Select Medical Holdings Corp Q2 FY2022 Earnings Call

Good morning. And thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Second Quarter 2022 Results and the Company's Business Outlook. Speaking today are the company's Executive Chairman and Co-Founder, Robert Ortenzio, and the company's Executive Vice President and Chief Financial Officer, 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 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.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical earnings call for the second quarter of 2022. The past two and a half years have presented numerous challenges for our company and our colleagues. As we're hopefully in the back end of the more extreme impacts of the pandemic, our focus has been on recruiting, retention, and valuing the accomplishments of our employees. This quarter, we have started to experience progress as a result of our efforts, which has led to an upturn in hiring key clinical positions, namely RNs. The investment in full-time staff has resulted in an increase in orientation and education costs for our new hires. We anticipate these costs will return to approximate historical trends once our utilization of agency reaches a normalized level. We have gained traction that has since declined as the second quarter progressed, both in reduced agency rates and utilization. The past nine months labor costs, particularly in our critical illness recovery hospital division, have created many headwinds, but we are cautiously optimistic we will continue to see improvements, which will result in stability and predictability of our clinical labor by the end of the year. Marty Jackson will provide some more granular data supporting our optimism on the direction of our clinical labor expenses in his comments. In other news, I'm pleased to share with you that US News and World Report has released its annual best hospitals list. One of our wholly owned and three of our partner inpatient rehabilitation hospitals are ranked among the nation's best for 2022, 2023. They are at number four, Kessler Institute for Rehabilitation, number 14, Baylor Scott and White Institute for Rehabilitation in Dallas, number 26, Emory Rehabilitation in Atlanta, and number 31, Ohio Health Rehabilitation Hospital in Columbus, Ohio. This marks the 30th consecutive year that the Kessler Institute has been named among the nation's best hospitals for rehabilitation, and the second year in a row for Baylor Scott and White Dallas, Emory, and OhioHealth. For my comments today, I am continuing with the format that was introduced in the first quarter, which provides more commentary on each of our four business segments. The financial details we normally provide on this call are available in our earnings release and Form 10-Q that was provided last night, and I will only provide the highlights in my remarks. Overall, we experienced revenue growth in the quarter with an increase of 1.3% over the prior year while continuing to navigate through labor challenges. For the quarter, total company adjusted EBITDA was $181 million compared to $342 million in the prior year. Our consolidated adjusted EBITDA margin was 11.4% for Q2 compared to 21.9% in the prior year. CARES Act grant income was recognized in Q2 of this year, as well as Q2 of the prior year. This quarter, we recognized $15.1 million of grant income versus $98 million in prior year Q2. Excluding grant income, adjusted EBITDA for this quarter would have been $165.9 million compared with a 10.5% margin compared with $244 million with a 15.6% margin last year. Excluding the decrease in CARES income, the most significant contributor to the decrease in Q2 adjusted EBITDA from the prior year was the salary, wage, and benefit increase in the critical illness division, while Q2 was the first quarter to show a reduction in agency expense. As I previously mentioned, retention efforts and new hires in the RN and CNA positions contributed to an increase in cost. Salary increases, orientation, education, and incentive bonuses are necessary steps in the efforts to replace the higher agency cost nurses with employed staff. We are starting to see positive results in hiring full-time nurses and expect this trend to continue into Q4 of this year. Now I'll provide some data points as commentary on each of our operating divisions. Our critical illness recovery hospital divisions revenue, patient days, and net revenue per patient day slightly increased compared to Q2 of the prior year. Occupancy decreased to 67% from 69% compared to the same quarter prior year. Many of our referring short-term acute care hospitals still experienced lower volumes within their ICUs compared to the prior year, specifically