and management fees amounted to $164.2 million, $146.0 million, and
$129.3 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Goodwill and Identifiable Intangible Assets
Goodwill and certain other indefinite-lived intangible assets are subject to periodic impairment
evaluations. For purposes of goodwill impairment assessment, we have defined our reporting units as
specialty hospitals, outpatient rehabilitation, and Concentra. Our most recent impairment assessment was
completed during the fourth quarter of 2016, which indicated that there was no impairment with respect to
goodwill or other recorded intangible assets. We have recorded total goodwill and other intangible assets
of $3.1 billion, of which goodwill and other identifiable intangible assets of $1.5 billion relates to our
specialty hospitals reporting unit, $891.5 million relates to the Concentra reporting unit, and $706.9 million
relates to our outpatient rehabilitation reporting unit. In performing the quantitative periodic impairment
tests, the fair value of the reporting unit is compared to its carrying value, including goodwill and other
intangible assets. If the carrying value exceeds the fair value and an impairment condition exists, an
64
impairment loss would be recognized. Impairment tests are required to be conducted at least annually, or
when events or conditions occur that might suggest a possible impairment. These events or conditions
include, but are not limited to; a significant adverse change in the business environment, 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. The occurrence of one of these events or conditions could significantly impact an impairment
assessment, necessitating an impairment charge and adversely affecting our results of operations.
To determine the fair value of our reporting units, we apply both a discounted cash flow (‘‘DCF’’)
income and market approach. Included in the DCF income approach, specific for each reporting unit, are
assumptions regarding revenue growth rate, future Adjusted EBITDA margin estimates, future general
and administrative expense rates, and the industry’s weighted average cost of capital and industry specific
market comparable Adjusted EBITDA multiples. We also must estimate residual values at the end of the
forecast period and future capital expenditure requirements. Each of these assumptions requires us to use
our knowledge of our industry, our recent transactions, and reasonable performance expectations for our
operations. If any one of the above assumptions changes or fails 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.
Regulatory changes governing the provision of our services in our specialty hospitals, outpatient
rehabilitation, and Concentra segments and development activities can have both positive and negative
effects on our results of operations and future cash flows which impact the fair value of our reporting units.
The excess fair value, as a percentage of carrying value, of our specialty hospitals reporting unit was
approximately 40.3%, 39.6% and 37.6% as of October 1, 2016, 2015, and 2014, respectively. The excess fair
value, as a percentage of carrying value, of our outpatient rehabilitation reporting unit was approximately
61.4% as of October 1, 2016. The fair value of our outpatient rehabilitation unit, including and our
contract therapy reporting unit, significantly exceeded the carrying values of each of those corresponding
reporting units as of October 1, 2015 and 2014. The excess fair value, as a percentage of carrying value, of
our Concentra reporting unit was approximately 22.2% as of October 1, 2016. The fair value of our
Concentra reporting unit approximated the carrying value as of October 1, 2015.
Realization of Deferred Tax Assets
Deferred tax assets and liabilities are required to be recognized using enacted tax rates for the effect
of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax
assets are also required to be reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized. As part of the process of preparing our
consolidated financial statements, we estimate our income taxes based on our actual current tax exposure
together with assessing temporary differences resulting from differing treatment of items for tax and
accounting purposes. We also recognize as deferred tax assets the future tax benefits from net operating
loss carry forwards. We evaluate the realizability of these deferred tax assets by assessing their valuation
allowances and by adjusting the amount of such allowances, if necessary. Among the factors used to assess
the likelihood of realization are our projections of future taxable income streams, the expected timing of
the reversals of existing temporary differences, and the impact of tax planning strategies that could be
implemented to avoid the potential loss of future tax benefits. However, changes in tax codes, statutory tax
rates or future taxable income levels could materially impact our valuation of tax accruals and assets and
could cause our provision for income taxes to vary significantly from period to period.
At December 31, 2016, we had deferred tax liabilities in excess of deferred tax assets of approximately
$177.7 million principally due to depreciation deductions that have been accelerated for tax purposes and
amortization of intangibles and goodwill. This amount includes approximately $26.4 million of valuation
reserves related primarily to state net operating losses.
65
Operating Statistics
The following table sets forth operating statistics for each of our operating segments for each of the
periods presented. The operating statistics reflect data for the period of time we managed these
operations:
Specialty hospitals data:(1)
Number of hospitals owned—start of period . . . . . . . . . . . . . .
Number of hospitals acquired . . . . . . . . . . . . . . . . . . . . . . .
Number of hospital start-ups . . . . . . . . . . . . . . . . . . . . . . . .
Number of hospitals closed/sold . . . . . . . . . . . . . . . . . . . . .
Number of hospitals owned—end of period . . . . . . . . . . . . . .
Number of hospitals managed—end of period . . . . . . . . . . . . .
Total number of hospitals (all)—end of period . . . . . . . . . . . .
Long term acute care hospitals . . . . . . . . . . . . . . . . . . . . . . . .
Rehabilitation hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available licensed beds(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Admissions(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patient days(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average length of stay (days)(2)
. . . . . . . . . . . . . . . . . . . . . . .
Net revenue per patient day(2)(3) . . . . . . . . . . . . . . . . . . . . . . .
Occupancy rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent patient days—Medicare(2) . . . . . . . . . . . . . . . . . . . . . .
Outpatient rehabilitation data:
Number of clinics owned—start of period . . . . . . . . . . . . . . . .
Number of clinics acquired . . . . . . . . . . . . . . . . . . . . . . . . .
Number of clinic start-ups . . . . . . . . . . . . . . . . . . . . . . . . .
Number of clinics closed/sold . . . . . . . . . . . . . . . . . . . . . . .
Number of clinics owned—end of period . . . . . . . . . . . . . . . .
Number of clinics managed—end of period . . . . . . . . . . . . . . .
Year Ended
December 31,
2014
Year Ended
December 31,
2015
Year Ended
December 31,
2016
115
1
7
(3)
120
9
129
120
1
2
(5)
118
9
127
118
5
2
(10)
115
8
123
113
16
5,326
55,581
1,340,506
24
1,546
$
109
18
5,172
56,570
1,373,780
24
1,569
$
103
20
5,237
52,381
1,258,068
24
1,651
$
70%
63%
885
14
18
(37)
880
143
72%
60%
880
7
34
(25)
896
142
66%
55%
896
559
28
(38)
1,445
166
1,611
Total number of clinics (all)—end of period . . . . . . . . . . . . . .
1,023
1,038
Number of visits(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net revenue per visit(2)(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concentra data:(5)
Number of centers owned—start of period . . . . . . . . . . . . . . .
Number of centers acquired . . . . . . . . . . . . . . . . . . . . . . . .
Number of centers closed/sold . . . . . . . . . . . . . . . . . . . . . .
Number of centers owned—end of period . . . . . . . . . . . . . . . .
Number of visits(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net revenue per visit(6)(7)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Specialty hospitals consist of LTCHs and IRFs.
4,970,724
103
$
5,218,532
103
$
7,799,208
102
$
—
300
—
300
4
(4)
300
4,436,977
114
$
300
7,373,751
118
$
(2) Data excludes specialty hospitals and outpatient clinics managed by the Company.
(3) Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenues
by the total number of patient days.
66
(4) Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service
revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation
direct patient service clinic revenue does not include contract therapy revenue.
(5) The selected financial data for the Company’s Concentra segment for the periods presented begins as
of June 1, 2015, which is the date the Concentra acquisition was consummated.
(6) Data excludes onsite clinics and CBOCs.
(7) Net revenue per visit is calculated by dividing center direct patient service revenue by the total
number of center visits.
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenues for the
periods indicated:
Select Medical Holdings Corporation
and Select Medical Corporation
Year Ended
December 31,
2014
Year Ended
December 31,
2015
Year Ended
December 31,
2016
Net operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of services(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
84.2
2.8
1.5
2.2
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early retirement of debt
. . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated subsidiaries . . . . . . . . . . .
Non-operating gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to non-controlling interests . . . . . . . . .
9.3
(0.0)
0.2
—
(2.8)
6.7
2.5
4.2
0.3
100.0%
85.8
2.5
1.6
2.8
7.3
—
0.4
0.8
(2.9)
5.6
2.0
3.6
0.1
100.0%
85.5
2.5
1.6
3.4
7.0
(0.3)
0.5
1.0
(4.0)
4.2
1.3
2.9
0.2
Net income attributable to Holdings and Select . . . . . . . . . . . .
3.9%
3.5%
2.7%
(1) Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and
other operating costs.
67
The following table summarizes selected financial data by business segment for the periods indicated:
Year Ended
December 31, December 31, December 31, % Change
Year Ended
Year Ended
2014
2015
2016
(In thousands)
% Change
2014 - 2015 2015 - 2016
Net operating revenues:
Specialty hospitals . . . . . . . . . . . . . . . . . $2,244,899
Outpatient rehabilitation(1) . . . . . . . . . . .
819,397
Concentra(2) . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . .
721
$2,346,781
810,009
585,222
724
$2,289,482
995,374
1,000,624
541
Total company . . . . . . . . . . . . . . . . . . . . $3,065,017
$3,742,736
$4,286,021
4.5%
(1.1)
N/A
0.4
22.1%
(2.4)%
22.9
N/M
(25.3)
14.5%
Income (loss) from operations:
Specialty hospitals . . . . . . . . . . . . . . . . . $ 290,001
Outpatient rehabilitation(1) . . . . . . . . . . .
84,739
Concentra(2) . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . .
(90,264)
$ 273,631
85,167
8,926
(92,934)
$ 224,926
107,169
81,522
(113,770)
(5.6)% (17.8)%
0.5
N/A
(3.0)
25.8
N/M
(22.4)
Total company . . . . . . . . . . . . . . . . . . . . $ 284,476
$ 274,790
$ 299,847
(3.4)%
9.1%
Adjusted EBITDA:
Specialty hospitals . . . . . . . . . . . . . . . . . $ 341,787
Outpatient rehabilitation(1) . . . . . . . . . . .
97,584
Concentra(2) . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . .
(75,499)
$ 327,623
98,220
48,301
(74,979)
281,511
129,830
143,009
(88,543)
(4.1)% (14.1)%
0.7
N/A
0.7
32.2
N/M
(18.1)
Total company . . . . . . . . . . . . . . . . . . . . $ 363,872
$ 399,165
465,807
9.7%
16.7%
Adjusted EBITDA margins:
Specialty hospitals . . . . . . . . . . . . . . . . .
Outpatient rehabilitation(1) . . . . . . . . . . .
Concentra(2) . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . .
Total company . . . . . . . . . . . . . . . . . . . .
Total assets:
15.2%
11.9
N/M
11.9%
14.0%
12.1
8.3
N/M
10.7%
12.3%
13.0
14.3
N/M
10.9%
Specialty hospitals . . . . . . . . . . . . . . . . . $2,279,665
Outpatient rehabilitation . . . . . . . . . . . .
532,685
Concentra(2) . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . .
112,459
$2,425,113
548,242
1,311,631
103,692
$2,530,609
978,192
1,323,516
112,078
Total company . . . . . . . . . . . . . . . . . . . . $2,924,809
$4,388,678
$4,944,395
Purchases of property and equipment, net:
Specialty hospitals . . . . . . . . . . . . . . . . . $
Outpatient rehabilitation(1) . . . . . . . . . . .
Concentra(2) . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . .
77,742
12,506
4,998
$ 126,014
17,768
26,771
12,089
$ 109,139
21,286
15,946
15,262
Total company . . . . . . . . . . . . . . . . . . . . $
95,246
$ 182,642
$ 161,633
N/M—Not Meaningful.
N/A—Not Applicable
68
(1) The outpatient rehabilitation segment includes the operating results of our contract therapy
businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.
(2) Concentra’s financial results are consolidated with Select’s effective June 1, 2015.
(3) Other includes our corporate services and certain other non-consolidating joint ventures and minority
investments in other healthcare related businesses.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
In the following, we discuss our results of operations related to net operating revenues, operating
expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early
retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain (loss), interest
expense, income taxes, and non-controlling interest, which, in each case, are the same for Holdings and
Select.
Net Operating Revenues
Our net operating revenues increased by 14.5% to $4,286.0 million for the year ended December 31,
2016, compared to $3,742.7 million for the year ended December 31, 2015, principally due to the
acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016.
Specialty Hospitals. Our specialty hospitals segment net operating revenues declined 2.4% to
$2,289.5 million for the year ended December 31, 2016, compared to $2,346.8 million for the year ended
December 31, 2015. The primary reason for this decrease was a decline in our patient days to
1,258,068 days for the year ended December 31, 2016, compared to 1,373,780 days for the year ended
December 31, 2015. As discussed above under ‘‘Regulatory Changes—Medicare Reimbursement of LTCH
Services—Patient Criteria,’’ new Medicare regulations, which establish new payment limits for Medicare
patients discharged from an LTCH who do not meet specified patient criteria, began to be phased in to our
LTCHs in the fourth quarter of 2015 and, as of the end of the third quarter of 2016, all of our LTCHs are
now operating under the new payment rules. We experienced fewer Medicare patient days primarily due to
changes we implemented at LTCHs operating under the new Medicare patient criteria regulations. We also
experienced fewer patient days in 2016 as compared to 2015 as a result of specialty hospital closures and
sales. This decrease in patient days was offset, in part, by an increase in our net revenue per patient day.
Our average net revenue per patient day for our specialty hospitals increased 5.2% to $1,651 for the year
ended December 31, 2016, compared to $1,569 for the year ended December 31, 2015, principally as a
result of increases in our Medicare net revenue per patient day. The increase in our Medicare net revenue
per patient day resulted primarily from the increase in patient acuity at LTCHs operating under the
Medicare patient criteria regulations. Our occupancy percentage in our specialty hospitals declined to 66%
for the year ended December 31, 2016, compared to 72% for the year ended December 31, 2015.
Outpatient Rehabilitation. Our outpatient rehabilitation segment net operating revenues increased to
$995.4 million for the year ended December 31, 2016, compared to $810.0 million for the year ended
December 31, 2015. This increase was due to an increase in visits resulting principally from our newly
acquired outpatient rehabilitation clinics and growth in our existing outpatient rehabilitation clinics. Net
revenue per visit in our owned outpatient rehabilitation clinics was $102 for the year ended December 31,
2016, compared to $103 for the year ended December 31, 2015.
Concentra Segment. Net operating revenues were $1,000.6 million for the year ended December 31,
2016, compared to $585.2 million for the year ended December 31, 2015, which includes results beginning
June 1, 2015. Net revenue per visit was $118 and visits were 7,373,751 in the centers for the year ended
December 31, 2016, compared to net revenue per visit of $114 and 4,436,977 visits in the centers for the
year ended December 31, 2015, which includes results beginning June 1, 2015.
69
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense, and bad debt
expense. Our operating expenses increased to $3,840.9 million, or 89.6% of net operating revenues, for the
year ended December 31, 2016, compared to $3,363.0 million, or 89.9% of net operating revenues, for the
year ended December 31, 2015. The increase in operating expenses is principally due to the acquisitions of
Concentra on June 1, 2015 and Physiotherapy on March 4, 2016. Our cost of services, a major component
of which is labor expense, was $3,664.8 million, or 85.5% of net operating revenues, for the year ended
December 31, 2016, compared to $3,211.5 million, or 85.8% of net operating revenues, for the year ended
December 31, 2015. The decrease in cost of services, as a percentage of net operating revenues, resulted
principally from cost reductions achieved by Concentra, partially offset by an increase in expenses relative
to revenues at our specialty hospitals. Facility rent expense, a component of cost of services, was
$225.6 million for the year ended December 31, 2016, compared to $169.8 million for the year ended
December 31, 2015. General and administrative expenses were $106.9 million for the year ended
December 31, 2016, which included $3.2 million of Physiotherapy acquisition costs, compared to
$92.1 million for the year ended December 31, 2015, which included $4.7 million of Concentra acquisition
costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for both
years ended December 31, 2016 and 2015. Our general and administrative function includes our shared
services activities which have grown and expanded as a result of our significant business acquisitions. Our
bad debt expense was $69.1 million for the year ended December 31, 2016, compared to $59.4 million for
the year ended December 31, 2015. Bad debt expense as a percentage of net operating revenues was 1.6%
for both the years ended December 31, 2016 and 2015.
Adjusted EBITDA
Specialty Hospitals. Adjusted EBITDA for our specialty hospitals was $281.5 million for the year
ended December 31, 2016, compared to $327.6 million for the year ended December 31, 2015. Our
Adjusted EBITDA margin for the segment was 12.3% for the year ended December 31, 2016, compared to
14.0% for the year ended December 31, 2015. The reduction in Adjusted EBITDA and Adjusted EBITDA
margin for our specialty hospitals segment was principally attributable to Adjusted EBITDA losses
resulting from start-up hospitals, Adjusted EBITDA losses of newly acquired specialty hospitals, and
specialty hospital closures. Start-up specialty hospitals incurred $21.8 million of Adjusted EBITDA losses
for the year ended December 31, 2016, compared to $16.8 million for the year ended December 31, 2015,
as discussed under ‘‘Summary Financial Results’’ above. We also experienced a decline in Adjusted
EBITDA in our LTCHs as a result of both a decrease in patient days as discussed above under ‘‘Net
Operating Revenues’’ and an increase in expenses as discussed above under ‘‘Operating Expenses.’’
Outpatient Rehabilitation. Our Adjusted EBITDA for our outpatient rehabilitation segment
increased 32.2% to $129.8 million for the year ended December 31, 2016, compared to $98.2 million for
the year ended December 31, 2015. This increase was principally due to the acquisition of Physiotherapy
on March 4, 2016. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.0% for
the year ended December 31, 2016, compared to 12.1% for the year ended December 31, 2015. The
increase was principally due to the sale of our contract therapy businesses, which operated at lower
Adjusted EBITDA margins than our outpatient rehabilitation clinics.
Concentra Segment. Adjusted EBITDA for our Concentra segment was $143.0 million for the year
ended December 31, 2016, compared to $48.3 million for the year ended December 31, 2015, which
includes results beginning June 1, 2015. Our Adjusted EBITDA margin for the Concentra segment was
14.3% for the year ended December 31, 2016, compared to 8.3% for the year ended December 31, 2015.
The increase in Adjusted EBITDA was principally due to our ownership of Concentra for the entirety of
fiscal year 2016, compared to our ownership of Concentra beginning June 1, 2015 for fiscal year 2015. The
increase in Concentra’s Adjusted EBITDA margin was principally due to cost reductions in 2016 compared
to the prior year.
70
Other. The Adjusted EBITDA loss was $88.5 million for the year ended December 31, 2016,
compared to an Adjusted EBITDA loss of $75.0 million for the year ended December 31, 2015.
Depreciation and Amortization
Depreciation and amortization expense was $145.3 million for the year ended December 31, 2016,
compared to $105.0 million for the year ended December 31, 2015. The increase was principally due to the
acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016.
Income from Operations
For the year ended December 31, 2016, we had income from operations of $299.8 million, compared
to $274.8 million for the year ended December 31, 2015. The increase was principally due to the
acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016.
Loss on Early Retirement of Debt
On March 4, 2016, we prepaid the series D tranche B term loans under the Select credit facilities,
resulting in a loss on early retirement of debt of $0.8 million. On September 26, 2016, Concentra prepaid
its second lien term loan under the Concentra credit facilities, resulting in a loss on early retirement of
debt of approximately $10.9 million. The losses on early retirement of debt consisted of a prepayment
premium, unamortized debt issuance costs, and unamortized original issue discounts.
Equity in Earnings of Unconsolidated Subsidiaries
For the year ended December 31, 2016, we had equity in earnings of unconsolidated subsidiaries of
$19.9 million, compared $16.8 million for the year ended December 31, 2015. The increase in our equity in
earnings of unconsolidated subsidiaries resulted from increased earnings associated with several of our
equity method investments in rehabilitation businesses.
Non-Operating Gain
We recognized a non-operating gain of $42.7 million for the year ended December 31, 2016,
principally due to the sale of our contract therapy businesses for $65.0 million, resulting in a non-operating
gain of $33.9 million.
During the year ended December 31, 2015, we recognized a non-operating gain of $29.6 million
related to the sale of an equity method investment.
Interest Expense
Interest expense was $170.1 million for the year ended December 31, 2016, compared to
$112.8 million for the year ended December 31, 2015. The increase in interest expense was principally the
result of increases in our indebtedness used to finance the acquisitions of Concentra on June 1, 2015 and
Physiotherapy on March 4, 2016 in addition to increases in our interest rates resulting from amendments to
the Select credit facilities in the fourth quarter of 2015 and the first quarter of 2016.
Income Taxes
We recorded income tax expense of $55.5 million for the year ended December 31, 2016, which
represented an effective tax rate of 30.7%. We recorded income tax expense of $72.4 million for the year
ended December 31, 2015, which represented an effective tax rate of 34.8%.
Our effective tax rate for the year ended December 31, 2016 benefited from the sale of our contract
therapy businesses. Our tax basis in our contract therapy businesses exceeded our selling price. As a result,
71
we had no tax expense from the sale. Our effective tax rate for the year ended December 31, 2015
benefited from the resolution of uncertain tax positions.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $9.9 million for the year ended December 31,
2016, compared to $5.3 million for the year ended December 31, 2015. The increase is principally due to
the acquisition of Concentra, offset in part by the minority interest owners’ share of losses from new
specialty hospitals.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
In the following, we discuss our results of operations related to net operating revenues, operating
expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early
retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain (loss), interest
expense, income taxes, and non-controlling interest, which, in each case, are the same for Holdings and
Select.
Net Operating Revenues
Our net operating revenues increased by $677.7 million to $3,742.7 million for the year ended
December 31, 2015, compared to $3,065.0 million for the year ended December 31, 2014.
Specialty Hospitals. Our specialty hospitals segment net operating revenues increased 4.5% to
$2,346.8 million for the year ended December 31, 2015, compared to $2,244.9 million for the year ended
December 31, 2014. The segment experienced growth in its patient services revenues which resulted from
increases in patient days and an increase in our net revenues per patient day. Patient days increased to
1,373,780 days for the year ended December 31, 2015, compared to 1,340,506 days for the year ended
December 31, 2014. The average net revenue per patient day increased to $1,569 for the year ended
December 31, 2015, compared to $1,546 for the year ended December 31, 2014, due to increases in both
our Medicare and non-Medicare net revenue per patient day. The occupancy percentage was 72% for the
year ended December 31, 2015, compared to 70% for the year ended December 31, 2014.
Outpatient Rehabilitation. Our outpatient rehabilitation segment net operating revenues decreased
to $810.0 million for the year ended December 31, 2015, compared to $819.4 million for the year ended
December 31, 2014. This decrease resulted from a reduction in net operating revenues at our contract
therapy business, offset in part by increases in net operating revenues at our outpatient rehabilitation
clinics. The net operating revenues generated by our outpatient rehabilitation clinics for the year ended
December 31, 2015 increased 5.3%, compared to the year ended December 31, 2014. This growth was
principally due to a 5.0% increase in visits to 5,218,532 at our owned clinics. Net revenue per visit in our
owned outpatient rehabilitation clinics was $103 for both the years ended December 31, 2015 and 2014.
The net operating revenues generated by our contract therapy business for the year ended December 31,
2015 decreased $42.3 million, compared to the year ended December 31, 2014, which principally resulted
from contract terminations.
Concentra Segment. For the period from June 1, 2015 to December 31, 2015, net operating revenues
were $585.2 million, visits were 4,436,977 in the medical centers, and net revenue per visit was $114.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and bad debt
expense. Our operating expenses increased by $650.8 million to $3,363.0 million, or 89.9% of net operating
revenues, for the year ended December 31, 2015, compared to $2,712.2 million, or 88.5% of net operating
revenues, for the year ended December 31, 2014, principally due to the acquisition of Concentra on June 1,
72
2015. Our cost of services, a major component of which is labor expense, was $3,211.5 million, or 85.8% of
net operating revenues, for the year ended December 31, 2015, compared to $2,582.3 million, or 84.2% of
net operating revenues, for the year ended December 31, 2014. Approximately half of the increase in cost
of services as a percent of net operating revenues resulted from the addition of Concentra which operated
with a higher relative cost of services percentage to net operating revenues during the year ended
December 31, 2015, as compared to the relative cost of services percentage to net operating revenues
experienced overall by Select in the year ended December 31, 2015. The other half of the increase
occurred in our specialty hospitals segment and resulted principally from non-recurring increases in labor
costs associated with several training initiatives, including training to prepare for the adoption of patient
criteria and incremental costs resulting from a higher staff turnover rate for the year ended December 31,
2015, as compared to 2014. Facility rent expense, a component of cost of services, was $169.8 million for
the year ended December 31, 2015 compared to $128.7 million for the year ended December 31, 2014.
General and administrative expenses were $92.1 million for the year ended December 31, 2015, compared
to $85.2 million for the year ended December 31, 2014 and were 2.5% and 2.8% of net operating revenues
for the years ended December 31, 2015 and 2014, respectively. The increase in general and administrative
expenses resulted primarily from Concentra acquisition costs of $4.7 million. Our bad debt expense was
$59.4 million, or 1.6% of net operating revenues, for the year ended December 31, 2015, compared to
$44.6 million, or 1.5% of net operating revenues, for the year ended December 31, 2014. This is principally
a result of higher relative bad debt expense in our specialty hospitals segment, compared to the year ended
December 31, 2014, and at Concentra.
Adjusted EBITDA
Specialty Hospitals. Adjusted EBITDA for our specialty hospitals decreased to $327.6 million for the
year ended December 31, 2015, compared to $341.8 million for the year ended December 31, 2014. Our
Adjusted EBITDA margin for the segment was 14.0% for the year ended December 31, 2015, compared to
15.2% for the year ended December 31, 2014. The decline in Adjusted EBITDA and Adjusted EBITDA
margin for our specialty hospitals segment was attributable to increases in our cost of services and bad debt
expense as discussed above under ‘‘Operating Expenses.’’
Outpatient Rehabilitation. Our Adjusted EBITDA for our outpatient rehabilitation segment
increased 0.7% to $98.2 million for the year ended December 31, 2015, compared to $97.6 million for the
year ended December 31, 2014. Our Adjusted EBITDA margin for the outpatient rehabilitation segment
was 12.1% for the year ended December 31, 2015 compared to 11.9% for the year ended December 31,
2014. The Adjusted EBITDA in our outpatient rehabilitation clinics increased by $7.4 million for the year
ended December 31, 2015, compared to the year ended December 31, 2014. The increase in Adjusted
EBITDA for our outpatient rehabilitation clinics was principally the result of increases in net operating
revenues as discussed above under ‘‘Net Operating Revenues.’’ Our Adjusted EBITDA margin for our
outpatient rehabilitation clinics was 13.8% for the year ended December 31, 2015, compared to 13.3% for
the year ended December 31, 2014. Our contract therapy business experienced a decrease in Adjusted
EBITDA of $6.8 million, compared to the year ended December 31, 2014, which principally resulted from
contract terminations as discussed above under ‘‘Net Operating Revenues.’’
Concentra Segment. For the period June 1, 2015 to December 31, 2015, Adjusted EBITDA was
$48.3 million and the Adjusted EBITDA margin for the segment was 8.3%.
Other. The Adjusted EBITDA loss was $75.0 million for the year ended December 31, 2015,
compared to an Adjusted EBITDA loss of $75.5 million for the year ended December 31, 2014.
