Select Medical Holdings Corporation (NYSE:SEM) Q4 2023 Earnings Call Transcript

Select Medical Holdings Corporation (NYSE:SEM) Q4 2023 Earnings Call Transcript February 23, 2024

Select Medical Holdings Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and thank you for joining us today for Select Medical Holdings Corporation’s Earnings Conference Call to discuss the Fourth Quarter 2023 Results and the Company’s Business Outlook. Speaking today are the company’s Executive Chairman and Co-founder, Robert Ortenzio; and the company’s Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select Medical’s plans, expectations, strategies, intentions and beliefs.

These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference call over to Mr. Robert Ortenzio.

Robert Ortenzio: Thanks, operator. Good morning, everyone. Welcome to Select Medical’s earnings call for the fourth quarter of 2023. Before providing details on each of our four operating divisions, I will provide some updates and commentary on the business. As most of you know, on January 3, 2024, we announced that our Board of Directors has approved a plan to pursue the separation of Select Medical’s wholly-owned occupational health services business, Concentra. As I have previously stated, we are pursuing the separation of Concentra with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets. The potential separation is intended to be affected in a tax-free manner to Select Medical and its stockholders and to be completed in 2024.

We expect in the very near future to receive a private letter ruling from the U.S. Internal Revenue Service with an opinion confirming the tax-free status of the potential separation of the Concentra business. The completion of the separation is still subject to customary conditions, including favorable market conditions, completion of necessary financing transactions and final approval by the Select Medical Board of Directors. I will now provide commentary on our four business lines. Overall, we had a very successful fourth quarter and year. We experienced double-digit adjusted EBITDA growth over prior year in every quarter of this year. In the fourth quarter of 2023, adjusted EBITDA grew 21% and revenue grew by 5% with all four of our operating divisions again exceeding prior year revenue and EBITDA.

For the quarter, total company adjusted EBITDA was $180.1 million compared to $148.9 million in the prior year. Our consolidated adjusted EBITDA margin was 10.9% for Q4, compared to 9.4% in the prior year. Our critical illness recovery hospital division continued to see margin improvement in Q4 with a 28% increase in adjusted EBITDA margin along with a 4% reduction in their salary, wages and benefits to revenue ratio compared to the prior year. Consistent with prior quarters, Marty Jackson will provide additional detail regarding critical illness continued progress with labor. Critical illness incurred $3.6 million of startup losses related to new hospitals in this quarter compared to $3.1 million in the same quarter prior year. The opening of the critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with Rush University System for Health remains on target for Q2 of this year.

As we mentioned last quarter, we also have hospital expansions underway which are expected to be completed in 2025, including in our Orlando market which will also include a 48-bed rehab distinct part unit. On the inpatient rehab development front, we’re excited to announce that we signed an agreement with CoxHealth System to construct a new freestanding 63-bed inpatient rehab hospital in Ozark, Missouri in which we will have a majority interest. This hospital is projected to open early-2026. As previously noted, we have agreements with the University of Florida Health Shands to open a 48-bed hospital in Jacksonville, Florida, in Q3 of 2024 and with the Cleveland Clinic to open a fourth inpatient rehab hospital, which is a 32-bed hospital scheduled to open in the first half of 2025.

In the latter half of 2024, we plan to begin construction on a new inpatient rehab hospital in Southern New Jersey, the Bacharach Institute for Rehab in partnership with AtlantiCare. We anticipate that our inpatient rehab division will continue their strong performance and have a successful 2024. Overall, I am pleased with the development results and pipeline for our Specialty Hospital divisions. In 2023, we developed or acquired and put in operation 128 inpatient rehab beds and 227 critical illness recovery hospital beds. In 2024, we plan to be under construction or complete construction of 533 inpatient rehab facility beds and 70 critical illness recovery hospital beds that will begin operations in the current year or 2025. Concentra continued their strong performance exceeding prior year revenue, EBITDA and patient volumes.