than patients, which contributed to our decrease in occupancy. We expect that when ICU volumes in our referring hospitals increase, we will continue to see these patients within our hospitals. Adjusted EBITDA margin for the critical illness was 4% for the quarter compared to 13% in the prior year as our salary, wage, and benefit to revenue ratio increased by 14%. The SWB to revenue ratio improved slightly from Q1, and we have seen improvement every month within the second quarter. Salary increases, RN orientation, education, along with incentive and sign-on bonuses, were the main drivers for the increase in labor. Education and orientation hours for RNs increased by 67% over the prior year, while overall bonus expense increased 51%. In Q2, we saw a substantial drop in nursing agency rates from Q1 but remain slightly higher than prior year Q2. In Q2, we expanded our footprint in the Youngstown, Ohio market with a two hospital acquisition. One existing hospital was closed and consolidated with one of the acquired locations. We have also signed agreements with joint venture partners to open four hospitals located in Jackson, Tennessee, Tucson, Arizona, Alexandria, Virginia, and Venice, Florida, all expected to open in 2023. On the regulatory front, this week CMS issued final tech LTCH rules for fiscal 2023 effective October 1st of this year. The final rule includes a 3.8% increase in the federal base rate, which is higher than the 2.8% increase outlined in the proposed rule. The high-cost outlier threshold increased by 16.7%, which was lower than the proposed rule. The MS-LTC-DRG relative weight and expected length of stays were also updated in the final rule. Turning to inpatient rehab. Our inpatient rehabilitation hospital division experienced an increase of 7.6% in net revenues with patient volumes increasing by 4%. Occupancy increased to 86% compared to prior year, which was 85%. Revenue for patient day increased $79 from $1,849 to $1,928. The adjusted EBITDA margin for the inpatient rehab was 21.8% for Q2 compared to 23.9% in the prior year. The decline in inpatient rehab adjusted EBITDA margin was attributed to elevated agency costs along with an increase in nursing incentive bonuses for employed staff. The overall salary, wage, and benefit to revenue ratio for inpatient rehab hospitals increased by 4% from prior year Q2 but improved by 3% from Q1 2022. Nursing agency usage levels increased from prior year but we have seen improvement compared to the first quarter of this year, along with improvement each month throughout the second quarter. The agency rates for RNs in the rehab division decreased by 4% from prior year and 21% from Q1. The increase in agency compared to prior year was predominantly in our California and North Jersey markets. In regards to development, we have signed an agreement with a joint venture partner to open a rehabilitation distinct part unit in our Venice, Florida critical illness recovery hospital, which is expected to open in 2023. There are numerous opportunities in the pipeline currently being evaluated. Last week, CMS also issued the final inpatient rehab rules for fiscal 2023 effective October 1st. The final rule includes a 3.7% increase in the standard payment amount, which is higher than the 2.7% included in the proposed rule. In addition, the high-cost outlier threshold increased by 32%, which is lower than the proposed rule. The CMG relative weights and average length of stay values were also updated with the final rule. Turning to Concentra. Concentra continues to outperform and exceed plan. Although, when comparing this quarter to prior years, revenue declined by $15 million as a result of the significant demand for COVID-related testing and evaluations in the second quarter of 2021. Last year, these services generated $55 million in revenue and $22 million in adjusted EBITDA, compared to $8 million in revenue and $3 million in adjusted EBITDA in Q2 of this year. The revenue decline was less than expected as the exceptional performance in the centers mitigated the COVID testing revenue reduction. Center patient volume increased by 6% and consensus overall net revenue per visit increased by 2% to $127. Our adjusted EBITDA margin for Concentra was 21% for Q2 compared to 30% in the prior year. The results in Q2 of the prior year included $32.3 million of CARES grant income. Excluding the grant income, the adjusted EBITDA margin would have been 23% in Q2 2021 versus 21% this quarter. Concentra experienced a 1% improvement in their salary, wage, and benefits revenue ratio from prior year Q2 and remained consistent with Q1. The reduction in adjusted EBITDA margin from prior year was primarily a result of increased lab and