73
Depreciation and Amortization
Depreciation and amortization expense was $105.0 million, including $33.6 million in our Concentra
segment, for the year ended December 31, 2015, compared to $68.4 million for the year ended
December 31, 2014.
Income from Operations
For the year ended December 31, 2015, we had income from operations of $274.8 million, compared
to $284.5 million for the year ended December 31, 2014. The decrease in our income from operations
resulted principally from increases in operating expenses at our specialty hospitals segment, as discussed
above under ‘‘Operating Expenses,’’ and was offset in part by the incremental contribution from of our
Concentra segment since June 1, 2015.
Loss on Early Retirement of Debt
On March 4, 2014, we amended the Select term loans. During the year ended December 31, 2014, we
recognized a loss of $2.3 million for unamortized debt issuance costs, unamortized original issue discount
and certain fees incurred related to the Select term loan modifications.
Equity in Earnings of Unconsolidated Subsidiaries
For the year ended December 31, 2015, we had equity in earnings of unconsolidated subsidiaries of
$16.8 million, compared to $7.0 million for the year ended December 31, 2014. The increase in our equity
in earnings of unconsolidated subsidiaries resulted from increased earnings associated with several of our
inpatient rehabilitation joint ventures and improved financial results at the start-up companies in which we
own a non-controlling interest.
Non-operating gain
For the year ended December 31, 2015, we had a gain on the sale of an equity investment of
$29.6 million. The equity investment was a start-up company investment in which we owned a
non-controlling interest.
Interest Expense
Interest expense was $112.8 million for the year ended December 31, 2015, compared to $85.4 million
for the year ended December 31, 2014. The increase in interest expense was principally due to increases in
our indebtedness to finance the Concentra acquisition.
Income Taxes
We recorded income tax expense of $72.4 million for the year ended December 31, 2015, which
represented an effective tax rate of 34.8%. We recorded income tax expense of $75.6 million for the year
ended December 31, 2014, which represented an effective tax rate of 37.1%. The decrease in the effective
tax rate has resulted principally from the resolution of uncertain tax positions.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $5.3 million for the year ended December 31,
2015, compared to $7.5 million for the year ended December 31, 2014. These amounts represent the
minority owner’s share of income and losses in consolidated entities, such as Concentra, in which our
ownership is less than 100.0%. The decrease was principally caused by net losses in our Concentra segment
for the year ended December 31, 2015, which offset positive net income from other consolidated entities.
74
Liquidity and Capital Resources
Years Ended December 31, 2014, 2015, and 2016
Cash flows provided by operating activities . . .
Cash flows used in investing activities . . . . . . .
Cash flows provided by (used in) financing
Year Ended December 31,
2014
2015
2016
$ 170,642
(101,091)
(In thousands)
$
208,415
(1,211,754)
$ 346,603
(554,320)
activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(70,516)
1,014,420
292,311
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
(965)
11,081
84,594
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,319
3,354
14,435
Cash and cash equivalents at end of period . . .
$
3,354
$
14,435
$ 99,029
Operating activities provided $346.6 million of cash flows for the year ended December 31, 2016. The
increase in operating cash flows for the year ended December 31, 2016 compared to the year ended
December 31, 2015 is principally due to cash flows provided from Concentra which was acquired on
June 1, 2015 and cash distributions we received from unconsolidated investments in which we are minority
owners.
Operating activities provided $208.4 million of cash flows for the year ended December 31, 2015. The
increase in operating cash flows for the year ended December 31, 2015 compared to the year ended
December 31, 2014 is principally due to the addition of Concentra.
Our days sales outstanding were 51 days at December 31, 2016, 53 days at December 31, 2015, and
53 days at December 31, 2014. Our days sales outstanding will fluctuate based upon variability in our
collection cycles. Our days sales outstanding at December 31, 2016, 2015 and 2014 all fall within our
normal range for accounts receivable turnover.
Investing activities used $554.3 million, $1,211.8 million and $101.1 million of cash flow for the years
ended December 31, 2016, 2015 and 2014, respectively. For the year ended December 31, 2016, the
principal use of cash was $406.3 million for the Physiotherapy acquisition and $161.6 million for purchases
of property and equipment, offset in part by the sale of assets and businesses of $80.5 million. For the year
ended December 31, 2015, the principal use of cash was $1,047.2 million for the Concentra acquisition and
$182.6 million for purchases of property and equipment, offset in part by the proceeds from the sale of an
equity investment. For the year ended December 31, 2014, the principal use of cash was $95.2 million for
purchases of property and equipment.
Financing activities provided $292.3 million of cash flow for the year ended December 31, 2016. The
principal source of cash was the issuance of $625.0 million series F tranche B term loans under the Select
credit facilities, resulting in net proceeds of $600.1 million, offset by $215.7 million of cash used to repay
the series D tranche B term loans under the Select credit facilities and $80.0 million of net repayments
under the Select and Concentra revolving facilities.
Financing activities provided $1,014.4 million of cash flows for the year ended December 31, 2015.
Cash was principally provided from $235.0 million of net borrowings under the Select revolving facility,
$5.0 million of net borrowings under the Concentra revolving facility, $646.9 million borrowed under the
Concentra credit facilities, and $217.1 million attributable to non-consolidating interests in Concentra
Group Holdings. The principal uses of cash for financing activities were $26.9 million for mandatory
prepayment of term loans under the Select credit facilities, $23.3 million for Concentra’s debt issuance
costs, $13.6 million for common stock repurchases and $13.1 million for dividend payments to common
stockholders.
75
Financing activities used $70.5 million of cash flows for the year ended December 31, 2014. Cash was
principally used by a $34.0 million mandatory prepayment of term loans under the Select credit facilities,
$10.0 million for purchases of non-controlling interests, and $184.1 million used to repurchase shares of
common stock and pay dividends to common stockholders. This was offset in part by $40.0 million in net
borrowings under the Select revolving facility and $111.7 million from the issuance of additional 6.375%
senior notes.
Capital Resources
Working capital. We had net working capital of $236.4 million at December 31, 2016 compared to net
working capital of $19.9 million at December 31, 2015. The increase in net working capital is primarily due
to the early retirement of series D tranche B term loans, which were classified as a current liability at
December 31, 2015, and an increase in cash during the year ended December 31, 2016.
Select credit facilities. On March 2, 2016, Select made a mandatory term loan principal prepayment
of $10.2 million as a result of the annual excess cash flow provision contained in the Select credit facilities.
On March 4, 2016, Select amended the Select credit facilities in order to, among other things: (i) have
the lenders named therein make available an aggregate of $625.0 million series F tranche B term loans,
(ii) extend the financial covenants through March 3, 2021, (iii) add a 1.00% prepayment premium for
prepayments made with new term loans on or prior to March 4, 2017 if such new term loans have a lower
yield than the series F tranche B term loans, (iv) increase the interest rate payable on the series E
tranche B term loans from Adjusted LIBO plus 4.00% (subject to an Adjusted LIBO Rate floor of 1.00%),
or Alternate Base Rate plus 3.00%, to Adjusted LIBO plus 5.00% (subject to an Adjusted LIBO rate floor
of 1.00%), or Alternate Base Rate plus 4.00%; and (v) made certain other technical amendments to the
Select credit facilities. The series F tranche B term loans bear interest at a rate per annum equal to the
Adjusted LIBO Rate (as defined in the Select credit facilities, subject to an Adjusted LIBO Rate floor of
1.00%) plus 5.00% for Eurodollar Loans or the Alternate Base Rate (as defined in the Select credit
facilities) plus 4.00% for Alternate Base Rate Loans (as defined in the Select credit facilities). Select is
required to make principal payments on the series F tranche B term loans in quarterly installments on the
last day of each of March, June, September and December, beginning June 30, 2016, in amounts equal to
0.25% of the aggregate principal amount of the series F tranche B term loans outstanding as of the date of
the credit extension amendment. The balance of the series F tranche B term loans is payable on March 3,
2021. Except as specifically set forth in the credit extension amendment, the terms and conditions of the
series F tranche B term loans are identical to the terms of the outstanding series E tranche B term loans
under the Select credit facilities and the other loan documents to which Select is party.
Select used the proceeds of the series F tranche B term loans to (i) refinance in full the series D
tranche B term loans due December 20, 2016, (ii) consummate the acquisition of Physiotherapy, and
(iii) pay fees and expenses incurred in connection with the acquisition of Physiotherapy, the refinancing,
and the Select credit extension amendment.
At December 31, 2016, Select had outstanding borrowings under the Select credit facilities of
$1,147.8 million of Select term loans (excluding unamortized discounts and debt issuance costs of
$25.6 million) and borrowings of $220.0 million (excluding letters of credit) under the Select revolving
facility. At December 31, 2016, Select had $190.3 million of availability under the Select revolving facility
after giving effect to $39.7 million of outstanding letters of credit.
The Select credit facilities require Select to maintain certain leverage ratios (as defined in the Select
credit facilities). For the four consecutive fiscal quarters ended December 31, 2016, Select was required to
maintain its leverage ratio (its ratio of total indebtedness to consolidated EBITDA) at less than 5.75 to
1.00. Select’s leverage ratio was 5.40 to 1.00 as of December 31, 2016. Additionally, the Select credit
facilities will require a prepayment of borrowings of 50% of excess cash flow for fiscal year 2016, which will
result in a prepayment of approximately $33.2 million based on excess cash flow for the year ended
76
December 31, 2016. The Company expects to have the borrowing capacity and intends to use borrowings
under the Select revolving facility to make the required prepayment during the quarter ended March 31,
2017.
Concentra credit facilities. Select and Holdings are not parties to the Concentra credit facilities and
are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse
to Select, it is included in Select’s consolidated financial statements.
On September 26, 2016, Concentra entered into an amendment to the Concentra credit agreement
dated June 1, 2015. The Concentra credit agreement initially provided for $500.0 million in first lien credit
facilities composed of a $450.0 million, seven-year Concentra first lien term loans and a $50.0 million
Concentra revolving facility. The amendment provided an additional $200.0 million of first lien term loans
due June 1, 2022, the proceeds of which were used to prepay in full the Concentra’s second lien term loan
due June 1, 2023; and also amended certain restrictive covenants to give Concentra greater operational
flexibility.
The Concentra first lien term loan continues to bear interest at a rate equal to Adjusted LIBO (as
defined in the Concentra credit agreement) plus 3.00% (subject to an Adjusted LIBO floor of 1.00%), or
Alternate Base Rate (as defined in the Concentra credit agreement) plus 2.00% (subject to an Alternate
Base Rate floor of 2.00%). The Concentra first lien term loan amortizes in equal quarterly installments of
$1.6 million through March 31, 2022, with the remaining unamortized aggregate principal due on at
maturity on June 1, 2022.
At December 31, 2016, Concentra had outstanding borrowings under the Concentra credit facilities of
$642.2 million (excluding unamortized discounts and debt issuance costs of $15.9 million) of term loans.
Concentra did not have any borrowings under the Concentra revolving facility. At December 31, 2016,
Concentra had $43.4 million of availability under its revolving facility after giving effect to $6.6 million of
outstanding letters of credit.
The Concentra credit facilities will require a prepayment of borrowings of 25% of excess cash flow for
fiscal year 2016, which will result in a prepayment of approximately $23.1 million based on excess cash flow
for the year ended December 31, 2016. Concentra expects to have the borrowing capacity and intends to
use borrowings under the Concentra revolving facility and cash on hand to make the required prepayment
during the quarter ended March 31, 2017.
Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase
program to repurchase up to $500.0 million worth of shares of its common stock. The program has been
extended until December 31, 2017, and will remain in effect until then, unless further extended or earlier
terminated by the board of directors. Stock repurchases under this program may be made in the open
market or through privately negotiated transactions, and at times and in such amounts as Holdings deems
appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving
facility. Holdings did not repurchase shares during the year ended December 31, 2016. Since the inception
of the program through December 31, 2016, Holdings has repurchased 35,924,128 shares at a cost of
approximately $314.7 million, or $8.76 per share, which includes transaction costs.
Liquidity. We believe our internally generated cash flows and borrowing capacity under the Select
and Concentra credit facilities will be sufficient to finance operations over the next twelve months. 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. We also may refinance our credit
facilities depending upon prevailing market conditions.
77
Use of Capital Resources. We may from time to time pursue opportunities to develop new joint
venture relationships with significant health systems and other healthcare providers, and from time to time
we may also develop new inpatient rehabilitation hospitals and medical centers. We also intend to open
new outpatient rehabilitation clinics 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.
Commitments and Contingencies
The following contractual obligation table summarizes the contractual obligations for Select and
Concentra at December 31, 2016, and the effect such obligations are expected to have on liquidity and cash
flow in future periods. Reserves for uncertain tax positions of $4.1 million have been excluded from the
table below as we cannot reasonably estimate the amounts or periods in which these liabilities will be paid.
Contractual Obligations
Total
2017
2018 - 2020
2021 - 2022
After 2022
(in thousands)
6.375% senior notes(1) . . . . . . . . . . . . . . .
Select credit facilities(2)(3) . . . . . . . . . . . . .
Select other debt obligations . . . . . . . . . .
Concentra credit facilities(4)(5)
. . . . . . . . .
Concentra other debt obligations . . . . . . .
$ 710,000
1,367,751
22,688
642,239
5,178
Total debt . . . . . . . . . . . . . . . . . . . . . .
Interest(6)(7)
. . . . . . . . . . . . . . . . . . . . . .
Letters of credit outstanding . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . .
Construction contracts . . . . . . . . . . . . . .
Naming, promotional and sponsorship
agreement . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . .
Related party operating leases . . . . . . . . .
2,747,856
548,486
46,312
106,207
85,976
31,090
1,198,636
39,206
$
— $
11,730
7,371
6,520
1,113
26,734
150,125
—
31,227
85,976
3,146
221,797
5,408
795,912
336,281
46,312
47,971
—
9,883
450,262
17,243
$
— $ 710,000
595,311
24
616,159
341
760,710
15,293
19,560
349
—
—
—
—
3,375
3,375
1,835
—
13,810
—
1,921,835
60,245
—
13,199
—
6,977
151,204
6,017
11,084
375,373
10,538
Total contractual cash obligations . . . . . . .
$4,803,769
$524,413
$1,703,864
$2,159,477
$416,015
(1) Reflects the aggregate principal amount of the 6.375% senior notes which excludes the unamortized
premium of $1.0 million at December 31, 2016.
(2) Reflects the aggregate principal amount of the Select credit facilities which excludes the unamortized
original issue discounts and unamortized debt issuance costs of $25.6 million at December 31, 2016.
(3) The balance of the series E tranche B term loans will be payable on June 1, 2018 and the balance of
the series F tranche B term loans will be payable on March 3, 2021. The Select revolving facility will be
payable on March 1, 2018.
(4) Reflects the aggregate principal amount of the Concentra credit facilities which excludes the
unamortized original issue discounts and unamortized debt issuance costs of $15.9 million at
December 31, 2016.
(5) The balance of the Concentra first lien term loans will be payable on June 1, 2022.
(6) The interest obligation for the Select credit facilities was calculated using the average interest rate at
December 31, 2016 of 6.0% for the series E tranche B term loans, 6.0% for the series F tranche B
term loans, and 4.5% for the Select revolving facility. The interest obligation for the 6.375% senior
notes was calculated using the stated interest rate and a weighted average interest rate of 2.0% was
used for the other debt obligations.
78
(7) The interest obligation for the Concentra credit facilities was calculated using the average interest rate
at December 31, 2016 of 4.0% for the Concentra first lien term loans. The weighted average interest
rate for Concentra’s other debt obligations was 7.7%.
Concentra Class A Put Right
In connection with the acquisition of Concentra, WCAS and the other members of Concentra Group
Holdings will have the Put Right with respect to their equity interests in Concentra Group Holdings. If the
Put Right is exercised by WCAS, Select will be obligated to purchase up to 331⁄3% of the equity interests of
Concentra Group Holdings that WCAS purchased on June 1, 2015, at a purchase price based on a
valuation of Concentra Group Holdings performed by an investment bank to be mutually agreed upon
between Select and WCAS. The valuation will be based on certain precedent transactions using multiples
of EBITDA and capped at an agreed upon multiple of EBITDA. Select has the right to elect to pay the
purchase price in cash or in shares of Holdings’ common stock. WCAS may first exercise its Put Right after
June 1, 2018, and then may exercise its Put Right again annually during each fiscal year thereafter. If
WCAS exercises its Put Right, the other members of Concentra Group Holdings may elect to sell to Select,
on the same terms as WCAS, a percentage of their equity interests of Concentra Group Holdings that such
member purchased on June 1, 2015, up to but not exceeding the percentage of its initial equity interests
that WCAS has determined to sell to Select in the exercise of its Put Right plus the same percentage of the
equity interests that such member had the right to sell but declined to sell in connection with any previous
put exercise by WCAS.
In addition, WCAS and the other members of Concentra Group Holdings have a Put Right with
respect to their equity interest in Concentra Group Holdings that may only be exercised in the event
Holdings or Select experiences a change of control that has not been previously approved by WCAS and
which results in change in the senior management of Select. If an SEM COC Put Right is exercised by
WCAS, Select will be obligated to purchase all (but not less than all) of the equity interests in Concentra
Group Holdings of WCAS and each other member of Concentra Group Holdings, at a purchase price
based on a valuation of Concentra Group Holdings performed by an investment bank to be mutually
agreed upon between Select and WCAS, which valuation will be based on certain precedent transactions
using multiples of EBITDA and capped at an agreed upon multiple of EBITDA.
Furthermore, Select has a call right (the ‘‘Call Right’’), whereby each other member of Concentra
Group Holdings will be obligated to sell all (but not less than all) of their equity interests in Concentra
Group Holdings to Select at a purchase price based on a valuation of Concentra Group Holdings
performed by an investment bank to be mutually agreed upon between Select and WCAS. The valuation
will be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon
multiple of EBITDA. Select may first exercise the Call Right after June 1, 2020. We exclude the
approximate amount that we may be required to pay to purchase these equity interests in Concentra
Group Holdings from the contractual obligations table above because of the uncertainty as to: (i) whether
or not the Put Right, if exercisable, or the Call Right, will actually be exercised; (ii) the dollar amounts that
would be paid if the Put Right or Call Right is exercised; and (iii) the timing and form of consideration of
any such payments.
Effects of Inflation and Changing Prices
We derive a substantial portion of our revenues from the Medicare program. We have been, and could
be in the future, affected by the continuing efforts of governmental and private third-party payors to
contain healthcare costs by limiting or reducing reimbursement payments.
Additionally, reimbursement payments under governmental and private third-party payor programs
may not increase to sufficiently cover increasing costs. Medicare reimbursement in our specialty hospitals
is subject to fixed payments under the Medicare prospective payment systems. In accordance with
79
Medicare laws, CMS makes annual adjustments to Medicare payments under what is commonly known as
a ‘‘market basket update.’’ Generally, these rates are adjusted for inflation. However, these adjustments
may not reflect the actual increase in the costs of providing healthcare services and may be reduced by
CMS for other adjustments.
The healthcare industry is labor intensive and the Company’s largest expenses are labor related costs.
Wage and other expenses increase during periods of inflation and when labor shortages occur in the
marketplace. There can be no guarantee we will not experience increases in the cost of labor, as the need
for clinical healthcare professionals is expected to grow. In addition, suppliers pass along rising costs to us
in the form of higher prices. We have little or no ability to pass on these increased costs associated with
providing services due to federal laws that establish fixed reimbursement rates.
Recent Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board (the ‘‘FASB’’) issued Accounting
Standards Update (‘‘ASU’’) 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than
Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity
asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the
income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer
occurs. The standard will be effective for fiscal years beginning after December 15, 2017. The Company is
currently evaluating the standard to determine the impact it will have on its consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of
Certain Cash Receipts and Cash Payments, which addresses the diversity in practice in how certain cash
receipts and cash payments are presented and classified in the statement of cash flows. The standard will
be effective for fiscal years beginning after December 15, 2017. The Company does not anticipate changes
to current accounting policies or the need to retrospectively adjust previously presented consolidated
financial statements as a result of the adoption of the guidance in the new standard.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU includes a lessee accounting
model that recognizes two types of leases; finance and operating. This ASU requires that a lessee
recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve
months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a
lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be
classified as either operating or finance. The recognition, measurement, and presentation of expenses and
cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.
For short-term leases of twelve months or less, lessees are permitted to make an accounting election by
class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected,
lease expense would be recognized generally on the straight-line basis over the respective lease term.
The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as
of the beginning of an interim or annual reporting period. A modified retrospective approach is required
for leases that exist or are entered into after the beginning of the earliest comparative period in the
financial statements.
Upon adoption, the Company will recognize significant assets and liabilities on the consolidated
balance sheets as a result of the operating lease obligations of the Company. Operating lease expense will
still be recognized as rent expense on a straight-line basis over the respective lease term in the consolidated
statements of operations and comprehensive income.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes,
which changes the presentation of deferred income taxes. The intent is to simplify the presentation of
80
deferred income taxes through the requirement that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. The revised guidance is effective for annual fiscal
periods beginning after December 15, 2016. Early adoption is permitted. The Company will adopt the
guidance in this ASU in the first quarter of 2017. Upon adoption, deferred tax assets and liabilities will no
longer be classified as current and will instead be classified as noncurrent on the consolidated balance
sheets. The Company will still be required to offset deferred tax assets and liabilities for each taxpaying
entity within a tax jurisdiction.
In May 2014, March 2016, April 2016, and December 2016, the FASB issued ASU 2014-09, Revenue
from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent
Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations
and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and
Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customer (collectively ‘‘the standards’’), respectively, which supersede most of the current
revenue recognition requirements. The core principle of the new guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers are also required. The original standards were effective for fiscal years beginning
after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards,
with a new effective date for fiscal years beginning after December 15, 2017. The standards require the
selection of a retrospective or cumulative effect transition method. The Company will adopt the guidance
beginning January 1, 2018, using a retrospective transition method.
The Company anticipates the most significant change will be how the estimate for the allowance for
doubtful accounts will be recognized under the new standards. Under the current standards, the
Company’s estimate for amounts not expected to be collected based on our historical experience have been
recorded to bad debt expense. Under the new standards, the Company’s estimate for amounts not
expected to be collected based on historical experience will be recognized as a reduction to revenue.
Subsequent changes in estimates of collectability due to a change in the financial status of a payor, for
example a bankruptcy, will continue to be recognized as bad debt expense. Amounts previously written off
to the allowance for bad debts as a result of our inability to collect payment will be recognized as a
reduction to revenue under the new standard.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation, which simplifies
various aspects of accounting for share-based payments. The areas for simplification involve several
aspects of the accounting for share-based payment transactions, including the income tax consequences
and classification on the statements of cash flows. During the fourth quarter of 2016, the Company
adopted and applied the standard on a prospective basis beginning January 1, 2016. The Company has
elected to recognize the effect of forfeitures in compensation cost when they occur. There was no
retrospective impact to the consolidated financial statements, including the consolidated statements of
cash flows, as a result of the adoption of this standard.
In April and August 2015, the FASB issued ASU 2015-03 and ASU 2015-15, each titled Interest-
Imputation of Interest, to simplify the presentation of debt issuance costs. The standard requires debt
issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt
liability. The FASB also confirmed that debt issuance costs related to line-of-credit arrangements will
continue to be recognized as an asset and amortized over the term of the arrangement. The Company
adopted the standard at the beginning of the first quarter of 2016. The balance sheet as of December 31,
2015 was retrospectively conformed to reflect the adoption of the standard and approximately
81
$38.0 million of unamortized debt issuance costs were reclassified to be a direct reduction of debt, rather
than a component of other assets.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our
principal interest rate exposure relates to the loans outstanding under the Select credit facilities and
Concentra credit facilities.
As of December 31, 2016, Select had $1,147.8 million (excluding unamortized discounts and debt
issuance discounts) in term loans outstanding under the Select credit facilities and $220.0 million in
revolving borrowings outstanding under the Select credit facilities, which bear interest at variable rates.
As of December 31, 2016, Concentra had outstanding borrowings under the Concentra credit facilities
of $642.2 million (excluding unamortized discounts and debt issuance costs) of term loans, which bear
interest at variable rates. Concentra did not have any outstanding revolving borrowings. Certain of Select’s
and Concentra’s outstanding borrowings that bear interest at variable rates may be effectively fixed based
upon then current interest rates if the Adjusted LIBO Rate does not exceed the applicable Adjusted LIBO
Rate floors for such borrowings:
(cid:127) Select’s aggregate $527.4 million in series E tranche B term loans are subject to an Adjusted LIBO
Rate floor of 1.00%. Therefore, if the Adjusted LIBO Rate does not exceed 1.00%, Select’s interest
rate on this indebtedness is effectively fixed at 6.00%.
(cid:127) Select’s aggregate $620.3 million in series F tranche B term loans are subject to an Adjusted LIBO
Rate floor of 1.00%. Therefore, if the Adjusted LIBO Rate does not exceed 1.00%, Select’s interest
rate on this indebtedness is effectively fixed at 6.00%.
(cid:127) The $642.2 million Concentra first lien term loans are subject to an Adjusted LIBO Rate floor of
1.00%. Therefore, if the Adjusted LIBO Rate does not exceed 1.00%, Concentra’s interest rate on
this indebtedness is effectively fixed at 4.00%
However, the Select and Concentra revolving borrowings are not subject to an Adjusted LIBO Rate
floor.
The following table summarizes the impact of hypothetical increases in market interest rates as of
December 31, 2016 on our consolidated interest expense over the subsequent twelve month period:
Increase in
Market
Interest Rate
Interest Rate Expense
Increases Per Annum
(in thousands)(1)
0.25%
0.50%
0.75%
1.00%
$ 5,025.0
$10,050.0
$15,074.9
$20,099.9
(1) Based on the 3-month LIBOR rate of 1.00% as of December 31, 2016, an increase in interest
rates would impact the interest rate paid on all of Select’s and Concentra’s variable rate
debt, as indicated in the table above.
Item 8. Financial Statements and Supplementary Data.
See Consolidated Financial Statements and Notes thereto commencing at Page F-1.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934)
as of the end of the period covered in this report. Based on this evaluation, our principal executive officer
and principal financial officer concluded that our disclosure controls and procedures, including the
accumulation and communication of disclosure to our principal executive officer and principal financial
officer as appropriate to allow timely decisions regarding disclosure, are effective as of December 31, 2016
to provide reasonable assurance that material information required to be included in our periodic SEC
reports is recorded, processed, summarized, and reported within the time periods specified in the relevant
SEC rules and forms.
Physiotherapy Acquisition
On March 4, 2016, we consummated the acquisition of Physiotherapy. SEC guidance permits
management to omit an assessment of an acquired business’ internal control over financial reporting from
management’s assessment of internal control over financial reporting for a period not to exceed one year
from the date of the acquisition, and at this time Select is omitting an assessment of Physiotherapy’s
internal controls over financial reporting.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of
the Securities Exchange Act of 1934) identified in connection with the evaluation required by
Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the fourth quarter of the year
ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the
design of any control system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems, there is only reasonable
assurance that our controls will succeed in achieving their goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control
over our financial reporting. In order to evaluate the effectiveness of internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an
assessment, including testing, using the criteria of ‘‘Internal Control—Integrated Framework (2013)’’
issued by the Committee of Sponsoring Organizations of the Treadway Commission, or ‘‘COSO,’’ as of
December 31, 2016. Our system of internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation and fair
presentation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles.