As we mentioned on the last call, Concentra had significant development activity in October with the acquisition of three occupational medicine centers in Delaware and Maryland and the opening of three de novos in Norfolk, Virginia; Columbus, Ohio and Fort Myers, Florida. We have five signed leases for de novo slated open in 2024 and two signed leases for de novo expected to be open in Q1 2025. There is a strong pipeline of acquisitions, including one currently under a letter of intent and other de novos that we continue to evaluate. This quarter, our outpatient rehab division generated a 41% increase in adjusted EBITDA and an 11% increase in visits per day. The division added seven clinics this quarter via de novos, which offset the closure of 12 underperforming clinics and the fold-in of eight clinics into existing operations as their leases expired.

The pipeline for future growth remains strong with 19 executed leases for de novo clinics, of which 10 are scheduled to open in the first half of 2024. There are also many additional opportunities for acquisitions and de novo development that are under consideration. At this point, I’ll provide some further data points on each of our operating divisions. Our critical illness recovery hospital division experienced increases of 1% in net revenue and 29% in adjusted EBITDA. While our occupancy was down from same quarter last year, an increase in our case mix index and favorable payer contract negotiations contributed to an increase in our revenue per patient day. We’ve experienced very nice volume increases thus far in the first quarter of 2024 and are now at levels that exceed prior year.

Our adjusted EBITDA margin was 10.1% for the quarter compared to 7.9% in the prior year Q4. The reduction in labor costs contributed to the improvement of our EBITDA margin with a 4% reduction in our salary, wages and benefit to revenue ratio. Both nursing agency rates and utilization decreased 24% when compared to prior year Q4. Orientation hours decreased 10% compared to prior year Q4 and decreased 26% compared to Q3 of 2023. Nursing sign-on incentive bonus dollars decreased 36% from prior year Q4 and 5% from the prior sequential quarter. Our inpatient rehab hospital division experienced 9% increase in net revenue and a 19% increase in adjusted EBITDA. Patient volumes increased 7% and our rate per patient day increased 3%. Our occupancy of 85% was consistent with prior year.

The adjusted EBITDA margin for inpatient rehab was 25.5% for Q4, higher than the prior year of 23.6%. Concentra experienced an increase of 6% in net revenue, driven primarily by rate. Our workers comp volume increased 6% but was offset primarily by a decrease in employer-based visits which are reimbursed at lower rates that resulted in an overall visit increase of 1%. Concentra’s adjusted EBITDA margin increased to 15.5% for the quarter compared to 15% for the same quarter prior year. Outpatient rehab division experienced an increase of 6% in net revenue, with patient volumes increasing by 11%, offset by a decrease in rate from $102 net revenue per visit to $100. Organizational activities focusing on improving clinical productivity via patient access contributed to additional volume where the decline in rate was due to a decline in the outpatient Medicare fee schedule, payer mix, and variable discounts.

The outpatient division adjusted EBITDA increased by 40.9% compared to prior year with a 33% increase in EBITDA margin to 7.5% from 5.7%. Earnings per fully diluted share were $0.36 in the fourth quarter compared to $0.22 per share in the same quarter prior year. For the full year, earnings per fully diluted share were $1.91 compared to $1.23 per share in the prior year. Adjusted earnings per fully diluted share were $1.99 this year, which excludes the loss from early retirement of debt and its related costs and tax effects. In regards to our allocation deployment of capital, our Board of Directors declared a cash dividend of $0.125 payable on March 13, 2024, to stockholders of record as of the close of business on March 1, 2024. This past quarter, we did not repurchase shares under our Board authorized share repurchase program and we will continue to evaluate stock repurchases, reduction of debt, and development opportunities.

This concludes my remarks and I’ll turn the call over to Marty Jackson for some additional financial details and commentary before we open the call up for questions.

A – Martin Jackson: Thanks, Bob. Good morning, everyone. I would like to first provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our salaries, wages, and benefits as a percentage of revenue decreased from 59.8% in Q4 prior year, down to 57.6% this past quarter. Our SW&B as a percentage of revenue improved as the quarter progressed. Our year-to-date basis with regards to SW&B as a percentage of revenue decreased from 63.4% in ’22 down to 57.2% in ’23. Thus far in 2024, our SW&B as a percentage to revenue has continued to trend favorably and we expect to finish at or below 55% in Q1. This past quarter we had a sequential reduction from Q3 to Q4 in our RN agency costs with a decrease in both utilization and agency rates.