83
The operations and related assets of Physiotherapy are excluded from management’s assessment of
internal control over financial reporting as of December 31, 2016 because it was acquired by the Company
in a purchase business combination during 2016. Physiotherapy’s acquired assets (excluding its goodwill
and intangible assets) represented less than 2% of our total assets and approximate revenues represented
less than 6% of our total revenues of the related consolidated financial statements as of and for the year
ended December 31, 2016.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness of internal control over financial
reporting to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting,
excluding the recently completed Physiotherapy acquisition as of December 31, 2016. This assessment was
based on criteria for effective internal control over financial reporting described in ‘‘Internal Control—
Integrated Framework (2013)’’ issued by COSO. Based on this assessment, management concludes that, as
of December 31, 2016, internal control over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with U.S. generally accepted accounting principles. The effectiveness of the Company’s
internal control over
financial reporting as of December 31, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm as stated in their report
which appears herein.
Item 9B. Other Information.
None.
84
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information regarding directors and nominees for directors of the Company, including
identification of the audit committee and audit committee financial expert, and Compliance with
Section 16(a) of the Exchange Act is presented under the headings ‘‘Corporate Governance—Committees
of the Board of Directors,’’ ‘‘Election of Directors—Directors and Nominees’’ and ‘‘Section 16(a)
Beneficial Ownership Reporting Compliance’’ in the Company’s definitive proxy statement for use in
connection with the 2017 Annual Meeting of Stockholders (the ‘‘Proxy Statement’’) to be filed within
120 days after the end of the Company’s fiscal year ended December 31, 2016. The information contained
under these headings is incorporated herein by reference. Information regarding the executive officers of
the Company is included in this Annual Report on Form 10-K under Item 1 of Part I as permitted by
Instruction 3 to Item 401(b) of Regulation S-K.
We have adopted a written code of business conduct and ethics, known as our code of conduct, which
applies to all of our directors, officers, and employees, as well as a code of ethics applicable to our senior
financial officers, including our chief executive officer, our chief financial officer and our chief accounting
officer. Our code of conduct and code of ethics for senior financial officers are available on our Internet
website, www.selectmedicalholdings.com. Our code of conduct and code of ethics for senior financial
officers may also be obtained by contacting investor relations at (717) 972-1100. Any amendments to our
code of conduct or code of ethics for senior financial officers or waivers from the provisions of the codes
for our chief executive officer, our chief financial officer and our chief accounting officer will be disclosed
on our Internet website promptly following the date of such amendment or waiver.
Item 11. Executive Compensation.
Information concerning executive compensation is presented under the headings ‘‘Executive
Compensation’’ and ‘‘Compensation Committee Report’’ in the Proxy Statement. The information
contained under these headings is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Information with respect to security ownership of certain beneficial owners and management is set
forth under the heading ‘‘Security Ownership of Certain Beneficial Owners and Directors and Officers’’ in
the Proxy Statement. The information contained under this heading is incorporated herein by reference.
85
Equity Compensation Plan Information
Set forth in the table below is a list of all of our equity compensation plans and the number of
securities to be issued on exercise of equity rights, average exercise price, and number of securities that
would remain available under each plan if outstanding equity rights were exercised as of December 31,
2016.
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of
securities
remaining
available
for future
issuance under
equity
compensation
plans
(excluding securities
reflected in
column (a))
(c)
Plan Category
Equity compensation plans approved by security
holders:
Select Medical Holdings Corporation 2005 Equity
Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . .
520,720
Select Medical Holdings Corporation 2011 Equity
Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . .
Director Equity Incentive Plan . . . . . . . . . . . . . . .
Select Medical Holdings Corporation 2016 Equity
Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . .
0
9,000
0
0
$ 9.07
$ 0.00
$10.00
$ 0.00
$ 0.00
0(1)
0(2)
0(2)
6,065,922
0
(1) In connection with the approval of the Select Medical Holdings Corporation 2011 Equity Incentive
Plan, we no longer issue awards under the Select Medical Holdings Corporation 2005 Equity
Incentive Plan.
(2) In connection with the approval of the Select Medical Holdings Corporation 2016 Equity Incentive
Plan, we no longer issue awards under the Select Medical Holdings 2011 Equity Incentive Plan and
the Director Equity Incentive Plan.
Item 13. Certain Relationships, Related Transactions and Director Independence.
Information concerning related transactions is presented under the heading ‘‘Certain Relationships,
Related Transactions and Director Independence’’ in the Proxy Statement. The information contained
under this heading is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Information concerning principal accountant fees and services is presented under the heading
‘‘Ratification of Appointment of Independent Registered Public Accounting Firm’’ in the Proxy Statement.
The information contained under this heading is incorporated herein by reference.
86
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
PART IV
1) Financial Statements: See Index to Financial Statements appearing on page F-1 of this
report.
2) Financial Statement Schedule: See Schedule II—Valuation and Qualifying Accounts
appearing on page F-59 of this report.
3) The following exhibits are filed as part of, or incorporated by reference into, this report:
Number
2.1
Description
Stock Purchase Agreement dated as of March 22, 2015 by and among MJ Acquisition
Corporation, Concentra Inc. and Human Inc., incorporated by reference to Exhibit 2.1 of the
Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical
Corporation filed March 24, 2015 (Reg. Nos. 001-34465 and 001-31441).
2.2 Amendment No. 1 to the Stock Purchase Agreement dated as of June 1, 2015 by and among MJ
Acquisition Corporation, Concentra Inc. and Human Inc., incorporated by reference to
Exhibit 2.1 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and
Select Medical Corporation filed August 6, 2015 (Reg. Nos. 001-34465 and 001-31441).
2.3 Agreement and Plan of Merger, by and among Select Medical Corporation, Grip Merger
Sub, Inc., Physiotherapy Associates Holdings, Inc. and KHR Physio, LLC, dated January 22,
2016, incorporated herein by reference to Exhibit 2.1 of the Current Report on Form 8-K of
Select Medical Holdings Corporation and Select Medical Corporation filed on January 25, 2016
(Reg. Nos. 001-34465 and 001-31441).
2.4
2.5
First Amendment to Agreement and Plan of Merger, by and among Select Medical Corporation,
Grip Merger Sub, Inc., Physiotherapy Associates Holdings, Inc. and KHR Physio, LLC, dated
March 4, 2016, incorporated herein by reference to Exhibit 2.1 of the Current Report on
Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on
March 4, 2016 (Reg. Nos. 001-34465 and 001-31441).
Stock Purchase Agreement, by and among Encore GC Acquisition, LLC, Select Medical
Corporation, Select Medical New York, Inc., Select Medical Rehabilitation Services, Inc. and
Metro Therapy, Inc., dated March 31, 2016, incorporated herein by reference to Exhibit 2.3 of
the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical
Corporation filed on May 5, 2016 (Reg. Nos. 001-34465 and 001-31441).
3.1 Amended and Restated Certificate of Incorporation of Select Medical Corporation, incorporated
by reference to Exhibit 3.1 of Select Medical Corporation’s Form S-4 filed June 15, 2005 (Reg.
No. 001-31441).
3.2
Form of Restated Certificate of Incorporation of Select Medical Holdings Corporation,
incorporated by reference to Exhibit 3.3 of Select Medical Holdings Corporation’s Form S-1/A
filed September 21, 2009 (Reg No. 333-152514).
3.3 Amended and Restated Bylaws of Select Medical Corporation, incorporated herein by reference
to Exhibit 3.1 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation
and Select Medical Corporation filed on October 30, 2014 (Reg. Nos. 001-34465 and 001-31441).
87
Number
Description
3.4 Amended and Restated Bylaws of Select Medical Holdings Corporation, as amended,
incorporated herein by reference to Exhibit 3.4 of the Annual Report on Form 10-K of Select
Medical Holdings Corporation and Select Medical Corporation filed on February 26, 2016 (Reg.
Nos. 001-34465 and 001-31441).
4.1
4.2
4.3
10.1
Indenture, dated as of May 28, 2013, by and among Select Medical Holdings Corporation, the
guarantors named therein and U.S. Bank National Association, as trustee, incorporated herein by
reference to Exhibit 4.1 of the Current Report on Form 8-K of Select Medical Holdings
Corporation on May 28, 2013 (Reg. No. 001-34465).
Forms of 6.375% Senior Notes due 2021, incorporated herein by reference to Exhibit 4.2 of the
Current Report on Form 8-K of Select Medical Holdings Corporation on May 28, 2013 (Reg.
No. 001-34465).
Supplemental Indenture, dated as of March 11, 2014, by and among the Company, the guarantors
named therein and U.S. Bank National Association, as trustee, incorporated herein by reference
to Exhibit 4.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and
Select Medical Corporation filed on March 11, 2014 (Reg. Nos. 001-34465 and 001-31441).
Credit Agreement, dated as of June 1, 2011, among Select Medical Holdings Corporation, Select
Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative and Collateral Agent,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs Bank USA, as
Co-Syndication Agents and Morgan Stanley Senior Funding, Inc. and Wells Fargo Bank, National
Association, LLC, as Co-Documentation Agents and the other
lenders party thereto,
incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select
Medical Holdings Corporation and Select Medical Corporation filed on June 2, 2011 (Reg.
Nos. 001-34465 and 001-31441).
10.2
Employment Agreement, dated as of March 1, 2000, between Select Medical Corporation and
Rocco A. Ortenzio, incorporated by reference to Exhibit 10.16 of Select Medical Corporation’s
Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.3 Amendment No. 1 to Employment Agreement, dated as of August 8, 2000, between Select
Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.17 of
Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg.
No. 333-48856).
10.4 Amendment No. 2 to Employment Agreement, dated as of February 23, 2001, between Select
Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.47 of
Select Medical Corporation’s Registration Statement on Form S-1 March 30, 2001 (Reg.
No. 333-48856).
10.5 Amendment No. 3 to Employment Agreement, dated as of April 24, 2001, between Select
Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.50 of
Select Medical Corporation’s Registration Statement on Form S-4 filed June 26, 2001 (Reg.
No. 333-63828).
10.6 Amendment No. 4 to Employment Agreement, dated as of September 17, 2001, between Select
Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.52 of
Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (Reg. No. 000-32499).
10.7 Amendment No. 5 to Employment Agreement, dated as of February 24, 2005, between Select
Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.10 of
Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
88
Number
10.8
Employment Agreement, dated as of March 1, 2000, between Select Medical Corporation and
Robert A. Ortenzio, incorporated by reference to Exhibit 10.14 of Select Medical Corporation’s
Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
Description
10.9 Amendment No. 1 to Employment Agreement, dated as of August 8, 2000, between Select
Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.15 of
Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg.
No. 333-48856).
10.10 Amendment No. 2 to Employment Agreement, dated as of February 23, 2001, between Select
Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.48 of
Select Medical Corporation’s Registration Statement on Form S-1 filed March 30, 2001 (Reg.
No. 333-48856).
10.11 Amendment No. 3 to Employment Agreement, dated as of September 17, 2001, between Select
Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.53 of
Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (Reg. No. 000-32499).
10.12 Amendment No. 4 to Employment Agreement, dated as of December 10, 2004, between Select
Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 99.3 of Select
Medical Corporation’s Current Report on Form 8-K filed December 16, 2004 (Reg.
No. 001-31441).
10.13 Amendment No. 5 to Employment Agreement, dated as of February 24, 2005, between Select
Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.16 of
Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
10.14
Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation
and Martin F. Jackson, incorporated by reference to Exhibit 10.11 of Select Medical
Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.15 Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select
Medical Corporation and Martin F. Jackson, incorporated by reference to Exhibit 10.52 of Select
Medical Corporation’s Registration Statement on Form S-1 filed March 30, 2001 (Reg.
No. 333-48856).
10.16
10.17
Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between
Select Medical Corporation and Martin F. Jackson, incorporated by reference to Exhibit 10.24 of
Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation
and Michael E. Tarvin, incorporated by reference to Exhibit 10.22 of Select Medical
Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.18 Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select
Medical Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.54 of Select
Medical Corporation’s Registration Statement on Form S-1 filed March 30, 2001 (Reg.
No. 333-48856).
10.19
Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between
Select Medical Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.39 of
Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
89
Number
10.20
Description
Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation
and Scott A. Romberger, incorporated by reference to Exhibit 10.56 of Select Medical
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
10.21 Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select
Medical Corporation and Scott A. Romberger, incorporated by reference to Exhibit 10.57 of
Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (Reg. No. 000-32499).
10.22
Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between
Select Medical Corporation and Scott A. Romberger, incorporated by reference to Exhibit 10.42
of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
10.23
Form of Unit Award Agreement, incorporated by reference to Exhibit 10.54 of Select Medical
Holdings Corporation’s Form S-1 filed July 24, 2008 (Reg. No. 333-152514).
10.24 Office Lease Agreement, dated as of June 17, 1999, between Select Medical Corporation and Old
Gettysburg Associates III, incorporated by reference to Exhibit 10.27 of Select Medical
Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.25
10.26
First Addendum to Lease Agreement, dated as of April 25, 2008, between Old Gettysburg
Associates III and Select Medical Corporation, incorporated by reference to Exhibit 10.65 of
Select Medical Holdings Corporation’s Form S-1 filed July 24, 2008 (Reg. No. 333-152514).
Second Addendum to Lease Agreement, dated as of November 1, 2012, between Old Gettysburg
Associates III LP and Select Medical Corporation, incorporated by reference to Exhibit 10.37 of
the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on February 26, 2013 (Reg. Nos. 001-34465 and 001-31441).
10.27 Office Lease Agreement, dated August 25, 2006, between Old Gettysburg Associates IV, L.P. and
Select Medical Corporation, incorporated by reference to Exhibit 10.1 of Select Medical
Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (Reg.
No. 001-31441).
10.28
First Addendum to Lease Agreement, dated as of November 1, 2012, between Old Gettysburg
Associates IV LP and Select Medical Corporation, incorporated by reference to Exhibit 10.39 of
the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on February 26, 2013 (Reg. Nos. 001-34465 and 001-31441).
10.29 Office Lease Agreement, dated November 1, 2012, by and between Select Medical Corporation
and Old Gettysburg Associates, incorporated by reference to Exhibit 10.40 of the Annual Report
on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on
February 26, 2013 (Reg. Nos. 001-34465 and 001-31441).
10.30 Office Lease Agreement, dated November 1, 2012, by and between Select Medical Corporation
and Old Gettysburg Associates II, LP, incorporated by reference to Exhibit 10.41 of the Annual
Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation
filed on February 26, 2013 (Reg. Nos. 001-34465 and 001-31441).
90
Number
Description
10.31 Naming, Promotional and Sponsorship Agreement, dated as of October 1, 1997, between
NovaCare, Inc. and the Philadelphia Eagles Limited Partnership, assumed by Select Medical
Corporation in a Consent and Assumption Agreement dated November 19, 1999 by and among
NovaCare, Inc., Select Medical Corporation and the Philadelphia Eagles Limited Partnership,
incorporated by reference to Exhibit 10.36 of Select Medical Corporation’s Registration
Statement on Form S-1 filed December 7, 2000 (Reg. No. 333-48856).
10.32
10.33
10.34
10.35
First Amendment to Naming, Promotional and Sponsorship Agreement, dated as of January 1,
2004, between Select Medical Corporation and Philadelphia Eagles, LLC, incorporated by
reference to Exhibit 10.63 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
Select Medical Holdings Corporation 2005 Equity Incentive Plan, as amended and restated,
incorporated by reference to Exhibit 10.88 of Select Medical Holdings Corporation’s Form S-1/A
filed September 9, 2009 (Reg. No. 333-152514).
Select Medical Holdings Corporation 2011 Equity Incentive Plan, incorporated by reference to
Exhibit A to Select Medical Holdings Corporation’s Definitive Proxy Statement on Schedule 14A
filed on March 25, 2011 (Reg. No. 333-174393).
Select Medical Holdings Corporation 2005 Equity Incentive Plan for Non-Employee Directors,
as amended and restated, incorporated by reference to Exhibit 10.89 of Select Medical Holdings
Corporation’s Form S-1/A filed September 9, 2009 (Reg. No. 333-152514).
10.36 Amendment No. 6 to Employment Agreement between Select Medical Corporation and
Rocco A. Ortenzio, incorporated by reference to Exhibit 10.95 of Select Medical Holdings
Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514).
10.37 Amendment No. 6 to Employment Agreement between Select Medical Corporation and
Robert A. Ortenzio, incorporated by reference to Exhibit 10.96 of Select Medical Holdings
Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514).
10.38
10.39
10.40
10.41
10.42
Third Amendment to Change of Control Agreement between Select Medical Corporation and
Michael E. Tarvin, incorporated by reference to Exhibit 10.100 of Select Medical Holdings
Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514).
Third Amendment to Change of Control Agreement between Select Medical Corporation and
Scott A. Romberger, incorporated by reference to Exhibit 10.102 of Select Medical Holdings
Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514).
Third Amendment to Change of Control Agreement between Select Medical Corporation and
Martin F. Jackson, incorporated by reference to Exhibit 10.103 of Select Medical Holdings
Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514).
Form of Restricted Stock Agreement under the 2005 Equity Incentive Plan, incorporated by
reference to Exhibit 10.119 of the Annual Report on Form 10-K of Select Medical Holdings
Corporation and Select Medical Corporation filed on March 17, 2010 (Reg. Nos. 001-34465 and
001-31441).
Employment Agreement, dated September 13, 2010, by and between Select Medical Corporation
and David S. Chernow, incorporated herein by reference to Exhibit 10.1 of the Current Report
on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on
September 15, 2010. (Reg. Nos. 001-34465 and 001-31441).
91
Number
Description
10.43 Restricted Stock Award Agreement, dated September 13, 2010, by and between Select Medical
Holdings Corporation and David S. Chernow, incorporated herein by reference to Exhibit 10.2 of
the Current Report on Form 8-K of Select Medical Holdings Corporation and Select filed on
September 15, 2010. (Reg. Nos. 001-34465 and 001-31441).
10.44 Amendment No. 1 to Employment Agreement, dated March 21, 2011, between Select Medical
Corporation and David S. Chernow, incorporated herein by reference to Exhibit 10.8 of the
Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical
Corporation filed on May 5, 2011. (Reg. Nos. 001-34465 and 001-31441).
10.45 Amendment No. 7 to Employment Agreement, dated November 10, 2010, by and between Select
Medical Corporation and Rocco A. Ortenzio, incorporated herein by reference to Exhibit 10.1 of
the Current Report on Form 8-K of Select Medical Holdings Corporation and Select filed on
November 15, 2010. (Reg. Nos. 001-34465 and 001-31441).
10.46 Amendment No. 7 to Employment Agreement, dated November 10, 2010, by and between Select
Medical Corporation and Robert A. Ortenzio, incorporated herein by reference to Exhibit 10.2
of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select filed on
November 15, 2010. (Reg. Nos. 001-34465 and 001-31441).
10.47
Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select
Medical Corporation and Martin F. Jackson, incorporated herein by reference to Exhibit 10.111
of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441).
10.48 Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical
Corporation and Robert A. Ortenzio, incorporated herein by reference to Exhibit 10.112 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441).
10.49 Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical
Corporation and Rocco A. Ortenzio, incorporated herein by reference to Exhibit 10.113 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441).
10.50
10.51
10.52
Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select
Medical Corporation and Scott A. Romberger,
incorporated herein by reference to
Exhibit 10.115 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and
Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441).
Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select
Medical Corporation and Michael E. Tarvin, incorporated herein by reference to Exhibit 10.117
of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441).
Form of Restricted Stock Award Agreement under the Select Medical Holdings Corporation
2011 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.107 of the Annual
Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation
filed on March 2, 2012 (Reg. Nos. 001-34465 and 001-31441).
92
Number
Description
10.53 Additional Credit Extension Amendment, dated as of August 13, 2012, among Select Medical
Holdings Corporation, Select Medical Corporation, the subsidiaries of Select Medical
Corporation named therein and the financial institutions party thereto, incorporated herein by
reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings
Corporation and Select Medical Corporation filed on August 14, 2012 (Reg. Nos. 001-34465 and
001-31441).
10.54 Amendment No. 1 to the Credit Agreement, dated as of August 8, 2012, among Select Medical
Holdings Corporation, Select Medical Corporation and JPMorgan Chase Bank, N.A.,
incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select
Medical Holdings Corporation and Select Medical Corporation filed on August 14, 2012 (Reg.
Nos. 001-34465 and 001-31441).
10.55 Amendment No. 2 to the Credit Agreement, dated as of November 6, 2012, among Select
Medical Holdings Corporation, Select Medical Corporation and JPMorgan Chase Bank, N.A.,
incorporated by reference to Exhibit 10.85 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on February 26, 2013 (Reg.
Nos. 001-34465 and 001-31441).
10.56 Additional Credit Extension Amendment, dated as of February 20, 2013, among Select Medical
Holdings Corporation, Select Medical Corporation, the subsidiaries of Select Medical
Corporation named therein and the financial institutions party thereto, incorporated herein by
reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings
Corporation and Select Medical Corporation filed on February 20, 2013 (Reg. Nos. 001-34465
and 001-31441).
10.57 Amendment No. 3 to the Credit Agreement, dated as of February 15, 2013, among Select
Medical Holdings Corporation, Select Medical Corporation and JPMorgan Chase Bank, N.A.,
incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select
Medical Holdings Corporation and Select Medical Corporation filed on February 20, 2013 (Reg.
Nos. 001-34465 and 001-31441).
10.58 Amendment No. 4 to the Credit Agreement, dated as of June 3, 2013, among Select Medical
Holdings Corporation, Select Medical Corporation and JPMorgan Chase Bank, N.A.,
incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q of Select
Medical Holdings Corporation filed on August 8, 2013 (Reg. No. 001-34465).
10.59 Amendment No. 5 to the Credit Agreement, dated as of March 4, 2014, among Select Medical
Holdings Corporation, Select Medical Corporation and JPMorgan Chase Bank, N.A.,
incorporated herein by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q of Select
Medical Holdings Corporation and Select Medical Corporation filed on May 1, 2014 (Reg.
Nos. 001-34465 and 001-31441).
10.60 Additional Credit Extension Amendment, dated as of October 23, 2014, among Holdings, Select,
JPMorgan Chase Bank, N.A., as administrative agent and collateral agent and the additional
lender named therein, incorporated herein by reference to Exhibit 10.1 of the Current Report on
Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on
October 24, 2014 (Reg. Nos. 001-34465 and 001-31441).
10.61 Additional Credit Extension Amendment, dated as of October 23, 2014, among Holdings, Select,
JPMorgan Chase Bank, N.A., as administrative agent and collateral agent and the additional
lender named therein, incorporated herein by reference to Exhibit 10.2 of the Current Report on
Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on
October 24, 2014 (Reg. Nos. 001-34465 and 001-31441).
93
Number
Description
10.62 Office Lease Agreement, dated October 30, 2014, between Century Park Investments, L.P. and
Select Medical Corporation, incorporated herein by reference to Exhibit 10.80 of the Annual
Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation
filed on February 25, 2015 (Reg. Nos. 001-34465 and 001-31441).
10.63 Additional Credit Extension Amendment, dated as of May 20, 2015, among Select Medical
Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as
administrative agent, collateral agent and lender and the additional lenders names therein,
incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select
Medical Holdings Corporation and Select Medical Corporation filed on May 20, 2015 (Reg.
Nos. 001-34465 and 001-31441).
10.64 Amended and Restated Limited Liability Agreement, dated June 1, 2015, by and among Select
Medical Corporation, Select Medical Holdings Corporation, Welsh, Carson, Anderson & Stowe
XII, L.P., Cressey & Company Fund IV LP, James Greenwood and Daniel Thomas, incorporated
herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on August 6, 2015 (Reg.
Nos. 001-34465 and 001-31441).
10.65
10.66
10.67
First Lien Credit Agreement, dated June 1, 2015, by and among, Concentra Holdings, Inc.,
Concentra, Inc., JPMorgan Chase Bank, N.A. as administrative agent, collateral agent and lender
and the additional lenders names therein, incorporated herein by reference to Exhibit 10.3 of the
Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on August 6, 2015 (Reg. Nos. 001-34465 and 001-31441).
Second Lien Credit Agreement, dated June 1, 2015, by and among, Concentra Holdings, Inc.,
Concentra, Inc., Deutsche Bank AG New York Branch, as administrative agent, collateral agent
and lender and the additional lenders names therein, incorporated herein by reference to
Exhibit 10.4 of the Current Report on Form 8-K of Select Medical Holdings Corporation and
Select Medical Corporation filed on August 6, 2015 (Reg. Nos. 001-34465 and 001-31441).
Subscription Agreement, dated June 1, 2015, by and among Select Medical Corporation, Welsh,
Carson, Anderson & Stowe XII, L.P., Concentra Group Holdings, LLC and Cressey & Company
Fund IV LP, incorporated herein by reference to Exhibit 10.5 of the Current Report on Form 8-K
of Select Medical Holdings Corporation and Select Medical Corporation filed on August 6, 2015
(Reg. Nos. 001-34465 and 001-31441).
10.68 Amendment No. 6 to the Credit Agreement, dated as of December 11, 2015, among Select
Medical Holdings Corporation, Select Medical Corporation and JPMorgan Chase Bank, N.A.,
incorporated herein by reference to Exhibit 10.81 of the Annual Report on Form 10-K of Select
Medical Holdings Corporation and Select Medical Corporation filed February 26, 2016 (Reg.
Nos. 001-34465 and 001-31441).
10.69
First Amendment to Lease Agreement, dated February 24, 2016, between Old Gettysburg II, LP
and Select Medical Corporation, incorporated herein by reference to Exhibit 10.81 of the Annual
Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation
filed February 26, 2016 (Reg. Nos. 001-34465 and 001-31441).
10.70 Additional Credit Extension Amendment, dated March 4, 2016, among Select Medical Holdings
Corporation, Select Medical Corporation, the subsidiaries of Holdings and Select named therein,
JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and lender, and the
additional lenders named therein, incorporated herein by reference to Exhibit 10.1 of the Current
Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation
filed on March 4, 2016 (Reg. Nos. 001-34465 and 001-31441).
94
Number
10.71
10.72
Description
Second Amendment to the Lease Agreement, dated June 1, 2016, between Old Gettysburg II, LP
and Select Medical Corporation, incorporated herein by reference to Exhibit 10.1 of the
Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical
Corporation filed August 4, 2016 (Reg. Nos. 001-34465 and 001-31441).
Third Amendment to the Lease Agreement, dated September 19, 2016, between Old Gettysburg
II, LP and Select Medical Corporation, incorporated herein by reference to Exhibit 10.1 of the
Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical
Corporation filed November 3, 2016 (Reg. Nos. 001-34465 and 001-31441).
10.73 Amendment No. 1, dated September 26, 2016, among Concentra Inc., Concentra Holdings, Inc.,
JP Morgan Chase Bank, N.A, as the administrative agent, collateral agent and lender, and the
additional lenders named therein, incorporated herein by reference to Exhibit 10.1 of the Current
Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation
filed on September 28, 2016 (Reg. Nos. 001-34465 and 001-31441).
10.74 Office Lease Agreement, dated October 28, 2016, between Select Medical Corporation and Old
Gettysburg Associates V, L.P., incorporated herein by reference to Exhibit 10.3 of the Quarterly
Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation
filed November 3, 2016 (Reg. Nos. 001-34465 and 001-31441).
10.75
10.76
First Amendment to the Lease Agreement, dated November 15, 2016, between Old Gettysburg
Associates and Select Medical Corporation.
Select Medical Holdings Corporation 2016 Equity Incentive Plan, incorporated herein by
reference to Appendix A of the Definitive Proxy Statement on Schedule 14A of Select Medical
Holdings Corporation filed March 3, 2016 (Reg. No. 001-34465).
10.77
Form of Restricted Stock Award Agreement under the Select Medical Holdings Corporation
2016 Equity Incentive Plan.
12
Statement of Ratio of Earnings to Fixed Charges.
21.1
Subsidiaries of Select Medical Holdings Corporation.
23
Consent of PricewaterhouseCoopers LLP.
31.1
31.2
32.1
101
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer, and Executive Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
The following financial information from the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2016 formatted in XBRL (eXtensible Business Reporting Language):
(i) Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 2016, 2015 and 2014 (ii) Consolidated Balance Sheets as of December 31, 2016 and
2015, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015
and 2014, (iv) Consolidated Statements of Changes in Equity and Income for the years ended
December 31, 2016, 2015 and 2014 and (v) Notes to Consolidated Financial Statements.
Item 16. Form 10-K Summary.
None.
95
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signatures
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
By:
/s/ MICHAEL E. TARVIN
Michael E. Tarvin
(Executive Vice President, General Counsel and
Secretary)
Date: February 23, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated as of February 23,
2017.
/s/ ROCCO A. ORTENZIO
/s/ ROBERT A. ORTENZIO
Rocco A. Ortenzio
Director, Vice Chairman and Co-Founder
Robert A. Ortenzio
Director, Executive Chairman and Co-Founder
/s/ DAVID S. CHERNOW
/s/ MARTIN F. JACKSON
David S. Chernow
President and Chief Executive Officer (principal
executive officer)
Martin F. Jackson
Executive Vice President and Chief Financial Officer
(principal financial officer)
/s/ SCOTT A. ROMBERGER
Scott A. Romberger
Senior Vice President, Controller and Chief
Accounting Officer (principal accounting officer)
/s/ BRYAN C. CRESSEY
Bryan C. Cressey
Director
/s/ JAMES S. ELY III
James S. Ely III
Director
/s/ THOMAS A. SCULLY
Thomas A. Scully
Director
/s/ RUSSELL L. CARSON
Russell L. Carson
Director
/s/ JAMES E. DALTON, JR.
James E. Dalton, Jr.
Director
/s/ WILLIAM H. FRIST, M.D.
William H. Frist, M.D.
Director
/s/ LEOPOLD SWERGOLD
Leopold Swergold
Director
96
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
F-2
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Consolidated Statements of Operations and Comprehensive Income . . . . . . . . . . . . . . . . . . . . .
F-7
Consolidated Statement of Changes in Equity and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Financial Statements Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . F-59
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Select Medical Holdings Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all
material respects, the financial position of Select Medical Holdings Corporation and its subsidiaries as of
December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements, on the financial statement schedule, and on
the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which
it classifies debt issuance costs in 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has
excluded Physiotherapy from its assessment of internal control over financial reporting as of December 31, 2016
because it was acquired by the Company in a purchase business combination during 2016. We have also excluded
Physiotherapy from our audit of internal control over financial reporting. Physiotherapy is a wholly-owned
subsidiary whose total assets and total revenues represents less than 2% and 6%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2016.
/s/ PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
February 23, 2017
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of Select Medical Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all
material respects, the financial position of Select Medical Corporation and its subsidiaries as of December 31,
2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on
these financial statements, on the financial statement schedule, and on the Company’s internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which
it classifies debt issuance costs in 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has
excluded Physiotherapy from its assessment of internal control over financial reporting as of December 31, 2016
because it was acquired by the Company in a purchase business combination during 2016. We have also excluded
Physiotherapy from our audit of internal control over financial reporting. Physiotherapy is a wholly-owned
subsidiary whose total assets and total revenues represents less than 2% and 6%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2016.
/s/ PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
February 23, 2017
F-3
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
Select Medical Holdings
Corporation
Select Medical Corporation
December 31,
2015
December 31,
2016
December 31,
2015
December 31,
2016
Current Assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts
of $61,133 and $63,787 at 2015 and 2016, respectively . . .
Current deferred tax asset . . . . . . . . . . . . . . . . . . . . . .
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangibles, net
. . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
14,435
$
99,029
$
14,435
$
99,029
603,558
28,688
16,694
85,779
749,154
864,124
2,314,624
318,675
142,101
573,752
45,165
12,423
77,699
808,068
892,217
2,751,000
340,562
152,548
603,558
28,688
16,694
85,779
749,154
864,124
2,314,624
318,675
142,101
573,752
45,165
12,423
77,699
808,068
892,217
2,751,000
340,562
152,548
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,388,678
$4,944,395
$4,388,678
$4,944,395
Current Liabilities:
LIABILITIES AND EQUITY
Bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt and notes payable . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities
. . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current portion . . . . . . . . . . . . . . .
Non-current deferred tax liability . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 16)
$
28,615
225,166
137,409
120,989
73,977
9,401
133,728
729,285
2,160,730
218,705
133,220
3,241,940
$
39,362
13,656
126,558
146,397
83,261
22,325
140,076
571,635
2,685,333
222,847
136,520
3,616,335
$
28,615
225,166
137,409
120,989
73,977
9,401
133,728
729,285
2,160,730
218,705
133,220
3,241,940
$
39,362
13,656
126,558
146,397
83,261
22,325
140,076
571,635
2,685,333
222,847
136,520
3,616,335
Redeemable non-controlling interests . . . . . . . . . . . . . . . .
238,221
422,159
238,221
422,159
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000
shares authorized, 131,282,798 and 132,596,758 shares
issued and outstanding at 2015 and 2016, respectively . . .
Common stock of Select, $0.01 par value, 100 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . .
Total Select Medical Holdings Corporation and Select
Medical Corporation Stockholders’ Equity . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131
—
424,506
434,616
859,253
49,264
908,517
132
—
443,908
371,685
815,725
90,176
905,901
—
—
0
904,375
(45,122)
859,253
49,264
908,517
0
925,111
(109,386)
815,725
90,176
905,901
Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . .
$4,388,678
$4,944,395
$4,388,678
$4,944,395
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Select Medical Holdings Corporation
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share amounts)
For the Year Ended December 31,
2014
2015
2016
Net operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,065,017
$3,742,736
$4,286,021
Costs and expenses:
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
2,582,340
85,247
44,600
68,354
3,211,541
92,052
59,372
104,981
3,664,843
106,927
69,093
145,311
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,780,541
3,467,946
3,986,174
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
284,476
274,790
299,847
Other income and expense:
Loss on early retirement of debt . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated subsidiaries . . . . . . . . . .
Non-operating gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,277)
7,044
—
(85,446)
—
16,811
29,647
(112,816)
(11,626)
19,943
42,651
(170,081)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
203,797
208,432
180,734
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,622
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128,175
72,436
135,996
55,464
125,270
Less: Net income attributable to non-controlling interests . . . . .
7,548
5,260
9,859
Net income attributable to Select Medical Holdings Corporation
$ 120,627
$ 130,736
$ 115,411
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
0.91
0.91
0.40
$
$
$
1.00
0.99
0.10
$
$
$
0.88
0.87
0.00
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129,026
129,465
127,478
127,752
127,813
127,968
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Select Medical Corporation
Consolidated Statements of Operations and Comprehensive Income
(in thousands)
For the Year Ended December 31,
2014
2015
2016
Net operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,065,017
$3,742,736
$4,286,021
Costs and expenses:
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
2,582,340
85,247
44,600
68,354
3,211,541
92,052
59,372
104,981
3,664,843
106,927
69,093
145,311
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,780,541
3,467,946
3,986,174
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
284,476
274,790
299,847
Other income and expense:
Loss on early retirement of debt . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated subsidiaries . . . . . . . . . .
Non-operating gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,277)
7,044
—
(85,446)
—
16,811
29,647
(112,816)
(11,626)
19,943
42,651
(170,081)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
203,797
208,432
180,734
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,622
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128,175
72,436
135,996
55,464
125,270
Less: Net income attributable to non-controlling interests . . . . .
7,548
5,260
9,859
Net income attributable to Select Medical Corporation . . . . . . .
$ 120,627
$ 130,736
$ 115,411
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Select Medical Holdings Corporation
Consolidated Statement of Changes in Equity and Income
(in thousands)
Select Medical Holdings Corporation Stockholders
Balance at December 31, 2013 .
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Corporation .
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Net income attributable to Select Medical Holdings
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Net income attributable to non-controlling interests .
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Dividends paid to common stockholders .
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Issuance and vesting of restricted stock .
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Tax benefit from stock based awards .
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Repurchase of common shares .
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Stock option expense .
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Exercise of stock options .
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Issuance of non-controlling interests .
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Purchase of non-controlling interests .
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Distributions to non-controlling interests
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Redemption adjustment on non-controlling interest .
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Other .
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Balance at December 31, 2014 .
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Corporation .
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Net income attributable to Select Medical Holdings
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Net income (loss) attributable to non-controlling interests
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Dividends paid to common stockholders .
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Issuance and vesting of restricted stock .
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Tax benefit from stock based awards .
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Repurchase of common shares .
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Stock option expense .
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Exercise of stock options .
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Issuance of non-controlling interests .
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Acquired non-controlling interests .
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Purchase of non-controlling interests .
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Distributions to non-controlling interests
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.
Redemption adjustment on non-controlling interest .
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Other .
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Balance at December 31, 2015 .
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Corporation .
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Net income attributable to Select Medical Holdings
.
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Net income (loss) attributable to non-controlling interests
.
.
Issuance and vesting of restricted stock .
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Repurchase of common shares .
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Stock option expense .
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Exercise of stock options .
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.
Issuance of non-controlling interests .
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Acquired non-controlling interests .
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Purchase of non-controlling interests .
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Distributions to non-controlling interests
.
.
Redemption adjustment on non-controlling interest .
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Other .
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Balance at December 31, 2016 .
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Redeemable
Non-controlling
interests
Common Common Capital in
Stock
Par Value
Excess
of Par
Stock
Issued
Total
Retained Stockholders’ Non-controlling
Earnings
Interests
Equity
Total
Equity
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$ 11,584
140,261
$140
$474,729
$ 311,365
$ 786,234
$32,408
$ 818,642
1,410
(1,086)
(923)
1,586
2
(11,589)
(12)
975
1
12,078
3,119
(76,851)
698
7,354
(7,421)
120,627
(53,366)
(53,871)
923
120,627
—
(53,366)
12,080
3,119
(130,734)
698
7,355
—
(7,421)
—
923
—
6,138
1,693
(1,360)
(2,893)
(261)
120,627
6,138
(53,366)
12,080
3,119
(130,734)
698
7,355
1,693
(8,781)
(2,893)
923
(261)
$ 10,985
131,233
$131
$413,706
$ 325,678
$ 739,515
$35,725
$ 775,240
1,385
(1,518)
183
0
0
0
(2,190)
218,005
14,196
(876)
(2,909)
1,010
130,736
(13,129)
(7,659)
13,916
1,846
(8,168)
53
1,649
1,689
(194)
(1,010)
9
130,736
—
(13,129)
13,916
1,846
(15,827)
53
1,649
1,689
—
(194)
—
(1,010)
9
7,450
12,880
2,888
(25)
(9,732)
78
130,736
7,450
(13,129)
13,916
1,846
(15,827)
53
1,649
14,569
2,888
(219)
(9,732)
(1,010)
87
$238,221
131,283
$131
$424,506
$ 434,616
$ 859,253
$49,264
$ 908,517
12,479
(2,753)
(3,231)
177,216
227
115,411
(1,596)
1,344
(232)
202
1
0
0
16,639
(1,333)
4
1,672
2,377
75
579
(177,216)
(109)
(32)
115,411
—
16,640
(2,929)
4
1,672
2,377
—
654
—
(177,216)
(141)
(2,620)
47,801
2,514
(7,324)
541
115,411
(2,620)
16,640
(2,929)
4
1,672
50,178
2,514
654
(7,324)
(177,216)
400
$422,159
132,597
$132
$443,908
$ 371,685
$ 815,725
$90,176
$ 905,901
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Select Medical Corporation
Consolidated Statement of Changes in Equity and Income
(in thousands)
Select Medical Stockholders
Balance at December 31, 2013 .
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Net income attributable to Select Medical Corporation .
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Net income attributable to non-controlling interests .
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.
Additional investment by Holdings .
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Dividends declared and paid to Holdings
.
.
Contribution related to restricted stock awards and stock
.
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Tax benefit from stock based awards .
.
.
Issuance of non-controlling interests .
.
Purchase of non-controlling interests .
.
Distributions to non-controlling interests
.
Redemption adjustment on non-controlling interest .
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.
Other .
option issuances by Holdings
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.
.
Balance at December 31, 2014 .
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.
option issuances by Holdings
.
Net income attributable to Select Medical Corporation .
Net income (loss) attributable to non-controlling interests
.
Additional investment by Holdings .
.
Dividends declared and paid to Holdings
.
Contribution related to restricted stock awards and stock
.
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.
.
Tax benefit from stock based awards .
.
.
Issuance of non-controlling interests .
.
.
Acquired non-controlling interests .
.
.
Purchase of non-controlling interests .
.
Distributions to non-controlling interests
.
Redemption adjustment on non-controlling interest .
.
.
Other .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
.
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.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Balance at December 31, 2015 .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net income attributable to Select Medical Corporation .
Net income (loss) attributable to non-controlling interests
.
Additional investment by Holdings .
.
Dividends declared and paid to Holdings
.
Contribution related to restricted stock awards and stock
.
.
.
.
.
.
.
.
.
.
.
.
Issuance of non-controlling interests .
.
.
Acquired non-controlling interests .
.
.
Purchase of non-controlling interests .
.
Distributions to non-controlling interests
.
Redemption adjustment on non-controlling interest .
.
.
Other .
option issuances by Holdings
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
Balance at December 31, 2016 .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
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.
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.
.
.
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.
.
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.
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.
.
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.
.
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.
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.
(2,190)
218,005
14,196
(876)
(2,909)
1,010
12,479
(2,753)
(3,231)
177,216
227
Total
Retained Stockholders’ Non-controlling
Earnings
Interests
Equity
$ (83,342)
120,627
(184,100)
$ 786,234
120,627
—
7,355
(184,100)
Redeemable
Non-controlling
interests
Common Common Capital in
Stock
Par Value
Excess
of Par
Stock
Issued
$ 11,584
0
$0
$869,576
1,410
(1,086)
(923)
7,355
12,778
3,119
(7,421)
$ 10,985
0
$0
$885,407
Total
Equity
$ 818,642
120,627
6,138
7,355
(184,100)
12,778
3,119
1,693
(8,781)
(2,893)
923
(261)
$ 775,240
130,736
7,450
1,649
(28,956)
13,969
1,846
14,569
2,888
(219)
(9,732)
(1,010)
87
$ 908,517
115,411
(2,620)
1,672
(2,929)
16,644
50,178
2,514
654
(7,324)
(177,216)
400
$32,408
6,138
1,693
(1,360)
(2,893)
(261)
$35,725
7,450
12,880
2,888
(25)
(9,732)
78
$49,264
(2,620)
47,801
2,514
(7,324)
541
12,778
3,119
—
(7,421)
—
923
—
$ 739,515
130,736
—
1,649
(28,956)
13,969
1,846
1,689
—
(194)
—
(1,010)
9
$ 859,253
115,411
—
1,672
(2,929)
16,644
2,377
—
654
—
(177,216)
(141)
923
$(145,892)
130,736
(28,956)
1,649
13,969
1,846
1,689
(194)
1,672
16,644
2,377
(1,010)
9
$ (45,122)
115,411
(2,929)
75
579
(177,216)
(109)
(32)
$422,159
0
$0
$925,111
$(109,386)
$ 815,725
$90,176
$ 905,901
$238,221
0
$0
$904,375
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Select Medical Holdings Corporation
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early retirement of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets and businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of equity investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount, premium and issuance costs . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Year Ended December 31,
2014
2015
2016
$ 128,175
$
135,996
$ 125,270
11,954
68,354
44,600
(7,044)
2,277
(1,048)
—
—
11,186
7,553
14,311
(97,802)
(1,729)
(103)
5,997
(16,039)
13,969
104,981
59,372
(16,811)
—
(1,098)
(29,647)
—
14,985
9,543
(2,058)
(92,572)
(2,503)
4,713
2,345
7,200
20,476
145,311
69,093
(19,943)
11,626
(46,488)
(2,779)
5,339
17,413
15,656
(12,591)
(39,320)
17,450
9,290
(15,492)
46,292
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
170,642
208,415
346,603
Investing activities
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equity investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of assets and businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,211)
(95,246)
(4,634)
—
—
(1,061,628)
(182,642)
(2,347)
33,096
1,767
(472,206)
(161,633)
(4,723)
3,779
80,463
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(101,091)
(1,211,754)
(554,320)
Financing activities
Borrowings on revolving facilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on revolving facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from term loans (financing costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from 6.375% senior notes issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings of other debt
Principal payments on other debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from stock based awards
Proceeds from issuance of non-controlling interests
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of non-controlling interests
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
910,000
(870,000)
(2,139)
(33,994)
109,355
9,076
(14,673)
9,240
(53,366)
(130,734)
7,355
3,119
185
(9,961)
(3,979)
1,135,000
(895,000)
623,575
(29,134)
—
13,374
(18,136)
6,869
(13,129)
(15,827)
1,649
1,846
217,065
(1,095)
(12,637)
575,000
(655,000)
795,344
(438,034)
—
27,721
(21,401)
10,746
—
(2,929)
1,672
—
11,846
(2,099)
(10,555)
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(70,516)
1,014,420
292,311
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(965)
4,319
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,354
Supplemental Information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities for purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 78,812
$ 77,771
$ 14,230
11,081
3,354
84,594
14,435
14,435
$ 99,029
103,166
79,420
36,744
$ 142,640
$ 70,756
$ 32,861
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Select Medical Corporation
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early retirement of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets and businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount, premium and issuance costs . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Year Ended December 31,
2014
2015
2016
$ 128,175
$
135,996
$ 125,270
11,954
68,354
44,600
(7,044)
2,277
(1,048)
—
—
11,186
7,553
14,311
(97,802)
(1,729)
(103)
5,997
(16,039)
13,969
104,981
59,372
(16,811)
—
(1,098)
(29,647)
—
14,985
9,543
(2,058)
(92,572)
(2,503)
4,713
2,345
7,200
20,476
145,311
69,093
(19,943)
11,626
(46,488)
(2,779)
5,339
17,413
15,656
(12,591)
(39,320)
17,450
9,290
(15,492)
46,292
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
170,642
208,415
346,603
Investing activities
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in businesses
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of assets and businesses
(1,211)
(95,246)
(4,634)
—
—
(1,061,628)
(182,642)
(2,347)
33,096
1,767
(472,206)
(161,633)
(4,723)
3,779
80,463
Net cash used in investing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(101,091)
(1,211,754)
(554,320)
Financing activities
Borrowings on revolving facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on revolving facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from term loans (financing costs) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from 6.375% senior notes issuance . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings of other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investment by Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from stock based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
910,000
(870,000)
(2,139)
(33,994)
109,355
9,076
(14,673)
9,240
(184,100)
7,355
3,119
185
(9,961)
(3,979)
1,135,000
(895,000)
623,575
(29,134)
—
13,374
(18,136)
6,869
(28,956)
1,649
1,846
217,065
(1,095)
(12,637)
575,000
(655,000)
795,344
(438,034)
—
27,721
(21,401)
10,746
(2,929)
1,672
—
11,846
(2,099)
(10,555)
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(70,516)
1,014,420
292,311
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . .
(965)
4,319
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,354
Supplemental Information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities for purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . .
$ 78,812
$ 77,771
$ 14,230
11,081
3,354
84,594
14,435
14,435
$ 99,029
103,166
79,420
36,744
$ 142,640
$ 70,756
$ 32,861
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-10
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Business Description
Select Medical Corporation (‘‘Select’’) was formed in December 1996 and commenced operations
during February 1997 upon the completion of its first acquisition. Select Medical Holdings Corporation
(‘‘Holdings’’) was formed in October 2004 for the purpose of affecting a leveraged buyout of Select, which
was a publicly traded entity. On February 24, 2005, Select merged with a subsidiary of Holdings, which
resulted in Select becoming a wholly owned subsidiary of Holdings (the ‘‘Merger’’). On September 30,
2009, Holdings completed its initial public offering of common stock. At the time of the transaction,
generally accepted accounting principles (‘‘GAAP’’) required that any amounts recorded or incurred (such
as goodwill and compensation expense) by the parent as a result of the Merger or for the benefit of the
subsidiary be ‘‘pushed down’’ and recorded in Select’s consolidated financial statements. Holdings and
Select and their subsidiaries are collectively referred to as the ‘‘Company.’’ The consolidated financial
statements of Holdings include the accounts of its wholly owned subsidiary Select. Holdings conducts
substantially all of its business through Select and its subsidiaries.
The Company is managed through three business segments: specialty hospitals, outpatient
rehabilitation, and Concentra. Through the specialty hospitals segment, the Company provides post-acute
inpatient care through its long term acute care hospitals and inpatient acute rehabilitative hospitals.
Patients are typically admitted to our specialty hospitals from general acute care hospitals. These patients
have specialized needs, with serious and often complex medical conditions. The Company operated 123
specialty hospitals at December 31, 2016. The Company’s outpatient rehabilitation segment consists of
clinics that provide physical, occupational, and speech rehabilitation services. At December 31, 2016, the
Company operated 1,611 outpatient clinics. The Company’s Concentra segment consists of medical centers
and contract services provided at employer worksites and Department of Veterans Affairs community-
based outpatient clinics (‘‘CBOCs’’) that deliver occupational medicine, physical therapy, veteran’s
healthcare, and consumer health services. At December 31, 2016, the Company operated 300 medical
centers, 107 medical facilities located at the workplaces of Concentra’s employer customers, and
32 Department of Veterans Affairs CBOCs. At December 31, 2016, the Company had operations in
46 states and the District of Columbia.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its majority owned
subsidiaries, limited liability companies, and limited partnerships the Company and its subsidiaries control
through ownership of general and limited partnership or membership interests. All intercompany balances
and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the
date of the financial statements and reported amounts of revenues and expenses during the reporting
period. Significant estimates and assumptions are used for, but not limited to: accounts receivable and
allowance for doubtful accounts, depreciable lives of assets, intangible assets and liabilities, insurance, and
income taxes. Future events and their effects cannot be predicted with certainty; accordingly, the
Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the
F-11
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
preparation of the financial statements will change as new events occur, as more experience is acquired, as
additional information is obtained, and as the Company’s operating environment changes. The Company’s
management evaluates and updates assumptions and estimates on an ongoing basis. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents. Cash equivalents are stated at cost which approximates market value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company reports accounts receivable at estimated net realizable values. Substantially all of the
Company’s accounts receivable are related to providing healthcare services to patients whose costs are
primarily paid by federal and state governmental authorities, managed care health plans, commercial
insurance companies, and workers’ compensation and employer programs. Collection of these accounts
receivable is the Company’s primary source of cash and is critical to its operating performance. The
Company’s primary collection risks relate to non-governmental payors who insure these patients and
deductibles, co-payments, and amounts owed by the patient. Deductibles, co-payments, and self-insured
amounts owed by the patient are an immaterial portion of the Company’s net accounts receivable balance
and accounted for approximately 1.2% of the net accounts receivable balance before doubtful accounts at
both December 31, 2015 and 2016. The Company’s general policy is to verify insurance coverage prior to
the date of admission for a patient admitted to the Company’s hospitals, or in the case of the Company’s
outpatient rehabilitation clinics and Concentra medical centers, the Company verifies insurance coverage
prior to their first visit. The Company’s estimate for the allowance for doubtful accounts is calculated by
applying a reserve allowance based upon the age of an account balance. This method is monitored based
on historical cash collections experience and write-off experience. Collections are impacted by the
effectiveness of the Company’s collection efforts with non-governmental payors and regulatory or
administrative disruptions with the fiscal intermediaries that pay the Company’s governmental receivables.
Uncollected accounts are written off the balance sheet when they are turned over to an outside collection
agency, or when management determines that the balance is uncollectible, whichever occurs first.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist
primarily of cash balances and trade receivables. The Company invests its excess cash with large financial
institutions. The Company grants unsecured credit to its patients, most of who reside in the service area of
the Company’s facilities and are insured under third-party payor agreements. Because of the geographic
diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the
Company’s only significant concentration of credit risk.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Direct internal and
external costs of developing software for internal use, including programming and enhancements, are
capitalized and depreciated over the estimated useful lives once the software is placed in service.
Capitalized software costs are included within furniture and equipment. Software training costs,
F-12
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
maintenance, and repairs are expensed as incurred. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets or the term of the lease, as appropriate.
The general range of useful lives is as follows:
Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 - 25 years
5 - 15 years
40 years
5 - 25 years
3 - 20 years
The Company reviews the realizability of long-lived assets whenever events or circumstances occur
which indicate recorded costs may not be recoverable. Gains or losses related to the retirement or disposal
of property and equipment are reported as a component of income from operations.
Intangible Assets and Liabilities
Finite-lived intangible assets and liabilities are amortized based on the pattern in which the economic
benefits are consumed or otherwise depleted. If such a pattern cannot be reliably determined, other
intangible assets are amortized on a straight-line basis over their estimated lives. Goodwill and certain
other indefinite-lived intangible assets are not amortized, but instead are subject to periodic impairment
evaluations. In performing the quantitative periodic impairment tests, the fair value of the reporting unit is
compared to its carrying value, including goodwill and other intangible assets. If the carrying value exceeds
the fair value and an impairment condition exists, an impairment loss would be recognized.
To determine the fair value of its reporting units, the Company applies both a discounted cash flow
(‘‘DCF’’) income and market approach. Included in the DCF income approach, specific for each reporting
unit, are assumptions regarding revenue growth rate, future Adjusted EBITDA margin estimates, future
general and administrative expense rates, and the industry’s weighted average cost of capital and industry
specific market comparable Adjusted EBITDA multiples. The Company also must estimate residual values
at the end of the forecast period and future capital expenditure requirements. Each of these assumptions
requires the Company to use its knowledge of its industry, its recent transactions, and reasonable
performance expectations for its operations. If any one of the above assumptions changes or fails to
materialize, the resulting decline in the Company’s estimated fair value could result in an impairment
charge to the goodwill associated with any one of the reporting units.
Impairment tests are required to be conducted at least annually or when events or conditions occur
that might suggest a possible impairment. These events or conditions include, but are not limited to: a
significant adverse change in the business environment, 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. The occurrence of one of these
events or conditions could significantly impact an impairment assessment, necessitating an impairment
charge. For purposes of goodwill impairment assessment, the Company has defined its reporting units as
specialty hospitals, outpatient rehabilitation, and Concentra. Goodwill is assigned to reporting units based
upon the specific nature of the business acquired. 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. The Company’s most
recent impairment assessment was completed during the fourth quarter of 2016 utilizing financial
F-13
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
information as of October 1, 2016 and indicated that there was no impairment with respect to goodwill or
other identifiable intangible assets.