The reductions realized were 17% in RN agency costs, a drop in RN utilization from 15% to 14%, and a decrease in agency rate from $78 to $70. RN agency utilization decreased throughout the quarter from 14.4% in October, 13.8% in November and 13% in December. Nursing sign-on and incentive bonuses dollars also decreased by 5% and we had a 26% decrease in orientation hours. Moving on to our financials. In Q4, equity and earnings of unconsolidated subsidiaries was $10.2 million compared to $6.8 million in the same quarter prior year. Net income attributable to non-controlling interest was $15.5 million compared to $10.2 million in the same quarter prior year. Interest expense was $50.8 million in the fourth quarter. This compares to $47.3 million in the same quarter prior year.

The increase in interest expense was attributable to an increase in interest rates. This was offset by a decrease in our revolving credit facility when compared to Q4 of ’22. At the end of the quarter, we had $3.7 billion of debt outstanding and $84 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $280 million in revolving loans, $1.2 billion in our 6.25 senior notes, and $68.2 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.54 times. As of December 31, we had $434 million of availability on our revolver. The interest rate on $2 billion of our term loans is capped at 1% SOFR+ 300 basis points through September 30, 2024.

For the fourth quarter, operating activities provided us with $179.4 million in cash flows. Our day sales outstanding, or DSO, was 52 days as of December 31, 2023, this compared to 55 days at December 31, 2022, and 52 days at September 30, 2023. Investing activities used $69.6 million of cash in the fourth quarter. This includes $60.6 million in purchases of property, equipment and other assets and $9 million in acquisition and investment activity. Financing activities used $103.3 million of cash in the fourth quarter. This was primarily due to $60 million in net payments on a revolving line of credit, $16 million in dividends on our common stock, $13.4 million in net payments on other debt, which included $5.3 million of term loan payments and $12.5 million in net payments and distributions to non-controlling interests.

As stated previously, we did not purchase any shares under our Board-authorized repurchase program this quarter. Last quarter, the Board approved a two-year extension of the share repurchase program, which now remains in effect until December 31, 2025, unless further extended or earlier terminated by the Board. We are issuing our business outlook for 2024 and expect revenue to be in the range of $6.9 billion to $7.1 billion. Adjusted EBITDA is expected to be in the range of $830 million to $880 million. And finally, our expected range for earnings per fully diluted common share is $1.88 to $2.18. We expect capital expenditures to be in the range of $225 million to $275 million for 2024. This concludes our prepared remarks. And at this time, we’d like to turn it back over to the operator to open up the call for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Justin Bowers from Deutsche Bank.

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Q&A Session

Justin Bowers: Hi. Good morning, everyone. Could you talk about some of the moving parts in the guide and then any additional color you can give us by segment would be appreciated as well. How you’re thinking about some of the segments playing out for the year?

Martin Jackson: Yeah, Justin. This is Marty. The outlook that we provided is really a function of — taking a look at the four business segments, taking a look at some of the headwinds as well as the tailwinds. Obviously, the inpatient rehab is doing quite well. Concentra is doing quite well. We did have some headwinds, though, in the — both our critical illness recovery hospitals with regards to the high-cost outlier, and we had cuts on the Medicare portion of our outpatient rehab. So, — and all of that’s reflected in the outlook. So I think you can expect that the critical illness recovery hospitals and outpatient rehab was a little bit muted because of that. But both inpatient rehab and Concentra continues to do quite well both in terms of revenue growth and EBITDA growth.

Justin Bowers: Okay. Understood. And I just wanted to ask one about a couple about LTAC and then one on outpatient rehab. So I think you said that LTAC is tracking towards 55% SWB in first quarter. I just want to clarify that I heard that correctly. And then is that sort of the implication there, that volumes are up sequentially? And then just one more. Do you have another LTAC coming online in 2024 this year? So, I guess, a bit of a three-parter.

Martin Jackson: Sure. The first part of the question was the 55%. And yes, you did hear that correctly. We are trending towards 55%. We have seen volumes up in the first quarter, and we do have a hospital coming on and critical on this recovery hospital in Q2.