Identifiable assets and liabilities acquired in connection with business combinations accounted for
under the purchase method are recorded at their respective fair values. Deferred income taxes have been
recorded to the extent of differences between the fair value and the tax basis of the assets acquired and
liabilities assumed. The Company allocates the purchase price to identifiable intangible assets. At
December 31, 2016, identifiable intangible assets and liabilities consist of the values assigned to
trademarks, certificates of need, accreditations, customer relationships, non-compete agreements, and
leasehold interests. Management believes that the estimated useful lives established are reasonable based
on the economic factors applicable to each of the identifiable intangible assets and liabilities.
The approximate useful life of each class of intangible assets and liabilities is as follows:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of need . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accreditations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite
Indefinite
Indefinite
8 - 16 years
1 - 9 years
1 - 15 years
The Company reviews the realizability of identifiable intangible assets whenever events or
circumstances occur which indicate recorded amounts may not be recoverable.
If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the
Company recognizes an impairment loss to the extent the carrying amount of the assets exceeds their
estimated fair value.
Equity Method Investments
Investments in equity method investees are accounted for using the equity method based upon the
level of ownership and/or the Company’s ability to exercise significant influence over the operating and
financial policies of the investee. Investments of this nature are recorded at original cost and adjusted
periodically to recognize the Company’s proportionate share of the investees’ net income or losses after
the date of investment. When net losses from an investment accounted for under the equity method
exceeds its carrying amount, the investment balance is reduced to zero. The Company resumes accounting
for the investment under the equity method if the entity subsequently reports net income and the
Company’s share of that net income exceeds the share of the net losses not recognized during the period
the equity method was suspended. Investments are written down only when there is clear evidence that a
decline in value that is other than temporary has occurred. The Company evaluates its investments in
companies accounted for using the equity method for impairment when there is evidence or indicators that
a decrease in value may be other than temporary.
Debt Issuance Costs
Debt issuance costs related to notes and loans are recognized as a direct deduction from the carrying
value of the debt liability on the consolidated balance sheets. Debt issuance costs related to line-of-credit
arrangements are presented as part of other assets on the consolidated balance sheets. Debt issuance costs
F-14
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
are subsequently amortized and recognized as interest expense using the effective interest method over the
term of the related indebtedness. Whenever indebtedness is modified from its original terms or exchanged,
an evaluation is made whether an accounting modification or accounting extinguishment has occurred.
Due to Third-Party Payors
Due to third-party payors represents the difference between amounts received under interim payment
plans from Medicare and Medicaid for services rendered and amounts estimated to be reimbursed by
those third-party payors upon settlement of cost reports.
Income Taxes
Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary
differences between the book and tax basis of recorded assets and liabilities. Deferred tax assets are
reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax
asset will not be realized. As part of the process of preparing its consolidated financial statements, the
Company estimates income taxes based on its actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for book and tax purposes. The
Company also recognizes as deferred tax assets the future tax benefits from net operating loss carry
forwards. The Company evaluates the realizability of these deferred tax assets by assessing their valuation
allowances and by adjusting the amount of such allowances, if necessary. Among the factors used to assess
the likelihood of realization are projections of future taxable income streams, the expected timing of the
reversals of existing temporary differences, and the impact of tax planning strategies that could be
implemented to avoid the potential loss of future tax benefits.
Reserves for uncertain tax positions are established for exposure items related to various federal and
state tax matters. Income tax reserves are recorded when an exposure is identified and when, in the
opinion of management, it is more likely than not that a tax position will not be sustained and the amount
of the liability can be estimated.
Insurance Risk Programs
Under a number of the Company’s insurance programs, which include the Company’s employee
health insurance, workers’ compensation, and professional malpractice liability insurance programs, the
Company is liable for a portion of its losses before it can attempt to recover from the applicable insurance
carrier. The Company accrues for losses for which it will be ultimately responsible under an occurrence-
based approach whereby the Company estimates the losses that will be incurred in a respective accounting
period and accrues that estimated liability using actuarial methods. These programs are monitored
quarterly and estimates are revised as necessary to take into account additional information.
Non-Controlling Interests
The ownership interests held by other parties in subsidiaries, limited liability companies and limited
partnerships controlled by the Company are classified as non-controlling interests.
Some of our non-controlling ownership interests consist of outside parties that have certain
redemption rights that, if exercised, require the Company to purchase the parties ownership interest.
These interests are classified and reported as redeemable non-controlling interests and they have been
F-15
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
adjusted to their approximate redemption values. As of December 31, 2015 and 2016, the Company
believes the redemption amounts of these ownership interests approximate the fair value of those interests.
Net income (loss) of entities controlled by the Company that are less than wholly owned require
attribution of net income (loss) amounts to each non-controlling ownership interest and to the Company in
the consolidated statements of operations and comprehensive income.
The following table summarizes the net income (loss) attributable to non-controlling interests and
redeemable non-controlling interests. The results of Holdings are identical to those of Select.
Attributable to non-controlling interests . . . . . . . . . . . .
Attributable to redeemable non-controlling interests . . .
$6,138
1,410
(in thousands)
$ 7,450
(2,190)
$ (2,620)
12,479
Net income attributable to non-controlling interests . . . .
$7,548
$ 5,260
$ 9,859
For the Years Ended
December 31,
2014
2015
2016
Revenue Recognition
Net operating revenues consists primarily of patient service revenues and revenues generated from
services provided to healthcare institutions under contractual arrangements and are recognized as services
are rendered.
Patient service revenue is reported net of provisions for contractual allowances from third-party
payors and patients. The Company has agreements with third-party payors that provide for payments to
the Company at amounts different from its established billing rates. The differences between the estimated
program reimbursement rates and the standard billing rates are accounted for as contractual adjustments,
which are deducted from gross revenues to arrive at net operating revenues. Payment arrangements
include prospectively determined rates per discharge, reimbursed costs, discounted charges, per diem, and
per visit payments. Retroactive adjustments are accrued on an estimated basis in the period the related
services are rendered and adjusted in future periods as final settlements are determined. Accounts
receivable resulting from such payment arrangements are recorded net of contractual allowances.
A significant portion of the Company’s net operating revenues are generated directly from the
Medicare program. Net operating revenues generated directly from the Medicare program represented
approximately 45%, 37% and 30% of the Company’s net operating revenues for the years ended
December 31, 2014, 2015 and 2016, respectively. Approximately 24% and 18% of the Company’s accounts
receivable (after allowances for contractual adjustments but before doubtful accounts) are from Medicare
at December 31, 2015 and 2016, respectively. As a provider of services to the Medicare program, the
Company is subject to extensive regulations. The inability of any of the Company’s specialty hospitals or
outpatient rehabilitation clinics to comply with regulations can result in significant changes in that specialty
hospital’s or outpatient rehabilitation clinic’s net operating revenues generated from the Medicare
program.
F-16
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board (the ‘‘FASB’’) issued Accounting
Standards Update (‘‘ASU’’) 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than
Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity
asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the
income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer
occurs. The standard will be effective for fiscal years beginning after December 15, 2017. The Company is
currently evaluating the standard to determine the impact it will have on its consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of
Certain Cash Receipts and Cash Payments, which addresses the diversity in practice in how certain cash
receipts and cash payments are presented and classified in the statement of cash flows. The standard will
be effective for fiscal years beginning after December 15, 2017. The Company does not anticipate changes
to current accounting policies or the need to retrospectively adjust previously presented consolidated
financial statements as a result of the adoption of the guidance in the new standard.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU includes a lessee accounting
model that recognizes two types of leases; finance and operating. This ASU requires that a lessee
recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve
months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a
lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be
classified as either operating or finance. The recognition, measurement, and presentation of expenses and
cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.
For short-term leases of twelve months or less, lessees are permitted to make an accounting election by
class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected,
lease expense would be recognized generally on the straight-line basis over the respective lease term.
The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as
of the beginning of an interim or annual reporting period. A modified retrospective approach is required
for leases that exist or are entered into after the beginning of the earliest comparative period in the
financial statements.
Upon adoption, the Company will recognize significant assets and liabilities on the consolidated
balance sheets as a result of the operating lease obligations of the Company. Operating lease expense will
still be recognized as rent expense on a straight-line basis over the respective lease term in the consolidated
statements of operations and comprehensive income.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes,
which changes the presentation of deferred income taxes. The intent is to simplify the presentation of
deferred income taxes through the requirement that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. The revised guidance is effective for annual fiscal
periods beginning after December 15, 2016. Early adoption is permitted. The Company will adopt the
guidance in this ASU in the first quarter of 2017. Upon adoption, deferred tax assets and liabilities will no
longer be classified as current and will instead be classified as noncurrent on the consolidated balance
F-17
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
sheets. The Company will still be required to offset deferred tax assets and liabilities for each taxpaying
entity within a tax jurisdiction.
In May 2014, March 2016, April 2016, and December 2016, the FASB issued ASU 2014-09, Revenue
from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent
Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations
and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and
Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customer (collectively ‘‘the standards’’), respectively, which supersede most of the current
revenue recognition requirements. The core principle of the new guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers are also required. The original standards were effective for fiscal years beginning
after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards,
with a new effective date for fiscal years beginning after December 15, 2017. The standards require the
selection of a retrospective or cumulative effect transition method. The Company will adopt the guidance
beginning January 1, 2018, using a retrospective transition method.
The Company anticipates the most significant change will be how the estimate for the allowance for
doubtful accounts will be recognized under the new standards. Under the current standards, the
Company’s estimate for amounts not expected to be collected based on our historical experience have been
recorded to bad debt expense. Under the new standards, the Company’s estimate for amounts not
expected to be collected based on historical experience will be recognized as a reduction to revenue.
Subsequent changes in estimates of collectability due to a change in the financial status of a payor, for
example a bankruptcy, will continue to be recognized as bad debt expense. Amounts previously written off
to the allowance for bad debts as a result of our inability to collect payment will be recognized as a
reduction to revenue under the new standard.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation, which simplifies
various aspects of accounting for share-based payments. The areas for simplification involve several
aspects of the accounting for share-based payment transactions, including the income tax consequences
and classification on the statements of cash flows. During the fourth quarter of 2016, the Company
adopted and applied the standard on a prospective basis beginning January 1, 2016. The Company has
elected to recognize the effect of forfeitures in compensation cost when they occur. There was no
retrospective impact to the consolidated financial statements, including the consolidated statements of
cash flows, as a result of the adoption of this standard.
In April and August 2015, the FASB issued ASU 2015-03 and ASU 2015-15, each titled Interest—
Imputation of Interest, to simplify the presentation of debt issuance costs. The standard requires debt
issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt
liability. The FASB also confirmed that debt issuance costs related to line-of-credit arrangements will
continue to be recognized as an asset and amortized over the term of the arrangement. The Company
adopted the standard at the beginning of the first quarter of 2016. The balance sheet as of December 31,
2015 was retrospectively conformed to reflect the adoption of the standard and approximately
$38.0 million of unamortized debt issuance costs were reclassified to be a direct reduction of debt, rather
than a component of other assets.
F-18
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions
Physiotherapy Acquisition
On March 4, 2016, Select acquired 100% of the issued and outstanding equity securities of
Physiotherapy Associates Holdings, Inc. (‘‘Physiotherapy’’) for $406.3 million, net of $12.3 million of cash
acquired. Select financed the acquisition using a combination of cash on hand and proceeds from an
incremental term loan facility under the Select credit facilities, as defined below (refer to Note 8). For the
year ended December 31, 2016, $3.2 million of Physiotherapy acquisition costs were recognized in general
and administrative expense.
Physiotherapy is a national provider of outpatient physical rehabilitation care offering a wide range of
services, including general orthopedics, spinal care and neurological rehabilitation, as well as orthotics and
prosthetics services.
For the Physiotherapy acquisition, the Company allocated the purchase price to tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair value in
accordance with the provisions of Accounting Standards Codification (‘‘ASC’’) 805, Business Combinations.
During the year ended December 31, 2016, the Company finalized the accounting for identifiable
intangible assets and liabilities, fixed assets, non-controlling interests, and certain pre-acquisition
contingencies. The Company is in the process of completing the accounting for certain deferred tax
matters, which is expected to be completed during the first quarter of 2017.
The following table reconciles the allocation of the consideration given for identifiable net assets and
goodwill acquired to the net cash paid for the acquired business (in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable tangible assets, excluding cash and cash equivalents . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 12,340
87,832
32,484
343,019
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . . . . . .
475,675
54,517
2,514
418,644
(12,340)
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$406,304
The fair value assigned to identifiable intangible assets was determined through the use of the income
and cost approaches. Both valuation methods rely on management judgment including expected future
cash flows, employee attrition rates, contributory effects of other assets utilized in the business, peer group
cost of capital and royalty rates, and other factors. Useful lives for identifiable intangible assets were
determined based upon the remaining useful economic lives of the identifiable intangible assets that are
expected to contribute directly or indirectly to future cash flows. The valuations of tangible assets were
derived using a combination of the market and cost approaches. Significant judgments used in valuing
F-19
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions (Continued)
tangible assets include estimated reproduction or replacement cost, useful lives of assets, and estimated
selling prices.
Non-compete agreements . . . . . . . . . . . . . . . . . . . .
Leasehold interests . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
(in thousands)
$24,234
4,160
4,090
Weighted Average
Amortization Period
(in years)
14.8
3.5
Indefinite
Total identifiable intangible assets
. . . . . . . . . . . . .
$32,484
Intangible liabilities acquired included unfavorable leasehold interests of $1.9 million with a weighted
average amortization period of 3.9 years. The non-compete agreements are being amortized on a
straight-line basis over their expected useful lives. Leasehold interests are being amortized over their
remaining lease terms at time of acquisition.
Goodwill of $343.0 million has been recognized in the business combination, representing the excess
of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is
derived from Physiotherapy’s future earnings potential and its assembled workforce. Goodwill has been
assigned to the outpatient rehabilitation reporting unit and is not deductible for tax purposes. However,
prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in tax
deductible goodwill with an estimated value of $8.8 million, which the Company will deduct through 2030.
Due to the integration of Physiotherapy into our outpatient rehabilitation operations, it is not
practicable to separately identify net revenue and earnings of Physiotherapy on a stand-alone basis.
Concentra Acquisition
On June 1, 2015, MJ Acquisition Corporation, a joint venture that Select created with Welsh, Carson,
Anderson & Stowe XII, L.P., consummated the acquisition of Concentra, the indirect operating subsidiary
of Concentra Group Holdings, LLC, and its subsidiaries. Pursuant to the terms of the stock purchase
agreement, dated as of March 22, 2015, by and among MJ Acquisition Corporation, Concentra and
Humana Inc., MJ Acquisition Corporation acquired 100% of the issued and outstanding equity securities
of Concentra from Humana, Inc. for $1,047.2 million, net of $3.8 million of cash acquired.
During the year ended December 31, 2015, the Company finalized the accounting for identifiable
intangible assets and liabilities, fixed assets, non-controlling interests, and certain pre-acquisition
contingencies. During the quarter ended June 30, 2016, the Company completed the accounting for certain
deferred tax matters.
F-20
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions (Continued)
The following table reconciles the allocation of the consideration given for identifiable net assets and
goodwill acquired to the net cash paid for the acquired business (in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable tangible assets, excluding cash and cash equivalents . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,772
406,926
254,990
651,152
1,316,840
248,797
17,084
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . . . . .
1,050,959
(3,772)
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,047,187
Goodwill of $651.2 million was recognized in the business combination, representing the excess of the
consideration given over the fair value of the identifiable net assets acquired. The value of goodwill is
derived from Concentra’s future earnings potential and its assembled workforce. The goodwill is assigned
to the Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition by
MJ Acquisition Corporation, Concentra completed certain acquisitions that resulted in tax deductible
goodwill with an estimated value of $23.9 million, which the Company will deduct through 2025.
For the year ended December 31, 2016, Concentra had net revenue of $1.0 billion and net income of
approximately $14.9 million which are reflected in the Company’s consolidated statements of operations
and comprehensive income.
Pro Forma Results
The following pro forma unaudited results of operations have been prepared assuming the
acquisitions of Concentra and Physiotherapy occurred January 1, 2014 and 2015, respectively. These results
are not necessarily indicative of results of future operations nor of the results that would have actually
occurred had the acquisitions been consummated on the aforementioned dates.
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income per common share:
For the Years Ended
December 31,
2015
2016
(in thousands, except per
share amounts)
$4,477,088
119,763
$4,339,551
113,590
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.91
0.91
$
$
0.86
0.86
The pro forma financial information is based on the allocation of the purchase price of both the
Concentra and Physiotherapy acquisitions. The net income tax impact was calculated at a statutory rate, as
F-21
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions (Continued)
if Concentra and Physiotherapy had been subsidiaries of the Company as of January 1, 2014 and 2015,
respectively.
Pro forma results were adjusted to recognize Concentra acquisition costs in the year ended
December 31, 2014 and Physiotherapy acquisition costs in the year ended December 31, 2015. Therefore,
pro forma results for the year ended December 31, 2015 were adjusted to include $3.2 million of
Physiotherapy acquisition costs and exclude $4.7 million of Concentra acquisition costs. Pro forma results
for the year ended December 31, 2016 were adjusted to exclude approximately $3.2 million of
Physiotherapy acquisition costs.
Other Acquisitions
The Company completed acquisitions consisting principally of specialty hospital and outpatient
rehabilitation businesses during the year ended December 31, 2014. Consideration given for these
acquisitions consisted of $1.2 million of cash, net of cash received, and the issuance of $1.7 million of
non-controlling interests. The assets received in these acquisitions consisted principally of accounts
receivable, property and equipment, and goodwill of $1.9 million, of which $0.9 million and $1.0 million
was recognized in our specialty hospitals and outpatient rehabilitation reporting units, respectively.
In addition to the acquisition of Concentra, the Company completed acquisitions consisting
principally of specialty hospital and other Concentra businesses during the year ended December 31, 2015.
Consideration given for these acquisitions consisted of $14.4 million of cash, net of cash received, and the
issuance of $14.7 million of non-controlling interests. The assets received in these acquisitions consisted
principally of accounts receivable, property and equipment, and goodwill, of which $21.9 million and
$4.2 million was recognized in our specialty hospitals and Concentra reporting units, respectively.
In addition to the acquisition of Physiotherapy, the Company completed acquisitions consisting of
specialty hospital, outpatient rehabilitation, and Concentra businesses during the year ended December 31,
2016. Consideration given for these acquisitions consisted of $65.6 million of cash, net of cash received, the
issuance of $38.3 million of non-controlling interests, and $17.7 million of business net assets. The
Company’s acquisition of certain hospitals resulted in a non-operating gain totaling $9.5 million due, in
part, to a bargain purchase because the fair values of the identifiable assets acquired exceeded the fair
value of the consideration given in an exchange transaction. The assets received in these acquisitions
consisted principally of cash, real property, and goodwill, of which $96.8 million, $2.3 million, and
$4.6 million of goodwill was recognized in our specialty hospitals, outpatient rehabilitation, and Concentra
reporting units, respectively.
3. Sale of Businesses
The Company recognized non-operating gains of $35.6 million resulting from the sale of businesses
during the year ended December 31, 2016. The non-operating gains were the result of the sale of the
Company’s contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million,
and the sale of nine outpatient rehabilitation clinics to an entity the Company holds as an equity method
investment, resulting in a non-operating gain of $1.7 million.
F-22
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Property and Equipment
The Company’s property and equipment consists of the following:
December 31,
2015
2016
(in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . .
$
76,118
295,647
411,376
382,838
146,868
$
76,987
309,504
421,017
432,944
164,516
Total property and equipment . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . .
1,312,847
(448,723)
1,404,968
(512,751)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . .
$ 864,124
$ 892,217
Depreciation expense was $67.9 million, $96.1 million, and $129.0 million for the years ended
December 31, 2014, 2015 and 2016, respectively.
F-23
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Intangible Assets and Liabilities
The Company’s goodwill and identifiable intangible assets and liabilities consist of the following:
Gross
Carrying
Amount
2015
Accumulated
Amortization
December 31,
Net
Carrying
Amount
Gross
Carrying
Amount
(in thousands)
2016
Accumulated
Amortization
Net
Carrying
Amount
Goodwill . . . . . . . . . . . .
$2,314,624
$ — $2,314,624
$2,751,000
$
— $2,751,000
Identifiable intangibles—
Indefinite lived assets:
Trademarks . . . . . . . . .
Certificates of need . . .
Accreditations . . . . . . .
Identifiable intangibles—
Finite lived assets:
Customer relationships
Favorable leasehold
162,609
13,022
2,045
—
—
—
162,609
13,022
2,045
166,698
17,026
2,235
—
—
—
166,698
17,026
2,235
141,265
(8,514)
132,751
142,198
(23,185)
119,013
interests . . . . . . . . .
8,825
(577)
8,248
13,089
(2,317)
10,772
Non-compete
agreements . . . . . . .
—
—
—
26,655
(1,837)
24,818
Total identifiable
intangible assets . . . . .
$ 327,766
$(9,091)
$ 318,675
$ 367,901
$(27,339)
$ 340,562
Identifiable intangibles—
Finite lived liabilities:
Unfavorable leasehold
interests . . . . . . . . .
$
3,257
$ (292)
$
2,965
$
5,139
$ (1,410)
$
3,729
The Company’s customer relationships and non-compete agreements amortize over their estimated
useful lives. Amortization expense was $0.5 million, $8.9 million, and $16.3 million for the years ended
December 31, 2014, 2015, and 2016, respectively. Estimated amortization expense of the Company’s
customer relationships and non-compete agreements for each of the five succeeding years is $16.4 million
annually.
The Company’s favorable leasehold assets and unfavorable leasehold liabilities are amortized to rent
expense over the remaining term of their respective leases to reflect a market rent per period based upon
the market conditions present at the acquisition date. The Company’s unfavorable leasehold interests are
presented as part of accrued other and other non-current liabilities on the consolidated balance sheets.
The Company’s accreditations and trademarks have renewal terms. The costs to renew these
intangibles are expensed as incurred. At December 31, 2016, the accreditations and trademarks have a
weighted average time until next renewal of 1.5 years and 2.9 years, respectively.
F-24
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Intangible Assets and Liabilities (Continued)
The changes in goodwill for the years ended December 31, 2015 and 2016 are as follows:
Specialty
Hospitals
Outpatient
Rehabilitation
Concentra
Total
Balance as of January 1, 2015 . . . . . . . . . . . . . . . . .
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,335,460
21,919
—
Balance as of December 31, 2015 . . . . . . . . . . . . . .
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Measurement period adjustment . . . . . . . . . . . . . . .
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,357,379
96,785
—
(6,758)
(in thousands)
$306,623
—
(28)
$306,595
345,355
—
(8,393)
$
— $1,642,083
672,569
(28)
650,650
—
$650,650
4,562
4,825
—
$2,314,624
446,702
4,825
(15,151)
Balance as of December 31, 2016 . . . . . . . . . . . . . .
$1,447,406
$643,557
$660,037
$2,751,000
See Note 2 for details of the goodwill acquired during the period.
6. Equity Method Investments
The Company’s equity method investments consist principally of interests in specialty hospital and
outpatient rehabilitation businesses. Equity method investments of $101.4 million and $100.0 million are
presented as part of other assets on the consolidated balance sheets as of December 31, 2015 and 2016,
respectively. As of December 31, 2015 and 2016, these businesses consist primarily of the following
ownership interests:
BIR JV, LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OHRH, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GlobalRehab—Scottsdale, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rehabilitation Institute of Denton, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ES Rehabilitation, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49.0%
49.0%
49.0%
50.0%
49.0%
The Company provides contracted services, principally employee leasing services, and charges
management fees to related parties affiliated through its equity investments. Net operating revenues
generated from contracted services and management fees charged to related parties affiliated through the
Company’s equity investments were $129.3 million, $146.0 million, and $164.2 million for the years ended
December 31, 2014, 2015 and 2016, respectively.
During the year ended December 31, 2016, the Company recognized a non-operating loss of
$5.1 million related to the sale of an equity method investment. Additionally, the Company received
contingent proceeds related to the final settlement of its 2015 sale of an equity method investment,
resulting in a non-operating gain of $2.5 million recognized during the year ended December 31, 2016.
During the year ended December 31, 2015, the Company recognized a non-operating gain of
$29.6 million related to the sale of an equity method investment.
F-25
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Insurance Risk Programs
Under a number of the Company’s insurance programs, which include the Company’s employee
health insurance, workers’ compensation, and professional malpractice liability insurance programs, the
Company is liable for a portion of its losses before it can attempt to recover from the applicable insurance
carrier. The Company accrues for losses for which it will be ultimately responsible under an occurrence-
based approach whereby the Company estimates the losses that will be incurred in a respective accounting
period and accrues that estimated liability using actuarial methods. Provisions for losses for professional
liability risks retained by the Company at December 31, 2015 and 2016 have been discounted at 3%. At
December 31, 2015 and 2016, respectively, the Company had recorded a liability of $157.4 million and
$147.4 million related to these programs. If the Company did not discount the provisions for losses for
professional liability risks, the aggregate liability for all of the insurance risk programs would be
approximately $165.8 million and $152.7 million at December 31, 2015 and 2016, respectively.
8. Long-Term Debt and Notes Payable
For purposes of this indebtedness footnote, references to Select exclude Concentra because the
Concentra credit facilities are non-recourse to Holdings and Select.
The Company’s long-term debt and notes payable consist of the following:
December 31,
2015
2016
(in thousands)
$ 700,867
$ 702,545
295,000
743,071
11,987
220,000
1,122,203
22,688
2,067,436
8,996
Select 6.375% senior notes(1) . . . . . . . . . . . . . . . . . . . . . . .
Select credit facilities:
Select revolving facility . . . . . . . . . . . . . . . . . . . . . . . . .
Select term loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—Select . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Select debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Select current maturities . . . . . . . . . . . . . . . . . . . . .
1,750,925
222,905
Select long-term debt maturities . . . . . . . . . . . . . . . . . . . .
$1,528,020
$2,058,440
Concentra credit facilities:
Concentra revolving facility . . . . . . . . . . . . . . . . . . . . . .
Concentra term loans(3) . . . . . . . . . . . . . . . . . . . . . . . . .
Other—Concentra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total Concentra debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Concentra current maturities . . . . . . . . . . . . . . . . . .
5,000
624,659
5,312
634,971
2,261
$
—
626,375
5,178
631,553
4,660
Concentra long-term debt maturities . . . . . . . . . . . . . . . . .
$ 632,710
$ 626,893
Total current maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt maturities . . . . . . . . . . . . . . . . . . . . .
$ 225,166
2,160,730
$
13,656
2,685,333
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,385,896
$2,698,989
(1) Includes unamortized premium of $1.2 million and $1.0 million at December 31, 2015 and
2016, respectively. Includes unamortized debt issuance costs of $10.4 million and $8.5 million
at December 31, 2015 and 2016, respectively.
F-26
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
(2) Includes unamortized discounts of $2.8 million and $12.0 million at December 31, 2015 and
2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $13.6 million
at December 31, 2015 and 2016, respectively.
(3) Includes unamortized discounts of $2.9 million and $2.8 million at December 31, 2015 and
2016, respectively. Includes unamortized debt issuance costs of $20.2 million and
$13.1 million at December 31, 2015 and 2016, respectively.
Select Credit Facilities
The following discussion summarizes amendments and significant transactions affecting the term loan
facilities (collectively, the ‘‘Select term loans’’) and the revolving credit facility (the ‘‘Select revolving
facility’’ and together with the Select term loans, the ‘‘Select credit facilities’’).
On March 4, 2014, Select amended the Select credit facilities in order to, among other things:
(i) convert the remaining series B tranche B term loans into series D tranche B term loans and lower the
interest rate payable on the series D tranche B term loans from Adjusted LIBO plus 3.25%, or Alternate
Base Rate plus 2.25%, to Adjusted LIBO plus 2.75%, or Alternate Base Rate plus 1.75%; (ii) set the
maturity date of the series D tranche B term loans at December 20, 2016; (iii) convert the remaining
series C tranche B term loans to new series E tranche B term loans and lower the interest rate payable on
the series E tranche B term loans from Adjusted LIBO plus 3.00% (subject to an Adjusted LIBO Rate
floor of 1.00%), or Alternate Base Rate plus 2.00%, to Adjusted LIBO plus 2.75% (subject to an Adjusted
LIBO Rate floor of 1.00%), or Alternate Base Rate plus 1.75%; (iv) set the maturity date of the series E
tranche B term loans at June 1, 2018; (v) beginning with the quarter ending March 31, 2014, increase the
quarterly compliance threshold set forth in the leverage ratio financial maintenance covenant to a level
of 5.00 to 1.00 from 4.50 to 1.00; (vi) provide for a prepayment premium of 1.00% if the Select credit
facilities are amended at any time prior to March 4, 2015 in the case of the series E tranche B term loans
and such amendment reduces the yield applicable to such loans; and (vii) amend the definition of
‘‘Available Amount’’ in a manner the effect of which was to increase the amount available for investments,
restricted payments and the payment of specified indebtedness.
On March 4, 2014, Select made a principal prepayment of $34.0 million associated with the Select
term loans in accordance with the provision in the Select credit facilities that requires mandatory
prepayments of term loans resulting from excess cash flow as defined in the Select credit facilities.
On October 23, 2014, Select entered into two additional credit extension amendments, one of which
extended the maturity date on $6.75 million in aggregate principal of revolving commitments from June 1,
2016 to March 1, 2018, the second of which added $50.0 million in incremental revolving commitments that
mature on March 1, 2018.
On March 4, 2015, Select made a principal prepayment of $26.9 million associated with the series D
tranche B term loans and series E tranche B term loans in accordance with the provision in the Select
credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow as
defined in the Select credit facilities.
On May 20, 2015 Select entered into an additional credit extension amendment of the Select revolving
facility to obtain $100.0 million of incremental revolving commitments. The revolving commitments mature
on March 1, 2018.
F-27
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
On December 11, 2015, Select amended the Select credit facilities in order to, among other things:
(i) convert $56.2 million of its series D tranche B term loans into series E tranche B term loans, which have
a maturity date of June 1, 2018; (ii) increase the interest rate payable on the series E tranche B term loans
from Adjusted LIBO plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base
Rate plus 1.75%, to Adjusted LIBO plus 4.00% (subject to an Adjusted LIBO Rate floor of 1.00%), or
Alternate Base Rate plus 3.00%; (iii) beginning with the quarter ending December 31, 2015, increase the
quarterly compliance threshold set forth in the leverage ratio financial maintenance covenant to a level
of 5.75 to 1.00 from 5.00 to 1.00; (iv) increase the capacity for incremental extensions of credit to
$450.0 million; and (v) amend the definition of ‘‘consolidated EBITDA’’ to add back certain specialty
hospital start-up losses.
On March 2, 2016, Select made a principal prepayment of $10.2 million associated with the series D
tranche B term loans and series E tranche B term loans in accordance with the provision in the Select
credit facilities that requires mandatory repayments of term loans as a result of annual excess cash flow as
defined in the Select credit facilities.
On March 4, 2016, Select amended the Select credit facilities in order to, among other things: (i) have
the lenders named therein make available an aggregate of $625.0 million series F tranche B term loans,
(ii) extend the financial covenants through March 3, 2021, (iii) add a 1.00% prepayment premium for
prepayments made with new term loans on or prior to March 4, 2017 if such new term loans have a lower
yield than the series F tranche B term loans, (iv) increase the interest rate payable on the series E
tranche B term loans from Adjusted LIBO plus 4.00% (subject to an Adjusted LIBO Rate floor of 1.00%),
or Alternate Base Rate plus 3.00%, to Adjusted LIBO plus 5.00% (subject to an Adjusted LIBO Rate floor
of 1.00%), or Alternate Base Rate plus 4.00%; and (v) made certain other technical amendments to the
Select credit facilities. The series F tranche B term loans bear interest at a rate per annum equal to the
Adjusted LIBO Rate (as defined in the Select credit facilities, subject to an Adjusted LIBO Rate floor of
1.00%) plus 5.00% for Eurodollar Loans or the Alternate Base Rate (as defined in the Select credit
facilities) plus 4.00% for Alternate Base Rate Loans (as defined in the Select credit facilities). Select is
required to make principal payments on the series F tranche B term loans in quarterly installments on the
last day of each of March, June, September and December, beginning June 30, 2016, in amounts equal to
0.25% of the aggregate principal amount of the series F tranche B term loans outstanding as of the date of
the credit extension amendment. The balance of the series F tranche B term loans is payable on March 3,
2021.
Except as specifically set forth in the credit extension amendment, the terms and conditions of the
series F tranche B term loans are identical to the terms of the outstanding series E tranche B term loans
under the Select credit facilities and the other loan documents to which Select is party.
Select used the proceeds of the series F tranche B term loans to: (i) refinance in full the series D
tranche B term loans due December 20, 2016, (ii) consummate the acquisition of Physiotherapy, and
(iii) pay fees and expenses incurred in connection with the acquisition of Physiotherapy, the refinancing,
and the Select credit extension amendment.
At December 31, 2016, Select’s credit facilities consisted of a $527.4 million series E tranche B term
loans (excluding unamortized original issue discounts and debt issuance costs totaling $4.8 million) which
matures on June 1, 2018, $620.3 million series F tranche B term loans (excluding unamortized original
issue discounts and debt issuance costs totaling $20.7 million) which matures on March 3, 2021, and a
$450.0 million revolving facility which matures on March 1, 2018. At December 31, 2016, Select had
F-28
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
$190.3 million of availability under the Select revolving facility after giving effect to $39.7 million of
outstanding letters of credit.
All borrowings under Select’s credit facilities are subject to the satisfaction of required conditions,
including the absence of a default at the time of and after giving effect to such borrowing and the accuracy
of the representations and warranties of the borrowers.
The interest rates per annum applicable to borrowings under Select’s credit facilities are, at its option,
equal to either an Alternate Base Rate or an Adjusted LIBO Rate for a one, two, three or six month
interest period, or a nine or twelve month period if available, in each case, plus an applicable margin
percentage. The Alternate Base Rate is the greatest of (i) JPMorgan Chase Bank, N.A.’s prime rate,
(ii) one-half of 1% over the weighted average of rates on overnight federal funds as published by the
Federal Reserve Bank of New York and (iii) the Adjusted LIBO Rate from time to time for an interest
period of one month, plus 1.00%. The Adjusted LIBO Rate is, with respect to any interest period, the
London interbank offered rate for such interest period, adjusted for any applicable statutory reserve
requirements.
Borrowings under the revolving facility bear interest at a rate equal to Adjusted LIBO plus a
percentage ranging from 2.75% to 3.75%, or Alternate Base Rate plus a percentage ranging from 1.75% to
2.75%, in each case based on Select’s ratio of total indebtedness to consolidated EBITDA (as defined in
the Select credit facilities). The applicable margin percentage for borrowings under the Select revolving
facility is subject to change based upon the ratio of Select’s leverage ratio (as defined in the Select credit
facilities). The applicable interest rate for revolving loans as of December 31, 2016 was the (1) Alternate
Base Rate plus 2.75% for Alternate Base Rate Loans and the (2) Adjusted LIBO Rate plus 3.75% for
Eurodollar Loans.
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
subject to adjustment based upon the ratio of Select’s total indebtedness to consolidated EBITDA (as
defined in the Select credit facilities).
Subject to exceptions, the Select credit facilities require mandatory prepayments of Select term loans
in amounts equal to:
(cid:127) 50% (as may be reduced based on Select’s ratio of total indebtedness to consolidated EBITDA (as
defined in the Select credit facilities)) of Select’s annual excess cash flow;
(cid:127) 100% of the net cash proceeds from non-ordinary course asset sales or other dispositions, or as a
result of a casualty or condemnation event, subject to reinvestment rights and certain other
exceptions; and
(cid:127) 100% of the net cash proceeds from certain incurrences of debt.
Select’s credit facilities are guaranteed by Holdings, Select and substantially all of its current wholly
owned subsidiaries, and will be guaranteed by substantially all of Select’s future subsidiaries and secured by
substantially all of Select’s existing and future property and assets and by a pledge of its capital stock and
the capital stock of its subsidiaries.
Select’s credit facilities require that it comply on a quarterly basis with certain financial covenants,
including a maximum leverage ratio test.
F-29
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
In addition, Select’s credit facilities include negative covenants, subject to significant exceptions,
restricting or limiting its ability and the ability of Holdings and Select’s restricted subsidiaries, to, among
other things:
(cid:127) incur, assume, permit to exist or guarantee additional debt and issue or sell or permit any subsidiary
to issue or sell preferred stock;
(cid:127) amend, modify or waive any rights under the certificate of indebtedness, credit agreements,
certificate of incorporation, bylaws or other organizational documents which would be materially
adverse to the creditors;
(cid:127) pay dividends or other distributions on, redeem, repurchase, retire or cancel capital stock;
(cid:127) purchase or acquire any debt or equity securities of, make any loans or advances to, guarantee any
obligation of, or make any other investment in, any other company;
(cid:127) incur or permit to exist certain liens on property or assets owned or accrued or assign or sell any
income or revenues with respect to such property or assets;
(cid:127) sell or otherwise transfer property or assets to, purchase or otherwise receive property or assets
from, or otherwise enter into transactions with affiliates;
(cid:127) merge, consolidate or amalgamate with another company or permit any subsidiary to merge,
consolidate or amalgamate with another company;
(cid:127) sell, transfer, lease or otherwise dispose of assets, including any equity interests;
(cid:127) repay, redeem, repurchase, retire or cancel any subordinated debt;
(cid:127) incur capital expenditures;
(cid:127) engage to any material extent in any business other than business of the type currently conducted by
Select or reasonably related businesses; and
(cid:127) incur obligations that restrict the ability of its subsidiaries to incur or permit to exist any liens on
Select’s property or assets or to make dividends or other payments to Select.
The Select credit facilities also contain certain representations and warranties, affirmative covenants
and events of default. The events of default include payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain
events under ERISA, material judgments, actual or asserted failure of any guaranty or security document
supporting Select’s credit facilities to be in full force and effect and any change of control. If such an event
of default occurs, the lenders under the Select credit facilities will be entitled to take various actions,
including the acceleration of amounts due under the Select credit facilities and all actions permitted to be
taken by a secured creditor.
The Select credit facilities require it to maintain certain leverage ratios (as defined in the Select credit
facilities). For each of the four fiscal quarters during the year ended December 31, 2016, Select was
required to maintain its leverage ratio at less than 5.75 to 1.00. As of December 31, 2016, Select’s leverage
ratio was 5.40 to 1.00. Additionally, the Select credit facilities will require a prepayment of borrowings of
50% of excess cash
in a prepayment of
approximately $33.2 million based on excess cash flow for the year ended December 31, 2016. The
fiscal year 2016, which will result
flow
for
F-30
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
Company expects to have the borrowing capacity and intends to use borrowings under the Select revolving
facility to make the required prepayment during the quarter ended March 31, 2017.
Senior Notes
On May 28, 2013, Select issued and sold $600.0 million aggregate principal amount of 6.375% senior
notes due June 1, 2021. On March 11, 2014, Select issued and sold $110.0 million aggregate principal
amount of additional 6.375% senior notes due June 1, 2021 (the ‘‘Additional Notes’’) at 101.50% of the
aggregate principal amount resulting in gross proceeds of $111.7 million. The notes were issued as
additional notes under the indenture pursuant to which it previously issued $600.0 million of 6.375% senior
notes due June 1, 2021 (the ‘‘Existing Notes’’ and, together with the Additional Notes, the ‘‘Notes’’). The
Additional Notes are treated as a single series with the Existing Notes and have the same terms as those of
the Existing Notes.
Interest on the Notes accrues at the rate of 6.375% per annum and is payable semi-annually in cash in
arrears on June 1 and December 1 of each year. The Notes are Select’s senior unsecured obligations and
rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and
senior in right of payment to all of its existing and future subordinated indebtedness. The Notes are fully
and unconditionally guaranteed by all of Select’s wholly owned subsidiaries. The Notes are guaranteed,
jointly and severally, by Select’s direct or indirect existing and future domestic restricted subsidiaries other
than certain non-guarantor subsidiaries.
Select may redeem some or all of the Notes at the following redemption prices (expressed in
percentages of principal amount on the redemption date), plus accrued interest, if any, if redeemed during
the twelve-month period beginning on June 1 of the years indicated below:
Year
Redemption Price
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104.781%
103.188%
101.594%
100.000%
Select is obligated to offer to repurchase the Notes at a price of 101% of their principal amount plus
accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and
prohibitions are subject to certain qualifications and exceptions.
The indenture relating to the Notes contains covenants that, among other things, limit Select’s ability
and the ability of certain of its 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. In addition, the Indenture requires, among other things, Select to provide
financial and current reports to holders of the Notes or file such reports electronically with the SEC. These
covenants are subject to a number of exceptions, limitations and qualifications set forth in the Indenture.
F-31
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
Concentra credit facilities
On June 1, 2015, MJ Acquisition Corporation, as the initial borrower, entered into a first lien credit
agreement (the ‘‘Concentra credit agreement’’) and a second lien credit agreement (the ‘‘Concentra
second lien credit agreement’’). Concentra, as the surviving entity of the merger between MJ Acquisition
Corporation and Concentra, became the borrower.
The Concentra credit agreement provided for $500.0 million in first lien loans comprised of a
$450.0 million, seven-year term loan (‘‘Concentra first lien term loan’’) and a $50.0 million, five-year
revolving credit facility (the ‘‘Concentra revolving facility’’ and, together with the Concentra first lien term
loan, the ‘‘Concentra credit facilities’’). The borrowings under the Concentra credit agreement are
guaranteed, on a first lien basis, by Concentra Holdings, Inc., the direct parent of Concentra. Select and
Holdings are not parties to the Concentra credit agreement and are not obligors with respect to
Concentra’s debt under such agreement. Borrowings under the Concentra credit agreement bear interest
at a rate equal to:
(cid:127) in the case of the Concentra first lien term loan, Adjusted LIBO (as defined in the Concentra credit
agreement) plus 3.00% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate
(as defined in the Concentra credit agreement) plus 2.00% (subject to an Alternate Base Rate floor
of 2.00%); and
(cid:127) in the case of the Concentra revolving facility, Adjusted LIBO plus a percentage ranging from
2.75% to 3.00%, or Alternate Base Rate plus a percentage ranging from 1.75% to 2.00%, in each
case based on Concentra’s leverage ratio.
The Concentra second lien credit agreement provided for a $200.0 million eight-year second lien term
loan (‘‘Concentra second lien term loan’’). The borrowings under the Concentra second lien credit
agreement were guaranteed, on a second lien basis, by Concentra Holdings, Inc., the direct parent of
Concentra. Select and Holdings are not parties to the Concentra second lien credit agreement and are not
obligors with respect to Concentra’s debt under such agreement. Borrowings under the Concentra second
lien term loan bore interest at a rate equal to Adjusted LIBO Rate (as defined in the Concentra second
lien credit agreement) plus 8.00% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base
Rate (as defined in the Concentra second lien credit agreement) plus 7.00% (subject to an Alternate Base
Rate floor of 2.00%).
On September 26, 2016, Concentra entered into a credit agreement amendment to the Concentra
credit agreement dated June 1, 2015. The credit agreement amendment provided an additional
$200.0 million of first lien term loans due June 1, 2022, the proceeds of which were used to prepay in full
the Concentra second lien term loan due June 1, 2023; and also amended certain restrictive covenants to
give Concentra greater operational flexibility.
The Concentra first lien term loan amortizes in equal quarterly installments of $1.6 million through
March 31, 2022, with the remaining unamortized aggregate principal due at maturity on June 1, 2022. The
Concentra revolving facility matures on June 1, 2020.
At December 31, 2016, Concentra had outstanding borrowings under the Concentra credit facilities of
$642.2 million (excluding unamortized discounts and debt issuance costs totaling $15.9 million) of term
loans. Concentra did not have any borrowings under the Concentra revolving facility. At December 31,
F-32
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
2016, Concentra had $43.4 million of availability under its revolving facility after giving effect to
$6.6 million of outstanding letters of credit.
Concentra will be required to prepay borrowings under the Concentra credit agreement with (i) 100%
of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result
of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and the
payment of certain indebtedness secured by liens, (ii) 100% of the net cash proceeds received from the
issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow
(as defined in the Concentra credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00
and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater
than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt secured on
a pari passu basis optionally prepaid during the applicable fiscal year and the aggregate amount of
revolving commitments hereunder reduced permanently during the applicable fiscal year (other than in
connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow
if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.
The Concentra credit facilities will require a prepayment of borrowings of 25% of excess cash flow for
fiscal year 2016, which will result in a prepayment of approximately $23.1 million based on excess cash flow
for the year ended December 31, 2016. Concentra expects to have the borrowing capacity and intends to
use borrowings under the Concentra revolving facility and cash on hand to make the required prepayment
during the quarter ended March 31, 2017.
The Concentra credit agreement requires Concentra to maintain a leverage ratio (based upon the
ratio of indebtedness for money borrowed to consolidated EBITDA, as defined in the Concentra credit
agreement) of 5.75 to 1.00 which is tested quarterly, but only if Revolving Exposure (as defined in the
Concentra credit agreement) exceeds 30% of Revolving Commitments (as defined in the Concentra credit
agreement) on such day. Failure to comply with this covenant would result in an event of default under the
Concentra revolving facility only and, absent a waiver or an amendment from the lenders, preclude
Concentra from making further borrowings under the Concentra revolving facility and permit the lenders
to accelerate all outstanding borrowings under the Concentra revolving facility. Upon such acceleration,
Concentra’s failure to comply with the financial covenant would result in an event of default with respect
to the Concentra first lien term loan.
The Concentra credit facilities also contain a number of 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. The
Concentra credit facilities contain events of default for non-payment of principal and interest when due
(subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of
default that would be triggered by a change of control.
F-33
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt and Notes Payable (Continued)
Maturities of Long-Term Debt and Notes Payable
Maturities of the Company’s long-term debt and notes payable for the years after 2016 are
approximately as follows:
Select
Concentra
Total
(in thousands)
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 and beyond . . . . . . . . . . . . . . . . . . . . . . .
$
19,100
751,616
18,084
6,303
1,305,327
10
$
7,634
6,617
6,636
6,656
6,678
613,195
$
26,734
758,233
24,720
12,959
1,312,005
613,205
Total principal . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discounts and premiums . . . . . . . .
Unamortized debt issuance costs . . . . . . . . . . .
2,100,440
(10,961)
(22,043)
647,416
(2,773)
(13,090)
2,747,856
(13,734)
(35,133)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,067,436
$631,553
$2,698,989
Loss on Early Retirement of Debt
During the year ended December 31, 2014, the Company amended the Select term loans under the
Select credit facilities, resulting in a loss on early retirement of debt of $2.3 million. The loss on early
retirement of debt consisted of unamortized debt issuance costs, unamortized original issue discounts, and
certain fees incurred related to term loan modifications.
During the year ended December 31, 2016, the Company prepaid the series D tranche B term loans
under the Select credit facilities, resulting in a loss on early retirement of debt of $0.8 million. The
Company also prepaid its second lien term loan under the Concentra credit facilities, resulting in a loss on
early retirement of debt of approximately $10.9 million. The losses on early retirement of debt consisted of
a prepayment premium, unamortized debt issuance costs, and unamortized original issue discounts.
9. Fair Value
Financial instruments include cash and cash equivalents, notes payable, and long-term debt. The
carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity
of these instruments.
F-34
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Fair Value (Continued)
The face values, carrying values, and fair values of the Company’s 6.375% senior notes and credit
facilities are as follows:
December 31, 2015
December 31, 2016
Face
Value
Carrying
Value
Fair
Value
Face
Value
Carrying
Value
Fair
Value
(in thousands)
Select 6.375% senior
notes(1) . . . . . . . . . . . .
Select credit facilities(2) . .
Concentra credit
facilities(3) . . . . . . . . . .
$ 710,000
1,048,277
$ 700,867
1,038,071
$ 623,948
1,023,616
$ 710,000
1,367,751
$ 702,545
1,342,203
$ 710,000
1,370,460
652,750
629,659
645,392
642,239
626,375
644,648
(1) The carrying value includes an unamortized premium of $1.2 million and $1.0 million at December 31,
2015 and December 31, 2016, respectively, and unamortized debt issuance costs of $10.4 million and
$8.5 million at December 31, 2015 and December 31, 2016, respectively.
(2) The carrying value includes unamortized discounts of $2.8 million and $12.0 million at December 31,
2015 and December 31, 2016, respectively, and unamortized debt issuance costs of $7.4 million and
$13.6 million at December 31, 2015 and December 31, 2016, respectively.
(3) The carrying value includes unamortized discounts of $2.9 million and $2.8 million at December 31,
2015 and December 31, 2016, respectively, and unamortized debt issuance costs of $20.2 million and
$13.1 million at December 31, 2015 and December 31, 2016, respectively.
The fair value of the Select credit facilities and the Concentra credit facilities was based on quoted
market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes
debt was based on quoted market prices.
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy.
Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either
directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not
active.
10. Stockholders’ Equity
The following table summarizes the share activity for Holdings:
Restricted stock granted . . . . . . . . . . . . . . . . . . .
Common stock issued through stock option
exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested restricted stock forfeitures . . . . . . . . . .
Stock repurchases for satisfaction of tax
For the Years Ended December 31,
2014
2015
2016
1,585,775
1,384,954
1,425,678
974,969
65,000
183,450
304,000
202,100
81,500
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
237,690
182,580
232,318
Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to
$500.0 million worth of shares of its common stock. The program has been extended until December 31,
F-35
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stockholders’ Equity (Continued)
2017, and will remain in effect until then, unless further extended or earlier terminated by the board of
directors. Stock repurchases under this program may be made in the open market or through privately
negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings is
funding this program with cash on hand and borrowings under the Select revolving facility.
For the year ended December 31, 2014, Holdings repurchased 11,285,714 shares at a cost of
$127.5 million, which includes transaction costs. During the year ended December 31, 2015, Holdings
repurchased 1,032,334 shares at a cost of $13.6 million, which includes transaction costs. Holdings did not
repurchase shares during the year ended December 31, 2016. The common stock repurchase program has
available capacity of $185.2 million as of December 31, 2016.
11. Segment Information
The Company’s reportable segments consist of: specialty hospitals, outpatient rehabilitation, and
Concentra. Other activities include the Company’s corporate shared services and certain other
non-consolidating joint ventures and minority investments in other healthcare related businesses. The
accounting policies of the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance of the segments based on Adjusted EBITDA.
Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization,
gain (loss) on early retirement of debt, stock compensation expense, Concentra acquisition costs,
in earnings (losses) of
Physiotherapy acquisition costs, non-operating gain (loss), and equity
unconsolidated subsidiaries.
The following tables summarize selected financial data for the Company’s reportable segments. The
segment results of Holdings are identical to those of Select.
Year Ended December 31, 2014
Specialty
Hospitals
Outpatient
Rehabilitation
Concentra(2)
(in thousands)
Other
Total
Net revenue . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . .
Total assets(1): . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . .
$2,244,899
341,787
2,279,665
77,742
$819,397
97,584
532,685
12,506
$
721
(75,499)
112,459
4,998
$3,065,017
363,872
2,924,809
95,246
Year Ended December 31, 2015
Specialty
Hospitals
Outpatient
Rehabilitation
Net revenue . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . .
Total assets(1): . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . .
$2,346,781
327,623
2,425,113
126,014
$810,009
98,220
548,242
17,768
Concentra(2)
(in thousands)
$ 585,222
48,301
1,311,631
26,771
Other
Total
$
724
(74,979)
103,692
12,089
$3,742,736
399,165
4,388,678
182,642
F-36
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Segment Information (Continued)
Year Ended December 31, 2016
Specialty
Hospitals
Outpatient
Rehabilitation(3)
Concentra
Other
Total
(in thousands)
Net revenue . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . .
Total assets(1): . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . .
$2,289,482
281,511
2,530,609
109,139
$995,374
129,830
978,192
21,286
$1,000,624
143,009
1,323,516
15,946
$
541
(88,543)
112,078
15,262
$4,286,021
465,807
4,944,395
161,633
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
Year Ended December 31, 2014
Specialty
Hospitals
Outpatient
Rehabilitation
Concentra(2)
(in thousands)
Other
Total
Adjusted EBITDA . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . .
Stock compensation expense . . . . . . . . . . .
$341,787
(51,786)
—
$ 97,584
(12,845)
—
Income (loss) from operations . . . . . . . . . .
Loss on early retirement of debt . . . . . . . .
Equity in earnings of unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . .
$290,001
$ 84,739
$(75,499)
(3,723)
(11,042)
$(90,264) $284,476
(2,277)
7,044
(85,446)
$203,797
Year Ended December 31, 2015
Specialty
Hospitals
Outpatient
Rehabilitation
Adjusted EBITDA . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . .
Stock compensation expense . . . . . . . . . . .
Concentra acquisition costs . . . . . . . . . . .
$327,623
(53,992)
—
—
$ 98,220
(13,053)
—
—
Concentra(2)
(in thousands)
$ 48,301
(33,644)
(1,016)
(4,715)
Other
Total
$(74,979)
(4,292)
(13,663)
—
Income (loss) from operations . . . . . . . . .
Equity in earnings of unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . .
Non-operating gain . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . .
$273,631
$ 85,167
$ 8,926
$(92,934) $ 274,790
16,811
29,647
(112,816)
$ 208,432
F-37
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Segment Information (Continued)
Year Ended December 31, 2016
Specialty
Hospitals
Outpatient
Rehabilitation(3)
Concentra
Other
Total
Adjusted EBITDA . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . .
Stock compensation expense . . . . . . . . .
Physiotherapy acquisition costs . . . . . . . .
$281,511
(56,585)
—
—
$129,830
(22,661)
—
—
(in thousands)
$143,009
(60,717)
(770)
—
$ (88,543)
(5,348)
(16,643)
(3,236)
Income (loss) from operations . . . . . . . .
Loss on early retirement of debt
. . . . . .
Equity in earnings of unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . .
Non-operating gain . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . .
$224,926
$107,169
$ 81,522
$(113,770) $ 299,847
(11,626)
19,943
42,651
(170,081)
$ 180,734
(1) The specialty hospitals segment includes $2.7 million in real estate assets held for sale on
December 31, 2014 and 2015. The specialty hospitals segment includes $24.4 million in real estate
assets held for sale on December 31, 2016.
(2) The selected financial data for the Company’s Concentra segment begins as of June 1, 2015, which is
the date the Concentra acquisition was consummated.
(3) The outpatient rehabilitation segment includes the operating results of the Company’s contract
therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.