Justin Bowers: Okay. Got it. And then just on outpatient rehab. I know that there’s — obviously there’s been some headwinds with Medicare, too, but you guys have been chopping some wood operationally as well over the last, I think, four quarters to six quarters. Is that segment likely, like, are you expecting margins to improve in that segment this year and sort of any thoughts on the trajectory to get back to that low to mid-teens margin that you guys target?

Martin Jackson: Yes. As I mentioned before, we did have the cuts from Medicare, and that muted the growth there. We do expect — we’re seeing clinical efficiencies improve and we expect within — probably within the next two years to three years that we will be in that low to mid-range teens as far as margins are concerned.

Justin Bowers: Okay. Thanks. I’ll jump back in queue.

Martin Jackson: Thanks, Justin.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Kevin Fischbeck from Bank of America.

Kevin Fischbeck: Great. Thanks. Maybe just to go back to the guidance, the range, I guess, from a percentage perspective, looks a little wide. What are the things that you think are kind of the things that could push you to the high end or the low end of the guidance range?

Martin Jackson: I think the primary item for us, Kevin, is the potential impact on the high-cost outliers on the critical illness recovery hospitals. And that’s why we were pretty wide on the range.

Kevin Fischbeck: Okay. And then, I guess the improvement that you made in the Q4 on the labor side of things happened with volume being a little bit weak. And I just want to see, it seems it should be easier to staff when volumes are a little bit light. It sounds like you’re expecting volumes to kind of come back. Is there anything you need to do on the hiring side or any trends you could point to on the hiring side that kind of say, as volumes normalize, you still be able to make progress on the temp staffing side of things?

Martin Jackson: Yeah. For us, what we’ve seen is we are back to pre-pandemic with regards to our staffing. If you recall, we talked about, on average, pre-pandemic what our different buckets of nurses are in. So we have our full-time nurses. That’s pretty much back to where we’ve been pre-pandemic. We think we’re seeing PRN actually increase, which is a good thing. And historically we’ve been in that 15% to 18% as far as agency nursing, and we’re down to 13%, 14%.

Kevin Fischbeck: I think what the..

Martin Jackson: I think all that [Multiple Speakers]

Kevin Fischbeck: But then, say, if you’re — if you kind of back from a staffing level, what’s the lever to get further down as a percentage of SW&B, is it just occupancy and leverage from that, or is it rates?

Martin Jackson: Yeah. It really is. It’s volume. Volume will do wonders to get that percentage down. Yeah. I mean, volume is going to increase your top line.

Kevin Fischbeck: Yeah. Okay. And then maybe the Concentra spin-off sounds really interesting. I was wondering if you could just maybe provide us or remind us kind of how you’re thinking about the growth of Concentra and what that company might look like as a standalone company. You’ve done a really good job bringing the margins up in that business. Is there still room on the margin side, or is it more about organic growth, de novos and tucking acquisitions? How should we think about the growth of that business as a separate?

Robert Ortenzio: Well, it’s Bob. I think Concentra is just a fabulous company because of their dominance in that occupational medicine space and their various levers they have to grow. I mean, they can grow by de novo, they can grow by acquisitions either in new markets or existing markets. So they have a lot of levers that they can press, and I think that they enjoy solid margins. Now, I’m not sure that I could sit here and project that their margins are going to go very much higher than they are right now, but they do have a lot of opportunities for growth. So we’re pretty excited to have Concentra, as you know, all these years that we’ve had it, and I’m pretty enthusiastic about their prospects as a standalone company.

Kevin Fischbeck: All right. Great. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Ben Hendrix from RBC Capital Markets.

Ben Hendrix: Hey. Thank you very much. You guys are continuing to deliver a really impressive margin in the inpatient rehab business despite what looks like a fairly aggressive development strategy. I just wondered if you could kind of go in a little bit more into your development pipeline, how you’re thinking about that, and if there’s any risk that we could see some drag on the margin over the next several quarters given the expansion. Thanks.