12. Stock-based Compensation
Holdings awards stock-based compensation in the form of stock options and restricted stock awards
under its equity incentive plans. On June 2, 2016, Holdings adopted the Select Medical Holdings
Corporation 2016 Equity Incentive Plan and its existing plans were frozen. As of December 31, 2016,
Holdings is authorized to grant up to 7,491,600 restricted stock and stock option awards under the Select
Medical Holdings Corporation 2016 Equity Incentive Plan.
On November 8, 2005, the board of directors of Holdings adopted a director equity incentive plan
(‘‘Director Plan’’) and on August 12, 2009, the board of directors and stockholders of Holdings approved
an amendment and restatement of the Director Plan. This amendment authorized Holdings to issue under
the Director Plan options to purchase up to 75,000 shares of its common stock and restricted stock awards
covering up to 150,000 shares of its common stock. On June 2, 2016, upon the adoption of the Select
Medical Holdings Corporation 2016 Equity Incentive Plan, the Director Plan was frozen.
Holdings’ equity plans allow for the use of unissued shares or treasury shares to be used to satisfy
share based awards.
The Company measures the compensation costs of share-based compensation arrangements based on
the grant-date fair value and recognizes the costs in the financial statements over the period during which
employees are required to provide services. The Company values restricted stock grants by using the
F-38
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Stock-based Compensation (Continued)
closing market price of its stock on the date of grant. There were no options granted during the year ended
December 31, 2016.
Transactions and other information related to restricted stock awards are as follows:
Unvested balance, January 1, 2016 . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average
Shares Grant Date Fair Value
(share amounts in thousands)
3,817
1,426
(960)
(82)
$12.29
11.57
8.78
11.71
Unvested balance, December 31, 2016 . . . . . . . . . . . . . .
4,201
$12.86
The weighted average grant date fair value of restricted stock awards granted for the years ended
December 31, 2014, 2015, and 2016 was $13.61, $13.94, and $11.57, respectively. The total weighted
average grant date fair value of restricted stock awards vested for the years ended December 31, 2014,
2015, and 2016 was $7.4 million, $9.0 million, and $8.4 million, respectively.
As of December 31, 2016, there were 529,720 stock options outstanding and exercisable. The
outstanding and exercisable shares have a weighted average exercise price of $9.09 and a weighted average
remaining contractual life of 2.44 years. As of December 31, 2015, there were 743,000 stock options
outstanding and 728,000 stock options exercisable.
The total intrinsic value of options exercised for the years ended December 31, 2014, 2015, and 2016
was $6.0 million, $1.0 million, and $0.8 million, respectively. The aggregate intrinsic value of options
outstanding and options exercisable at December 31, 2016 was $2.2 million.
Stock compensation expense recognized by the Company was as follows:
For the Years Ended
December 31,
2014
2015
2016
(in thousands)
Stock compensation expense:
Included in general and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Included in cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,027
2,015
$11,633
3,046
$14,607
2,806
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,042
$14,679
$17,413
Stock compensation expense based on current stock-based awards for each of the next five years is
estimated to be as follows:
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . .
$15,499
(in thousands)
$4,726
$9,797
$1,220
$—
2017
2018
2019
2020
2021
F-39
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes
The components of the Company’s income tax expense for the years ended December 31, 2014, 2015,
and 2016 were as follows:
For the Years Ended December 31,
2014
2015
2016
(in thousands)
Current expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local
$52,063
9,248
$63,626
10,868
$ 54,726
13,329
Total current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . .
61,311
14,311
74,494
(2,058)
68,055
(12,591)
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$75,622
$72,436
$ 55,464
Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:
Federal income tax at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local income taxes, less federal income tax benefit . . . . . . . . . . . . . . . .
Permanent differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from the sale of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years
Ended December 31,
2014
2015
2016
35.0% 35.0% 35.0%
3.2
4.0
4.2
1.4
0.8
1.4
— (6.7)
—
0.2
(0.4)
(1.3)
(0.3)
(0.5)
(1.5)
(0.6)
(0.7)
(0.9)
(2.3)
(2.0)
(0.4)
Total effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37.1% 34.8% 30.7%
F-40
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes (Continued)
The Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets
Allowance for doubtful accounts . . . . . .
Compensation and benefit-related
December 31, 2015
December 31, 2016
Total
Current
Non-Current
Total
Current
Non-Current
(in thousands)
$
9,153
$ 9,153
$
— $ 10,735
$ 10,735
$
—
accruals
. . . . . . . . . . . . . . . . . . . .
61,111
50,303
10,808
70,199
56,570
13,629
Professional malpractice liability
insurance . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . .
Stock options . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets before valuation
allowance . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . .
Deferred tax liabilities
Deferred income . . . . . . . . . . . . . . . .
Investment in unconsolidated affiliates . .
Depreciation and amortization . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .
19,654
(1,009)
21,591
6,061
3,939
641
1,273
122,414
(7,586)
114,828
(31,375)
(4,302)
(260,724)
(8,444)
4,642
(1,009)
445
—
—
—
357
63,891
(1,910)
61,981
(27,221)
—
—
(6,072)
15,012
—
21,146
6,061
3,939
641
916
58,523
(5,676)
52,847
(4,154)
(4,302)
(260,724)
(2,372)
19,763
746
39,481
9,533
1,567
499
3,496
5,359
746
—
—
—
—
1,315
156,019
(26,421)
129,598
(26,068)
(3,885)
(271,914)
(5,413)
74,725
(3,005)
71,720
(23,298)
—
—
(3,257)
14,404
—
39,481
9,533
1,567
499
2,181
81,294
(23,416)
57,878
(2,770)
(3,885)
(271,914)
(2,156)
Total deferred tax liabilities . . . . . . . . . . .
(304,845)
(33,293)
(271,552)
(307,280)
(26,555)
(280,725)
Net deferred taxes
. . . . . . . . . . . . . . . .
$(190,017)
$ 28,688
$(218,705)
$(177,682)
$ 45,165
$(222,847)
The valuation allowance as of December 31, 2016 is primarily attributable to the uncertainty regarding
the realization of state net operating losses and other net deferred tax assets of loss entities. The state net
deferred tax assets have a full valuation allowance recorded for entities that have a cumulative history of
pre-tax losses (current year in addition to the two prior years). The net deferred tax liabilities at
December 31, 2015 and 2016 of approximately $190.0 million and $177.7 million, respectively, consist of
items which have been recognized for tax reporting purposes, but which will increase tax on returns to be
filed in the future, and include the use of net operating loss carryforwards. The Company has performed
an assessment of positive and negative evidence regarding the realization of the net deferred tax assets.
This assessment included a review of legal entities with three years of cumulative losses, estimates of
projected future taxable income, generation of income from the turning of existing deferred tax liabilities
and the impact of tax planning strategies that management would and could implement in order to keep
deferred tax assets from expiring unused. Although realization is not assured, based on the Company’s
assessment, it has concluded that it is more likely than not that such assets, net of the determined valuation
allowance, will be realized.
F-41
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes (Continued)
The total state net operating losses are approximately $585.4 million. State net operating loss carry
forwards expire and are subject to valuation allowances as follows:
State Net
Operating Losses
Gross Valuation
Allowance
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter through 2036 . . . . . . . . . . . . . . . . . . . . .
$ 9,161
5,155
14,826
24,860
531,388
8,154
4,424
13,844
22,710
418,837
(in thousands)
$
Reserves for Uncertain Tax Positions:
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of
multiple state jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and
determining its provision for income taxes. During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax determination is uncertain. The Company
establishes reserves for tax related uncertainties based on estimates of whether, and the extent to which,
additional taxes will be due. These reserves are established when it is believed that certain positions might
be challenged despite the Company’s belief that its tax return positions are fully supportable. The
Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of a tax
audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves
that have resulted from resolution of the tax position or expirations of statutes of limitations.
The reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):
Gross tax contingencies—January 1, 2014 . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions taken in prior periods due primarily to statute
expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for existing tax positions taken . . . . . . . . . . . . . . . . . . . . . . . . .
Gross tax contingencies—December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions taken in prior periods due primarily to statute
expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for settlements with taxing authorities . . . . . . . . . . . . . . . . . . .
Additions for existing tax positions taken . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for existing tax positions taken . . . . . . . . . . . . . . . . . . . . . . . .
Gross tax contingencies—December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions taken in prior periods due primarily to statute
expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for existing tax positions taken . . . . . . . . . . . . . . . . . . . . . . . . .
Additions included with acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,026
(1,632)
273
10,667
(3,309)
(770)
373
(1,395)
5,566
(2,619)
313
494
Gross tax contingencies—December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
$ 3,754
F-42
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes (Continued)
As of December 31, 2015 and 2016, the Company had $5.6 million and $3.8 million of unrecognized
tax benefits, respectively, all of which, if fully recognized, would affect the Company’s effective income tax
rate.
As of December 31, 2016, approximately $1.2 million of gross unrecognized tax benefits, including
interest, will be eligible for release in the next 12 months due to the expiration of statutes of limitations.
The Company’s policy is to include interest related to income taxes in income tax expense. As of
December 31, 2015 and December 31, 2016, the Company has accrued interest related to income taxes of
$0.6 million and $0.3 million, net of federal income taxes, respectively. Interest recognized for each of the
years ended December 31, 2014, 2015 and 2016 was $0.5 million, $0.3 million, and $0.1 million, net of
federal income tax benefits, respectively.
The federal statute of limitations remains open for tax years 2013 through 2016.
State jurisdictions generally have statutes of limitations for tax returns ranging from three to five
years. The state impact of any federal income tax changes remains subject to examination for a period of
up to one year after formal notification to the states. Currently, the Company has one state income tax
return under examination.
14. Retirement Savings Plan
Select sponsors a defined contribution retirement savings plan for substantially all of its employees.
Employees who are not classified as highly compensated employees (‘‘HCE’s’’) may contribute up to 30%
of their salary; HCE’s may contribute up to 7% of their salary. The plan provides a discretionary company
match which is determined annually. Currently, Select matches 25% of the first 6% of compensation
employees contribute to the plan. The employees vest in the employer contributions over a three-year
period beginning on the employee’s hire date. The expense incurred by Select related to this plan was
$9.3 million, $10.0 million, and $14.7 million during the years ended December 31, 2014, 2015, and 2016,
respectively.
For the period June 1, 2015 through December 31, 2015, Concentra sponsored a separate defined
contribution retirement savings plan and incurred expenses related to this plan of $8.8 million. For the year
ended December 31, 2016, Concentra employees participated in the defined contribution retirement
savings plan sponsored by Select.
15. Income per Share
The Company applies the two-class method for calculating and presenting income per common share.
The two-class method is an earnings allocation formula that determines earnings per share for each class of
stock participation rights in undistributed earnings. Under the two class method:
(i) Net income attributable to Select Medical Holdings Corporation is reduced by any contractual
amount of dividends in the current period for each class of stock. There were no contractual
dividends for the years ended December 31, 2014, 2015, and 2016.
(ii) The remaining income is allocated to common stock and unvested restricted stock to the extent
that each security may participate in income, as if all of the earnings for the period had been
distributed. The total income allocated to each security is determined by adding together the
amount allocated for dividends in (i) above and the amount allocated for participation features.
F-43
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Income per Share (Continued)
(iii) The income allocated to common stock is then divided by the weighted average number of
outstanding shares for the period to which the earnings are allocated to determine the income
per share for common stock.
In applying the two-class method, the Company determined that undistributed earnings should be
allocated equally on a per share basis between the common stock and unvested restricted stock due to the
equal participation rights of the common stock and unvested restricted stock (i.e., the voting conversion
rights).
The following table sets forth the calculation of income per share in the Company’s consolidated
statements of operations and comprehensive income and the differences between basic weighted average
shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted
earnings per share, respectively:
For the Year Ended December 31,
2014
2015
2016
(in thousands, except per share
amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation . .
Less: Earnings allocated to unvested restricted stockholders . . . . . .
$120,627
3,337
$130,736
3,830
$115,411
3,521
Net income available to common stockholders . . . . . . . . . . . . . . . .
$117,290
$126,906
$111,890
Denominator:
Weighted average shares—basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities:
129,026
127,478
127,813
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
439
274
155
Weighted average shares—diluted . . . . . . . . . . . . . . . . . . . . . . . . .
129,465
127,752
127,968
Basic income per common share: . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income per common share:
$
$
0.91
0.91
$
$
1.00
0.99
$
$
0.88
0.87
F-44
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingencies
Leases
The Company leases facilities and equipment from unrelated parties under operating leases.
Minimum future non-cancelable lease obligations on long-term operating leases in effect at December 31,
2016 are approximately as follows (in thousands):
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
(in thousands)
$ 221,797
181,770
150,374
118,118
87,630
438,947
$1,198,636
Total rent expense for facility and equipment operating leases, including cancelable leases, for the
years ended December 31, 2014, 2015, and 2016 was $169.1 million, $214.9 million, and $265.1 million,
respectively. Facility rent expense to unrelated parties, a component of total rent expense, for the years
ended December 31, 2014, 2015, and 2016 was $124.4 million, $165.3 million, and $220.8 million,
respectively.
The Company rents its corporate office space from related parties. The Company made payments for
office rent, leasehold improvements, and miscellaneous expenses aggregating $4.4 million, $4.7 million,
and $5.0 million for the years ended December 31, 2014, 2015, and 2016, respectively, to related parties.
As of December 31, 2016, future rental commitments under outstanding agreements with related
parties are approximately as follows (in thousands):
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,408
5,605
5,746
5,892
6,017
10,538
$39,206
Construction Commitments
At December 31, 2016, the Company had outstanding commitments under construction contracts
related to new construction, improvements, and renovations totaling approximately $86.0 million.
Other
A subsidiary of the Company has entered into a naming, promotional, and sponsorship agreement
with an NFL team, through 2025, for the team’s headquarters complex that requires a payment of
$3.1 million in 2017. Each successive annual payment increases by 2.3% through 2025.
F-45
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingencies (Continued)
Litigation
The Company is a party to various legal actions, proceedings and claims (some of which are not
insured), and regulatory and other governmental audits and investigations in the ordinary course of its
business. The Company cannot predict the ultimate outcome of pending litigation, proceedings and
regulatory and other governmental audits and investigations. These matters could potentially subject the
Company to sanctions, damages, recoupments, fines and other penalties. The Department of Justice, CMS,
or other federal and state enforcement and regulatory agencies may conduct additional investigations
related to the Company’s businesses in the future that may, either individually or in the aggregate, have a
material adverse effect on the Company’s business, financial position, results of operations and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional
malpractice liability insurance and general liability insurance, subject to self-insured retention of
$2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for
general liability claims. The Company also maintains umbrella liability insurance covering claims which,
due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance
policies. These insurance policies also do not generally cover punitive damages and are subject to various
deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available
insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the
outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its
financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims
Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time
while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known
as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages
and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and
has been a defendant in these cases in the past, and may be named as a defendant in similar cases from
time to time in the future.
Evansville Litigation. On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint
in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical
Corporation, Select Specialty Hospital—Evansville, LLC (‘‘SSH-Evansville’’), Select Employment
Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for
the Southern District of Indiana by private plaintiff-relators on behalf of the United States under the
federal False Claims Act. The plaintiff-relators are the former CEO and two former case managers at
SSH-Evansville, and the defendants currently include the Company, SSH-Evansville, a subsidiary of the
Company serving as common paymaster for its employees, and a physician who practices at
SSH-Evansville. The plaintiff-relators allege that, from 2006 until April 2012, SSH-Evansville discharged
patients too early or held patients too long, improperly discharged patients to and readmitted them from
short stay hospitals, up-coded diagnoses at admission, and admitted patients for whom long-term acute
care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of
federal and state law. The Second Amended Complaint replaces a prior complaint that was filed under seal
on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge
unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order
to allow the government time to complete its investigation and to decide whether or not to intervene. On
June 19, 2015, the United States Department of Justice notified the District Court of its decision not to
F-46
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingencies (Continued)
intervene in the case, and the District Court thereafter approved a case management plan imposing certain
deadlines.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on
multiple grounds. One basis for the Motion to Dismiss was the False Claims Act’s public disclosure bar,
which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated
sources, unless the relator is an original source. The Affordable Care Act, enacted on March 23, 2010,
altered the public disclosure bar language of the False Claims Act by, among other things, giving the
United States the right to oppose dismissal of a case based on the public disclosure bar. In their Motion to
Dismiss, the defendants contended that the public disclosure bar applies because substantially the same
conduct as the plaintiff-relators have alleged had previously been publicly disclosed, including in a New
York Times article and a prior qui tam case. A second basis for the defendants’ Motion to Dismiss was that
the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal
Rules of Civil Procedure.
Then, based on the Affordable Care Act’s changes to the public disclosure bar language of the False
Claims Act, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure
bar for claims arising from conduct from and after March 23, 2010. The defendants filed briefs challenging
the United States’ contention that the statutory changes gives it an unfettered right to veto the applicability
of the public disclosure bar. On September 30, 2016, the District Court partially granted and partially
denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same
conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the
public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23,
2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United
States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and
therefore did not dismiss those claims based on the public disclosure bar. However, the District Court
ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay
manipulation and premature discharging of patients with the requisite particularity, and dismissed those
claims. The District Court declined to dismiss the plaintiff-relators’ claims arising from conduct from and
after March 23, 2010 relating to delayed discharging of patients and upcoding and the plaintiff-relators’
retaliation claims. The Company intends to vigorously defend this action, but at this time the Company is
unable to predict the timing and outcome of this matter.
Knoxville Litigation. On July 13, 2015, the United States District Court for the Eastern District of
Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which
named as defendants Select, Select Specialty Hospital—Knoxville, Inc. (‘‘SSH-Knoxville’’), Select Specialty
Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint
was unsealed after the United States and the State of Tennessee notified the court on July 13, 2015 that
each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on
April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges
violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on
extending patient stays to increase reimbursement and to increase average length of stay; artificially
prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting
patients who do not require medically necessary care; performing unnecessary procedures and services;
and delaying performance of procedures to increase billing. The Complaint was served on some of the
defendants during October 2015.
F-47
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingencies (Continued)
In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The
defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s
claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based
on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were
based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The
defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar,
and because the plaintiff-relator did not plead his claims with sufficient particularity.
In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed the
plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but
one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the
plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a
Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016,
the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings,
arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the
basis for the District Court’s dismissal. The Company intends to vigorously defend this action, but at this
time the Company is unable to predict the timing and outcome of this matter.
Wilmington Litigation. On January 19, 2017, the United States District Court for the District of
Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel.
Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (‘‘SSH-Wilmington’’), Select Specialty
Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation and Crystal Cheek,
No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing
officer at SSH-Wilmington, and was unsealed after the United States filed a Notice of Election to Decline
Intervention on January 13, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants
and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the
False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical
practitioner signatures on medical records and failing to properly examine the credentials of medical
practitioners at SSH-Wilmington. The Complaint has not been served on the Select defendants. The
Company intends to vigorously defend this action if the plaintiff-relator pursues it, but at this time the
Company is unable to predict the timing and outcome of this matter.
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes
Select’s 6.375% senior notes are fully and unconditionally guaranteed, except for customary
limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the ‘‘Subsidiary Guarantors’’)
which is defined as a subsidiary where Select or a subsidiary of Select holds all of the outstanding
ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the
‘‘Non-Guarantor Subsidiaries’’ and Concentra Group Holdings and its subsidiaries, the ‘‘Non-Guarantor
Concentra’’).
Select conducts a significant portion of its business through its subsidiaries. Presented below is
condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor
Subsidiaries, and Non-Guarantor Concentra at December 31, 2015 and 2016 and for the years ended
December 31, 2014, 2015, and 2016.
F-48
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
The equity method has been used by Select with respect to investments in subsidiaries. The equity
method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor
Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.
Certain reclassifications have been made to prior reported amounts in order to conform to the current
year guarantor structure.
F-49
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2016
Select (Parent
Company Only) Guarantors
Subsidiary Non-Guarantor Non-Guarantor
Subsidiaries
Concentra
Eliminations
(in thousands)
Consolidated
Select
Medical
Corporation
Assets
Current Assets:
Cash and cash equivalents .
Accounts receivable, net
.
Current deferred tax asset .
.
Intercompany receivables .
.
.
Prepaid income taxes .
.
.
.
Other current assets .
.
.
.
Total Current Assets .
.
.
.
.
.
.
.
.
.
.
.
.
.
Property and equipment, net .
.
.
.
Investment in affiliates
.
.
Goodwill
.
.
.
.
Identifiable intangibles, net .
.
.
Non-current deferred tax asset .
.
.
Other assets
. .
. .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total Assets .
.
.
.
.
.
.
.
.
.
.
.
Liabilities and Equity
Current Liabilities:
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$
11,071
—
17,491
—
6,658
11,953
47,173
48,697
4,517,900
—
—
19,423
6,820
$
6,467
365,369
12,985
2,237,362
—
34,168
2,656,351
604,670
94,589
2,090,963
109,132
—
76,084
$
5,056
95,871
3,831
164,893
—
10,059
279,710
49,607
—
—
—
—
53,927
$
76,435
112,512
10,858
—
5,765
21,519
227,089
189,243
—
660,037
231,430
—
15,717
$
—
—
—
(2,402,255)(a)
—
—
(2,402,255)
—
(4,612,489)(b)(c)
—
—
(19,423)(d)
—
$
99,029
573,752
45,165
—
12,423
77,699
808,068
892,217
—
2,751,000
340,562
—
152,548
$4,640,013
$5,631,789
$383,244
$1,323,516
$(7,034,167)
$4,944,395
$
39,362
$
—
$
—
$
—
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
payable .
Bank overdrafts .
.
.
Current portion of long-term debt and notes
.
.
.
.
.
.
.
.
.
.
.
.
Accounts payable .
Intercompany payables .
.
Accrued payroll .
.
.
Accrued vacation .
.
.
Accrued interest
.
.
Accrued other .
.
.
.
.
.
.
.
.
.
.
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.
.
.
.
.
.
.
Total Current Liabilities .
.
.
.
.
.
.
.
.
.
Long-term debt, net of current portion .
.
Non-current deferred tax liability .
.
.
Other non-current liabilities
.
.
.
.
.
.
.
Total Liabilities .
.
.
.
.
.
.
.
.
.
.
.
.
.
Redeemable non-controlling interests .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Stockholder’s Equity:
.
Common stock . .
.
Capital in excess of par .
.
Retained earnings (accumulated deficit) .
.
Subsidiary investment .
.
.
.
.
.
.
.
.
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.
.
.
.
.
.
.
Total Select Medical Corporation Stockholder’s
.
.
Equity .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Non-controlling interests
Total Equity .
.
.
.
.
.
.
.
.
.
.
.
Total Liabilities and Equity .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
7,227
10,775
2,237,362
16,963
3,440
20,114
39,155
2,374,398
1,407,066
—
42,824
3,824,288
445
79,063
164,893
92,204
55,425
—
63,735
455,765
518,744
129,729
53,399
1,157,637
—
—
0
925,111
(109,386)
—
—
—
1,295,603
3,178,549
815,725
4,474,152
—
—
1,324
21,942
—
4,258
10,729
—
3,288
41,541
132,630
10,887
5,865
190,923
10,169
—
—
(35,444)
130,988
95,544
86,608
815,725
4,474,152
182,152
—
—
—
(2,402,255)(a)
—
—
—
—
(2,402,255)
—
(19,423)(d)
—
(2,421,678)
—
—
—
(1,085,017)(c)
(3,527,472)(b)
4,660
14,778
—
32,972
13,667
2,211
33,898
102,186
626,893
101,654
34,432
865,165
411,990
—
—
(175,142)
217,935
42,793
3,568
46,361
(4,612,489)
—
(4,612,489)
$
39,362
13,656
126,558
—
146,397
83,261
22,325
140,076
571,635
2,685,333
222,847
136,520
3,616,335
422,159
0
925,111
(109,386)
—
815,725
90,176
905,901
$4,640,013
$5,631,789
$383,244
$1,323,516
$(7,034,167)
$4,944,395
(a)
(b)
(c)
(d)
Elimination of intercompany.
Elimination of investments in consolidated subsidiaries.
Elimination of investments in consolidated subsidiaries’ earnings.
Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.
F-50
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2016
Net operating revenues . . . . . . .
$
541
$2,745,149
$539,707
$1,000,624
$
Select (Parent
Company Only) Guarantors
Subsidiary Non-Guarantor Non-Guarantor
Subsidiaries
Concentra
Eliminations
(in thousands)
Costs and expenses:
. . . . . . . . . .
Cost of services
General and administrative . . .
Bad debt expense . . . . . . . . .
Depreciation and amortization .
Total costs and expenses . . . . . .
2,037
106,864
—
5,348
114,249
Income (loss) from operations
. .
(113,708)
2,344,033
63
41,714
67,708
2,453,518
291,631
478,538
—
9,229
11,538
499,305
40,402
Other income and expense:
Intercompany interest and
royalty fees . . . . . . . . . . . .
Intercompany management fees
Loss on early retirement of
debt . . . . . . . . . . . . . . . .
Equity in earnings of
unconsolidated subsidiaries . .
Non-operating gain . . . . . . . .
Interest expense . . . . . . . . . .
Income (loss) from operations
(6,069)
168,915
12,863
(140,113)
(6,794)
(28,802)
(773)
—
—
—
33,932
(94,914)
19,838
8,719
(29,425)
105
—
(7,446)
(2,535)
4,597
—
(7,132)
before income taxes . . . . . . . .
(12,617)
163,513
Income tax expense (benefit) . . .
Equity in earnings of subsidiaries .
Net income (loss)
. . . . . . . . . .
(14,461)
113,567
115,411
52,616
(4,982)
105,915
Consolidated
Select
Medical
Corporation
$4,286,021
3,664,843
106,927
69,093
145,311
3,986,174
299,847
—
—
(11,626)
19,943
42,651
(170,081)
180,734
55,464
—
125,270
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(108,585)(a)
(108,585)
840,235
—
18,150
60,717
919,102
81,522
—
—
(10,853)
—
—
(38,296)
32,373
12,712
—
19,661
Less: Net income (loss)
attributable to non-controlling
interests . . . . . . . . . . . . . . .
Net income (loss) attributable to
—
—
(2,318)
12,177
—
9,859
Select Medical Corporation . . .
$ 115,411
$ 105,915
$ (4,814)
$
7,484
$(108,585)
$ 115,411
(a) Elimination of equity in earnings of subsidiaries.
F-51
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2016
Select (Parent
Company Only) Guarantors
Subsidiary Non-Guarantor Non-Guarantor
Subsidiaries
Concentra
Eliminations Corporation
(in thousands)
Consolidated
Select
Medical
Operating activities
Net income .
.
.
.
Adjustments to reconcile net income to net cash
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$ 115,411
$ 105,915
$ (7,132)
$ 19,661
$(108,585)(a)
$ 125,270
provided by (used in) operating activities:
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Distributions from unconsolidated subsidiaries .
.
.
Depreciation and amortization .
Provision for bad debts .
.
.
.
.
Equity in earnings of unconsolidated subsidiaries .
.
Loss on early retirement of debt
.
.
Loss (gain) on sale of assets and businesses .
.
.
.
Gain on sale of equity investment .
.
.
.
.
Impairment of equity investment
Stock compensation expense .
.
.
.
.
.
Amortization of debt discount, premium and
.
.
.
.
.
Deferred income taxes .
.
Changes in operating assets and liabilities, net of
issuance costs .
.
.
.
.
.
.
.
.
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.
.
.
.
.
.
.
.
.
.
.
.
effects from acquisition of businesses:
Equity in earnings of subsidiaries
.
Accounts receivable .
.
Other current assets .
.
.
Other assets
.
.
.
Accounts payable
.
.
Accrued expenses
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash provided by (used in) operating activities .
Investing activities
Acquisition of businesses, net of cash acquired .
.
.
.
Purchases of property and equipment
.
.
Investment in businesses .
.
.
.
.
Proceeds from sale of equity investment .
.
Proceeds from sale of assets and businesses .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash used in investing activities
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Financing activities
.
Borrowings on revolving facilities .
.
.
Payments on revolving facilities .
.
.
.
Net proceeds from term loans
.
.
.
.
Payments on term loans .
.
Borrowings of other debt
.
.
.
.
Principal payments on other debt .
.
.
Proceeds from bank overdrafts .
.
.
Dividends paid to Holdings .
.
.
.
Equity investment by Holdings .
Intercompany .
.
.
.
.
.
Proceeds from issuance of non-controlling interests
.
Purchase of non-controlling interests .
.
.
Distributions to non-controlling interests
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
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.
.
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.
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.
.
.
.
.
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.
.
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.
.
.
.
.
.
.
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash provided by (used in) financing activities .
Net increase in cash and cash equivalents .
.
.
.
.
.
Cash and cash equivalents at beginning of period .
Cash and cash equivalents at end of period .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
—
5,348
—
—
773
(33,738)
—
—
16,643
12,358
(709)
(113,567)
—
(1,432)
(2,978)
330
(1,287)
20,380
67,708
41,714
(19,838)
—
(12,975)
(2,779)
5,339
—
—
—
4,982
12,456
10,019
51,559
(23,842)
55,476
(2,848)
316,114
(406,305)
(15,262)
—
—
63,418
(59,520)
(103,130)
(4,723)
3,779
16,978
(358,149)
(146,616)
575,000
(650,000)
600,127
(230,524)
11,935
(15,144)
10,746
(2,929)
1,672
67,115
—
—
—
—
—
—
—
—
(751)
—
—
—
(165,986)
—
—
—
96
11,538
9,229
(105)
—
246
—
—
—
—
—
—
(36,768)
(4,328)
(53,268)
4,944
(3,803)
(79,351)
(953)
(27,295)
—
—
67
(28,181)
—
—
—
—
12,970
(2,554)
—
—
—
98,871
11,846
(2,099)
(7,071)
367,998
(166,737)
111,963
7,001
4,070
2,761
3,706
4,431
625
—
60,717
18,150
—
10,853
(21)
—
—
770
3,298
(11,882)
—
(15,008)
13,191
13,977
3,076
(4,094)
112,688
(5,428)
(15,946)
—
—
—
(21,374)
—
(5,000)
195,217
(207,510)
2,816
(2,952)
—
—
—
—
—
—
(3,484)
(20,913)
70,401
6,034
$ 11,071
$
6,467
$
5,056
$ 76,435
$
—
—
—
—
—
—
—
—
—
—
—
108,585(a)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,476
145,311
69,093
(19,943)
11,626
(46,488)
(2,779)
5,339
17,413
15,656
(12,591)
—
(39,320)
17,450
9,290
(15,492)
46,292
346,603
(472,206)
(161,633)
(4,723)
3,779
80,463
(554,320)
575,000
(655,000)
795,344
(438,034)
27,721
(21,401)
10,746
(2,929)
1,672
—
11,846
(2,099)
(10,555)
292,311
84,594
14,435
$ 99,029
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-52
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2015
Assets
Current Assets:
Cash and cash equivalents
Accounts receivable, net
Current deferred tax asset
Intercompany receivables .
.
Prepaid income taxes .
.
.
Other current assets .
.
.
.
Total Current Assets .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Property and equipment, net
.
.
Investment in affiliates
.
Goodwill
.
.
.
.
Identifiable intangibles, net .
.
Non-current deferred tax asset .
.
.
Other assets
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total Assets .
.
.
.
.
.
.
.
.
.
.
.
Liabilities and Equity
Current Liabilities:
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
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.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
payable .
Bank overdrafts .
.
.
Current portion of long-term debt and notes
.
.
.
.
.
.
.
.
.
.
.
.
Accounts payable .
Intercompany payables .
.
Accrued payroll .
.
.
Accrued vacation .
.
.
Accrued interest
.
.
Accrued other .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
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.
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.
.
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total Current Liabilities .
.
.
.
.
.
.
.
.
.
Long-term debt, net of current portion .
.
Non-current deferred tax liability .
.
.
Other non-current liabilities .
.
.
.
.
.
.
.
.
Total Liabilities .
.
.
.
.
.
.
.
.
.
.
.
.
Redeemable non-controlling interests
.
.
.
.
Stockholder’s Equity:
.
Common stock .
.
.
Capital in excess of par .
.
Retained earnings (accumulated deficit)
.
Subsidiary investment .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total Select Medical Corporation Stockholder’s Equity
Non-controlling interests
Total Equity .
.
.
.
.
.
.
.
.
.
.
.
Total Liabilities and Equity .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Select (Parent
Company Only) Guarantors
Subsidiary Non-Guarantor Non-Guarantor
Subsidiaries
Concentra
Eliminations
(in thousands)
Consolidated
Select
Medical
Corporation
$
4,070
—
11,556
—
7,979
10,521
34,126
38,872
4,111,682
—
—
12,297
3,841
$
3,706
419,554
6,733
1,974,229
—
34,887
2,439,109
548,820
66,015
1,663,974
72,776
—
108,524
$
625
68,332
4,761
127,373
—
5,731
206,822
61,126
—
—
—
—
659
$
6,034
115,672
5,638
—
8,715
34,640
170,699
215,306
—
650,650
245,899
—
29,077
$
$
—
—
—
(2,101,602)(a)
—
—
(2,101,602)
—
(4,177,697)(b)(c)
—
—
(12,297)(d)
—
14,435
603,558
28,688
—
16,694
85,779
749,154
864,124
—
2,314,624
318,675
—
142,101
$4,200,818
$4,899,218
$268,607
$1,311,631
$(6,291,596)
$4,388,678
$
28,615
$
—
$
—
$
—
$
221,769
10,445
1,974,229
22,970
6,406
6,315
38,883
2,309,632
984,743
—
47,190
3,341,565
197
101,156
127,373
66,908
50,254
3
42,939
388,830
452,417
114,394
41,904
997,545
939
16,997
—
3,916
9,363
—
9,866
41,081
90,860
9,239
4,798
145,978
—
870
11,224
0
904,375
(45,122)
—
—
—
1,189,688
2,711,115
859,253
3,900,803
—
—
—
—
(8,932)
74,011
65,079
46,326
2,261
8,811
—
27,195
7,954
3,083
42,040
91,344
632,710
107,369
39,328
870,751
226,127
—
—
(6,120)
217,935
—
—
—
(2,101,602)(a)
—
—
—
—
(2,101,602)
$
28,615
225,166
137,409
—
120,989
73,977
9,401
133,728
729,285
—
(12,297)(d)
—
2,160,730
218,705
133,220
(2,113,899)
3,241,940
—
—
—
(1,174,636)(c)
(3,003,061)(b)
238,221
0
904,375
(45,122)
—
859,253
49,264
908,517
211,815
(4,177,697)
2,938
—
859,253
3,900,803
111,405
214,753
(4,177,697)
$4,200,818
$4,899,218
$268,607
$1,311,631
$(6,291,596)
$4,388,678
(a)
(b)
(c)
(d)
Elimination of intercompany.
Elimination of investments in consolidated subsidiaries.
Elimination of investments in consolidated subsidiaries’ earnings.
Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.
F-53
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2015
Select (Parent
Company Only)
Subsidiary
Guarantors
Non-Guarantor
Subsidiaries
Non-Guarantor
Concentra
Consolidated Select
Eliminations Medical Corporation
$
724
$2,675,169
$481,621
$585,222
$
(in thousands)
Net operating revenues .
.
.
.
.
Costs and expenses:
Cost of services .
.
General and administrative .
Bad debt expense .
.
Depreciation and amortization
.
.
.
.
.
.
.
.
.
.
.
Total costs and expenses
.
.
.
.
royalty fees .
Income (loss) from operations .
Other income and expense:
Intercompany interest and
.
Intercompany management
.
.
.
.
.
Non-operating gain .
Equity in earnings of
fees .
. .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
unconsolidated subsidiaries .
.
Interest expense .
.
.
.
.
.
.
.
before income taxes
Income (loss) from operations
.
.
Income tax expense (benefit) .
.
Equity in earnings of subsidiaries
.
.
.
.
.
Net income (loss) .
.
Less: Net income (loss)
.
.
.
.
.
.
.
2,029
88,227
—
4,292
94,548
(93,824)
2,267,424
(890)
40,574
56,452
2,363,560
311,609
413,741
—
9,207
10,593
433,541
48,080
(1,417)
1,387
30
143,939
—
—
(58,350)
(9,652)
(7,869)
132,519
130,736
(119,512)
29,647
16,719
(24,251)
215,599
85,949
8,966
138,616
(24,427)
—
92
(6,153)
17,622
(512)
—
18,134
528,347
4,715
9,591
33,644
576,297
8,925
—
—
—
—
(24,062)
(15,137)
(5,132)
—
(10,005)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(141,485)(a)
(141,485)
$3,742,736
3,211,541
92,052
59,372
104,981
3,467,946
274,790
—
—
29,647
16,811
(112,816)
208,432
72,436
—
135,996
attributable to non-controlling
.
.
interests
.
.
.
.
.
.
.
.
.
.
Net income (loss) attributable to
Select Medical Corporation .
.
.
—
49
9,095
(3,884)
—
5,260
$130,736
$ 138,567
$
9,039
$ (6,121)
$(141,485)
$ 130,736
(a)
Elimination of equity in earnings of subsidiaries.
F-54
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2015
Operating activities
Net income
.
.
.
Adjustments to reconcile net income to net cash
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Select (Parent
Company Only)
Subsidiary
Guarantors
Non-Guarantor
Subsidiaries
Non-Guarantor
Concentra
Eliminations
Consolidated Select
Medical Corporation
(in thousands)
.
.
.
$ 130,736
$ 138,616
$ 18,134
$
(10,005)
$(141,485)(a)
$
135,996
—
33,644
9,591
—
14
—
1,016
2,139
1,426
—
825
2,790
—
(9,438)
(6,557)
25,445
(1,052,796)
(26,771)
—
—
1
(1,079,566)
20,000
(15,000)
623,575
(2,250)
3,009
(1,964)
—
—
—
—
217,935
217,065
—
(2,215)
1,060,155
6,034
—
6,034
—
—
—
—
—
—
—
—
—
141,485(a)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
13,969
104,981
59,372
(16,811)
(1,098)
(29,647)
14,985
9,543
(2,058)
—
(92,572)
(2,503)
4,713
2,345
7,200
208,415
(1,061,628)
(182,642)
(2,347)
33,096
1,767
(1,211,754)
1,135,000
(895,000)
623,575
(29,134)
13,374
(18,136)
6,869
(28,956)
1,649
1,846
—
217,065
(1,095)
(12,637)
1,014,420
11,081
3,354
$
14,435
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
provided by operating activities:
.
Distributions from unconsolidated subsidiaries .
.
.
Depreciation and amortization .
Provision for bad debts
.
.
.
.
Equity in earnings of unconsolidated subsidiaries .
.
Loss (gain) on sale of assets and businesses
.
.
.
Gain on sale of equity investment .
Stock compensation expense
.
.
.
.
Amortization of debt discount, premium and
.
.
.
.
.
Deferred income taxes
.
.
.
Changes in operating assets and liabilities, net of
issuance costs .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
effects of business combinations:
Equity in earnings of subsidiaries .
.
Accounts receivable .
.
Other current assets
.
Other assets .
.
.
Accounts payable .
.
Accrued expenses .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash provided by operating activities
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Investing activities
Acquisition of businesses, net of cash acquired .
.
.
Purchases of property and equipment .
.
.
Investment in businesses .
.
.
Proceeds from sale of equity investment
.
.
Proceeds from sale of assets and businesses .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash used in investing activities .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Financing activities
Borrowings on revolving facilities .
.
.
Payments on revolving facilities .
.
.
.
Net proceeds from term loans .
.
.
.
.
Payments on term loans .
.
.
Borrowings of other debt
.
.
.
.
Principal payments on other debt
.
.
.
Proceeds from bank overdrafts
.
.
.
Dividends paid to Holdings
.
.
Equity investment by Holdings
.
.
.
Tax benefit from stock based awards
.
.
.
.
.
Intercompany
Proceeds from issuance of non-controlling interests .
.
Purchase of non-controlling interests
.
Distributions to non-controlling interests
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash provided by (used in) financing activities
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net increase (decrease) in cash and cash equivalents .
.
Cash and cash equivalents at beginning of period .
.
—
4,292
—
—
—
—
13,969
7,404
(3,484)
(132,519)
—
(2,661)
10,840
560
(1,508)
27,629
—
(10,890)
—
—
—
(10,890)
1,115,000
(880,000)
—
(26,884)
8,684
(11,923)
6,869
(28,956)
1,649
1,846
(199,024)
—
—
—
(12,739)
4,000
70
13,870
56,452
40,574
(16,719)
(1,128)
(29,647)
—
—
—
(8,966)
(83,142)
(2,236)
(6,415)
8,569
9,569
119,397
—
(134,002)
(2,347)
33,096
1,742
(101,511)
—
—
—
—
—
(2,736)
—
—
—
—
(13,898)
—
—
—
(16,634)
1,252
2,454
99
10,593
9,207
(92)
16
—
—
—
—
—
(10,255)
(396)
288
2,654
5,696
35,944
(8,832)
(10,979)
—
—
24
(19,787)
—
—
—
—
1,681
(1,513)
—
—
—
—
(5,013)
—
(1,095)
(10,422)
(16,362)
(205)
830
Cash and cash equivalents at end of period .
.
.
.
.
.
$
4,070
$
3,706
$
625
$
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-55
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2014
Net operating revenues . . . . . . .
$
721
$2,641,171
(in thousands)
$423,125
$
— $3,065,017
Select (Parent
Company Only)
Subsidiary
Guarantors
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Select Medical
Corporation
Costs and expenses:
Cost of services . . . . . . . . . . .
General and administrative . . .
Bad debt expense . . . . . . . . . .
Depreciation and amortization
Total costs and expenses . . . . . .
2,015
86,311
—
3,723
92,049
2,214,118
(1,064)
38,237
54,957
2,306,248
Income (loss) from operations . .
(91,328)
334,923
366,207
—
6,363
9,674
382,244
40,881
Other income and expense:
Intercompany interest and
royalty fees . . . . . . . . . . . . .
(1,142)
1,131
11
Intercompany management
fees . . . . . . . . . . . . . . . . . .
142,273
(121,230)
(21,043)
Equity in earnings of
unconsolidated subsidiaries .
Loss on early retirement of
debt . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . .
Income (loss) from operations
—
6,958
86
(2,277)
(57,301)
—
(23,717)
—
(4,428)
before income taxes . . . . . . . .
(9,775)
198,065
15,507
—
—
—
—
—
—
—
—
—
—
—
—
—
(133,759)(a)
2,582,340
85,247
44,600
68,354
2,780,541
284,476
—
—
7,044
(2,277)
(85,446)
203,797
75,622
—
Income tax expense (benefit) . . .
Equity in earnings of subsidiaries
Net income . . . . . . . . . . . . . . . .
(4,333)
126,069
120,627
78,748
7,690
1,207
—
127,007
14,300
(133,759)
128,175
Less: Net income attributable to
non-controlling interests . . . . .
Net income attributable to Select
Medical Corporation . . . . . . .
—
890
6,658
—
7,548
$120,627
$ 126,117
$
7,642
$(133,759)
$ 120,627
(a) Elimination of equity in earnings of subsidiaries.
F-56
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s
6.375% Senior Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2014
Select (Parent
Subsidiary
Company Only) Guarantors
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Select Medical
Corporation
(in thousands)
$ 120,627
$127,007
$ 14,300
$(133,759)(a)
$ 128,175
Operating activities
Net income .
.
.
.
.
Adjustments to reconcile net income to net cash
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
subsidiaries
provided by operating activities:
Distributions from unconsolidated subsidiaries
.
.
Depreciation and amortization .
Provision for bad debts .
.
.
.
Equity in earnings of unconsolidated
.
.
.
.
.
.
.
Loss on early retirement of debt
.
Loss (gain) on sale of assets and businesses .
.
Stock compensation expense .
Amortization of debt discount, premium and
.
.
.
Deferred income taxes .
.
Changes in operating assets and liabilities, net
issuance costs .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
of effects of business combinations:
Equity in earnings of subsidiaries .
.
Accounts receivable .
.
Other current assets .
.
.
Other assets .
.
.
.
Accounts payable .
.
.
Accrued expenses .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash provided by operating activities .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Investing activities
Acquisition of businesses, net of cash acquired .
.
Purchases of property and equipment .
.
.
Investment in businesses
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash used in investing activities .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Financing activities
.
Borrowings on revolving facilities
.
Payments on revolving facilities
Payments on term loans .
.
.
Net proceeds from 6.375% senior notes issuance
.
.
.
.
Term loan financing costs .
.
.
.
Borrowings of other debt .
.
.
.
.
Principal payments on other debt
.
.
.
.
Proceeds from bank overdrafts .
.
.
.
.
Dividends paid to Holdings .
.
.
.
Equity investment by Holdings .
.
.
.
.
Tax benefit from stock based awards
Intercompany .
.
.
.
.
.
Proceeds from issuance of non-controlling
.
.
.
.
Purchase of non-controlling interests .
.
Distributions to non-controlling interests .
interests
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash used in financing activities .
.
.
.
.
Net decrease in cash and cash equivalents .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period .
.
.
$
(a)
Elimination of equity in earnings of consolidated subsidiaries.
—
3,723
—
—
2,277
—
11,186
7,553
14,311
(126,069)
—
1,885
2,811
3,136
(6,353)
35,087
—
(4,674)
—
(4,674)
910,000
(870,000)
(33,994)
109,355
(2,139)
8,151
(9,213)
9,240
(184,100)
7,355
3,119
21,812
—
—
—
(30,414)
(1)
71
70
—
—
—
—
—
—
—
—
—
133,759(a)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,954
68,354
44,600
(7,044)
2,277
(1,048)
11,186
7,553
14,311
—
(97,802)
(1,729)
(103)
5,997
(16,039)
170,642
(1,211)
(95,246)
(4,634)
(101,091)
910,000
(870,000)
(33,994)
109,355
(2,139)
9,076
(14,673)
9,240
(184,100)
7,355
3,119
—
185
(9,961)
(3,979)
(70,516)
(965)
4,319
$
3,354
11,889
54,957
38,237
(6,958)
—
(1,168)
—
—
—
(7,690)
(80,394)
(4,004)
(2,566)
2,440
(9,407)
122,343
(397)
(79,600)
(4,634)
(84,631)
—
—
—
—
—
—
(2,058)
—
—
—
—
(26,337)
—
(9,961)
—
(38,356)
(644)
3,098
65
9,674
6,363
(86)
—
120
—
—
—
—
(17,408)
390
(348)
421
(279)
13,212
(814)
(10,972)
—
(11,786)
—
—
—
—
—
925
(3,402)
—
—
—
—
4,525
185
—
(3,979)
(1,746)
(320)
1,150
$
2,454
$
830
$
F-57
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Subsequent Events
As announced on January 27, 2017, the Company is in negotiations to refinance Select’s senior
secured credit facility. The Company expects that its new senior secured credit facility, which will replace
the Select credit facilities, will consist of $1,150.0 million of term loans with an interest rate of LIBOR plus
3.50% subject to a 1.00% LIBOR floor and a $450.0 million revolving credit facility with an interest rate of
LIBOR plus 3.25%. The proposed refinancing is subject to customary terms and conditions, including
negotiation and execution of definitive documentation. The Company anticipates that the refinancing, if
completed, would close in March of 2017.
19. Selected Quarterly Financial Data (Unaudited)
The tables below sets forth selected unaudited financial data for each quarter of the last two years.
The financial data presented below is the same for both Select Medical Holdings Corporation and Select
Medical Corporation, except for income per common share which is limited to Select Medical Holdings
Corporation.
Year ended December 31, 2015
Net operating revenues . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Select Medical Holdings
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share amounts)
$795,343
79,265
$887,065
85,011
$1,021,123
48,214
$1,039,205
62,300
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,063
36,940
29,406
29,327
Income per common share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.27
0.27
$
$
0.28
0.28
$
$
0.22
0.22
$
$
0.22
0.22
Year ended December 31, 2016
Net operating revenues . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . .
Net income attributable to Select Medical
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share amounts)
$1,088,330
86,886
$1,097,631
101,054
$1,053,795
56,162
$1,046,265
55,745
Holdings Corporation . . . . . . . . . . . . . . . . . . .
54,833
33,935
6,471
20,172
Income per common share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.42
0.42
$
$
0.26
0.26
$
$
0.05
0.05
$
$
0.15
0.15
(1) Due to rounding, the summation of quarterly income per share balances may not equal year to date
equivalents.
F-58
The
following Financial Statement Schedule
thereon of
PricewaterhouseCoopers LLP dated February 23, 2017, should be read in conjunction with the
consolidated financial statements. Financial Statement Schedules not included in this filing have been
omitted because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
along with
report
the
Select Medical Holdings Corporation
Select Medical Corporation
Schedule II—Valuation and Qualifying Accounts
Description
Allowance for Doubtful Accounts
Year ended December 31, 2016 . . . . . . . . . . . . . . . . .
Year ended December 31, 2015 . . . . . . . . . . . . . . . . .
Year ended December 31, 2014 . . . . . . . . . . . . . . . . .
Income Tax Valuation Allowance
Year ended December 31, 2016 . . . . . . . . . . . . . . . . .
Year ended December 31, 2015 . . . . . . . . . . . . . . . . .
Year ended December 31, 2014 . . . . . . . . . . . . . . . . .
Balance at
Beginning
of Year
Charged to
Cost and
Expenses
Deductions(1)
Balance at
End of Year
(in thousands)
$61,133
$46,425
$40,815
$ 7,586
$ 9,641
$10,547
$69,093
$59,372
$44,600
$(66,439)
$(44,664)
$(38,990)
$18,835
$ (2,055)
$ (906)
$
$
$
—
—
—
$63,787
$61,133
$46,425
$26,421
$ 7,586
$ 9,641
(1) Allowance for doubtful accounts deductions represent write-offs against the reserve for 2014, 2015,
and 2016.
F-59
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
A D I V E R S E N E T W O R K D E L I V E R I N G
E X C E P T I O N A L R E S U L T S F O R 2 0 Y E A R S
long -term acute care
rehabilitation hospitals
After retiring, Julie Dombo was excited to pursue her twin
Grammy Award-winning singer the Rev. Stefanie R.
passions of weight lifting and race walking.
Her plans changed, however, when she was caught in an
armed robbery at a store in her hometown. She survived
several close-range gunshot wounds but lost 2/3 of her lung
and, due to complications, her hands and feet. Signifi cant
medical intervention saved her life.
Minatee travelled the world with the renowned Jubilation
Choir, sharing her musical gifts. But last year, a massive
stroke threatened to silence her powerful voice.
With a range of physical, cognitive and emotional
challenges, Rev. Minatee feared never fully regaining her
independence. She put her faith in God, she said, and the
Kessler Institute for Rehabilitation. Her team of experts
After stabilizing, she began her next stage of recovery at
helped her recover her “mind, body and spirit.”
Select Specialty Hospital – Wichita. She learned to breathe
and perform everyday tasks as a quadruple amputee. During
her two-month stay, she found comfort and healing with
caregivers who supported her, as well as her family.
“This journey has taught me the importance of patience
and perseverance, hard work and hope. The next stage of
my life is fi nally here,” she said.
Rev. Minatee returned to the choir, touring and sharing
“Select Specialty is where I began my new life,” she said.
her gift with the world.
is the newest addition to the
Select Medical family. This
wholly owned subsidiary brings
a nationwide network of outpatient physical
rehabilitation centers into our company. In addition, it off ers
a range of services including general orthopedics, spinal care,
neurological rehabilitation, orthotics and prosthetics services.
B O A R D O F D I R E C T O R S
Robert A. Ortenzio
Executive Chairman & Co-Founder
Select Medical Holdings Corporation
Bryan C. Cressey
Founder & Partner
Cressey & Company
William H. Frist
Former Majority Leader of the United States Senate
Partner, Cressey & Company
Rocco A. Ortenzio
Vice Chairman & Co-Founder
Select Medical Holdings Corporation
James E. Dalton, Jr.
Retired CEO
Quorum Health Group, Inc.
Thomas A. Scully
General Partner
Welsh, Carson, Anderson & Stowe
Russell L. Carson
Founder
Welsh, Carson, Anderson & Stowe
James S. Ely III
Founder & Chief Executive Offi cer
PriCap Advisors, LLC
Leopold Swergold
Managing Member
Anvers Management Company, LLC
E X E C U T I V E O F F I C E R S
Robert A. Ortenzio
Executive Chairman & Co-Founder
Martin F. Jackson
Executive Vice President
& Chief Financial Offi cer
Scott A. Romberger
Senior Vice President, Controller
& Chief Accounting Offi cer
Rocco A. Ortenzio
Vice Chairman & Co-Founder
John A. Saich
Executive Vice President
& Chief Human Resources Offi cer
Robert G. Breighner, Jr.
Vice President, Compliance and Audit Services
& Corporate Compliance Offi cer
David S. Chernow
President & Chief Executive Offi cer
Michael E. Tarvin
Executive Vice President,
General Counsel & Secretary
C O R P O R A T E I N F O R M A T I O N
Corporate Headquarters
Select Medical Holdings Corporation
4714 Gettysburg Road
Mechanicsburg, PA 17055-5036
717.972.1100
Stockholder Inquiries
Joel T. Veit
Senior Vice President & Treasurer
4714 Gettsyburg Road
Mechanicsburg, PA 17055-5036
717.972.1100 | ir@selectmedical.com
Register & Stock Transfer Agent
Stockholder correspondence
should be mailed to:
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
Penn National Insurance Plaza
2 N. 2nd Street, Suite 1100
Harrisburg, PA 17101
Stock Exchange
NYSE
Symbol: SEM
Internet Address
selectmedicalholdings.com
Overnight correspondence
should be mailed to:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845-3170
S E L E C T M E D I C A L
I M P R O V I N G Q U A L I T Y O F L I F E
2 0 1 6 A N N U A L R E P O R T
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S E L E C T M E D I C A L H O L D I N G S C O R P O R A T I O N
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Our Mission
S E L E C T M E D I C A L W I L L P R O V I D E A N E X C E P T I O N A L
P A T I E N T C A R E E X P E R I E N C E T H A T P R O M O T E S H E A L I N G
A N D R E C O V E R Y I N A C O M P A S S I O N A T E E N V I R O N M E N T .
20 years of growth
L E A R N M O R E A T >> S E L E C T M E D I C A L H O L D I N G S . C O M
A N N U A L R E P O R T
4 7 1 4 G E T T Y S B U R G R O A D , M E C H A N I C S B U R G , P A 1 7 0 5 5