Robert Ortenzio: Yeah. As you pointed out, we are a pretty — we feel pretty good about the development pipeline for inpatient rehab given our strategy. Our strategy as our new development is in partnership with large acute care systems. So in some regards, we don’t have complete control over the cadence of when those hospitals come on. Now, as you know that we — our policy is not to announce our rehab projects until they’re signed and commenced. But we did go a little bit further on disclosure today when I talked about the hospitals in 2024 that we had hoped to have under construction or complete. So that’s 533 rehab beds and a much smaller number of critical illness beds in 2024. Any drag on earnings as a result of that development, you can assume, is factored into the guidance. So, I think that we’re of a size and the platform there is that we feel we can bring these on and not really compromise our growth rate in that division.

Ben Hendrix: Thanks. And just if I may ask a different question here, we’re getting some questions about the recently announced subpoena in California for Concentra. And I know these types of things pop up from time to time. But is there anything unique or notable about this subpoena, and is there any potential for it to delay your timeline on the spin? Thanks.

Robert Ortenzio: No. We do not believe that it will have any delay on the separation of Concentra. These subpoenas you can get for all kinds of reasons. This one comes from the California State Department of Insurance. And you can have — I think investors in healthcare are used to the various qui tams that are often times announced because of whistleblower suits. And that can happen in state agencies as well as federal. We never like to get them, and I’m a little old to say that these are routine, but they have become routine over the years. And so we disclosed it as we feel is our obligation. But beyond that, I really can’t predict the outcome. And — but I can tell you that we will vigorously defend our business practices in California with Concentra.

Ben Hendrix: Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Bill Sutherland from the Benchmark Company.

Bill Sutherland: Thank you. Good morning, guys. Hey, Bob, you mentioned that volumes were starting to improve quarter to date for critical illness. Can you just give us a little more color on that and maybe the — how you think about the sustainability?

Robert Ortenzio: Well, I can’t give you much more color on that. I mean, we are trying to give a little bit more disclosure, and for us to give how the first quarter is shaping up is, as you know, probably a little unusual for us, but we were pleased that volumes are up. Now, it is — seasonally, this is the time, and those volumes can be affected by lots of things. But it was pretty broad-based and across the country for our critical illness hospital. So I thought that was noteworthy. I mean, I — it’s hard to say without more current data whether it’s because you have more respiratory cases or whether there’s COVID or other acute illnesses that are driving that volume. Normally, our critical illness volumes go up when the ICUs at acute care hospitals volumes go up.

So when we look at our volumes, I think you can assume that in large measure it’s because volumes at our referral hospitals in their ICUs are up as well. So sustainable. I’d like to think so. I mean, I don’t think there’s anything to suggest that there has been an outbreak of health in the United States. I think we’ll continue to see patients that, particularly with an aging population, that have the kind of respiratory conditions that land them in ICUs and make them appropriate for our level of care. So I’d like to think so. But as you’ve seen over the years, that census can go up and down. And Q1 is seasonally one of the better quarters because of the winter and the colder months.

Bill Sutherland: Yeah. It was interesting on a year-over-year basis. It’s because you were kind of flattish last year. At Concentra, curious if you could give us a little more color on the blend of the business and why the employer visit side is not as strong and what might be the outlook for that. I know it helps the mix, but just curious about that.

Martin Jackson: Yeah, Bill. This is Marty. Yeah. The employer side that there’s — the different things that they have there or the different activities they perform is pre-employment physicals, drug testing, to a certain extent, it has to do with the drug testing is down a little bit. And I think that may have to do with some of the — we’ve increased some of our pricing. And there is some — there is a lot of price elasticity associated with that product.

Bill Sutherland: But that’s a — but it has a pretty standard, I mean, steady demand side, the drug testing?

Martin Jackson: Yeah. There is [Multiple Speakers] As you probably know, there’s Department of Transportation requires drug testing for all truck drivers. So that’s certainly been good. And there is some — as far as the employment, employment’s been pretty steady.

Bill Sutherland: Okay. Thinking about outpatient rehab for a second and the revenue per visit and I know the pressure there from Medicare. How do you think things could go this year for that number? [Multiple Speakers]

Martin Jackson: I think we’re going to see — yeah — I think we’re going to see net revenue per visit increase. Our expectation is to see that increase at least a couple of dollars, whether it’s $2 or $3.

Bill Sutherland: Okay.

Martin Jackson: By the end of the year.

Bill Sutherland: Right. And then kind of — just kind of a more high-level question, Bob. I’m looking at this big expansion plan for beds for rehab hospital relative to critical illness. And I’m wondering if this is just timing or is this kind of a Board and Management view of capital allocation relative to — given the margin profile of rehab hospital and I think the market growth opportunities relative to critical illness?

Robert Ortenzio: Yeah. I mean, it’s a good question about how we think about allocating capital. It’s truly all an allocation of capital assessment. The rehab, the critical illness has historically been our largest division. We have a footprint of over 107 hospitals. I see that there will always be, I think, opportunities there. Although we have fought some reimbursement headwinds in the critical illness, and this high cost outlier threshold issue that we’ve talked about is certainly a headwind. That’s not to say that rehab hospitals will not have headwinds in the future. But I think the way we look at it is as we work with the kind of large partners of the type that we have signed, when you have those opportunities to do those deals, I think those are the ones that become a priority for our capital.

And typically they involve using capital to build new hospitals, which are not inexpensive. The critical illness opportunities do come about, and we tend to treat — choose the ones that are absolutely the most compelling. So we will continue to do that and add new hospitals to critical illness. But when we have an opportunity to work with a great partner as the profile of the ones that we have for inpatient rehab, we certainly want to move on those. And our development pipeline that we’ve been working for years and years and years is just very robust right now. And there are some great opportunities to sign some rehab deals with just some great partners. And what we’ve seen over the history of the company is these partnership deals and returns and growth within the partnerships is absolutely compelling.

And so — well — and I think because of the way we structured those with the partners, they tend to have a larger moat around them and give you the comfort that even in the face of perhaps some reimbursement headwinds, if and when they come, you’ll be able to navigate them better with a very large system. And I think the other thing that’s not particularly well recognized is not only the signing of the new partnerships, but the growth within the partnerships. And we mentioned today that we are getting underway with the construction of our fourth inpatient rehab facility in partnership with the Cleveland Clinic in their market. And so these opportunities just are really compelling. And sometimes building replacement facilities or taking units out of hospitals in partnership and building those are just really great deals.

So I think you’ll continue to see growth in both, but perhaps a bit more of an acceleration of the inpatient rehab and with the planned separation of Concentra, as we look at the growth rate for the company, we’ll see it in outpatient rehab, inpatient and in the critical illness. But the rehab is a good opportunity.

Bill Sutherland: Got it. Thanks, Bob.

Operator: Thank you. One moment for our next question. Our next question comes from the line of A.J. Rice from UBS.

A.J. Rice: Hi, everybody. A couple of questions maybe. I just want to make sure I understand on the — talked a couple of times in response to questions about the outlier threshold increasing on the critical access facilities or critical illness facilities. What — that went into effect, I think, October 1. Do you get a pretty good read right away as to how that impact is? I guess I’m trying to figure out why it still is a big swing factor in the guidance if we’ve got a quarter’s experience already.

Martin Jackson: A.J., it really takes some time to evaluate something that significant with regards to the high-cost outlier. I mean, we went from 38 — a little bit north of $38,000 up to $59,000. So, it’s — and remember, the length of stay of our patients is not five days to six days, it’s over 30 days.

Robert Ortenzio: I think the other thing, A.J., is it’s not hard for us with our kind of robust systems and data collection to understand the impact. We understood the impact way in advance of it going into effect. It’s a question of how your mitigation strategies are going to work. And so it’s not so much understanding the impact, but over the course of this year, how will — how successful will the operators be in the mitigation and that is — that tends to play out and is not as easy as you would think, because it’s — you want to keep your referral sources happy. But at the same time, you have to appreciate that the more high-cost outliers that you hit, the more of the losses you’re going to sustain. So I think that is a reason why we’ve left ourselves some room on the guidance.

A.J. Rice: Okay. Can you probably have given this before, can you just remind me what percentage of your admissions, or your volume, however you want to describe it, end up falling into that status typically? I know it’ll change with the increased threshold, but is there — can we give an order of magnitude of how many — what percentage of your patients are impacted in that business?

Martin Jackson: Yeah, A.J. It varies pretty significantly hospital by hospital and then on average also. So we really have not provided that because of that variation.