medical supply costs in addition to travel expenses returning to normal. In Q2, Concentra acquired two centers located in Chesapeake and Newport News Virginia, which is an attractive new market for the company. We have also signed four leases for de novo clinics that are expected to open by year-end. There continues to be a healthy pipeline of potential acquisition de novo opportunities that are under consideration. Turning to outpatient. Our outpatient rehabilitation division experienced a 2% increase in net revenues with patient volumes also increasing 2% compared to the same quarter prior year. Net revenue per visit increased $203 from $102 prior year despite a 3% decline in Medicare reimbursement. Adjusted EBITDA decreased compared to prior year with a decrease in margin to 11.7% from 16.3%. The decline in adjusted EBITDA margin is primarily due to an increase in salary, wage, and benefit to revenue ratio compared to the same quarter prior year. In the second quarter, the outpatient division experienced a 5% increase in salary, wages, and benefit to revenue ratio compared to prior year but improved by 1.5% from Q1 2022, which represents an improvement for the last two quarters. Other operating expenses to revenue ratio increased by 9% over prior year Q2, mainly due to marketing and travel costs returning to pre-pandemic levels. In Q2, we expanded our clinic count by 19 centers through acquisition and de novo growth. Looking forward to the remainder of the year, we have leases executed for 26 de novo clinics. Finally, earnings per fully diluted share were $0.43 for the second quarter compared to $1.22 per share in the same quarter prior year. Our earnings were positively affected by CARES grant income recognized in the second quarter of both this year and last. In regards to our allocation and deployment of capital, our Board of Directors declared a cash dividend of $0.0125 payable on September 2, 2022 to shareholders of record at the close of business on August 16, 2022. This quarter, we bought back 5,438,939 shares of stock at an average price of $23.16. We will continue to be opportunistic and evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks. I'll turn it over to Marty Jackson for some additional financial details before we open the call up for questions.

Thanks Bob. Good morning, everyone. I would like to follow up on several of the opening comments regarding our clinical labor costs. As we mentioned, we've seen a significant sequential reduction in Q1 '22 to Q2 of '22 in agency rates, utilization, and total agency expenses. The reductions we realized during this period were 22% for rates with the average rate for Q1 of $143 an hour, dropping to $111 for Q2, a 13% reduction in utilization moving from 37.5% in Q1 to 32.5% in Q2, and a 37% reduction in agency expense from $89.4 million in Q1 to $56.4 million in Q2. Even more encouraging are the reductions of these categories within the second quarter. We saw a reduction from April to June of 23% on rates from an average rate of $123 in April to $95 in June, dropping 29% in utilization from 38.2% in April to 26.9% in June, and a drop of 48% for overall agency expense from $24.4 million in April to $12.8 million in June. We have seen this trend continue for the month of July with a 5% reduction in rate to $90 an hour, 10% utilization reduction to 24.1%, and a 13% reduction in total agency expenses to $11.1 million. Bob also mentioned our efforts on the hiring of full-time nurses. We have seen a very nice increase in the number of full-time nurses hired this past quarter, growing by more than 54% sequentially from quarter one to quarter two. These new hires typically participate in seven to eight weeks of orientation and training prior to treating patients. During this time, we will continue to utilize agency but we see a pathway to continued reduction of agency throughout the balance of the year with these newly hired RNs. And other key performance indicators we focus on is salaries, wages, and benefits as a percentage of revenue. Our historical trend prior to the pandemic ran at a rate of 51% to 52%. During the pandemic, there was a significant increase in demand from health systems for nurses regardless of the cost. We saw agency rates increase from an historical range of $72 to $78 an hour, up to, in some cases, $220 an hour in certain geographical locations. Given this new macroeconomic environment, we saw for the first three quarters of 2021 this KPI increased to 56%. This rate increased dramatically in Q4 of '21 in the first two quarters of this year, ranging from 64% to 66%. We believe given our discussion above this rate will come down nicely over the next two quarters as new hires replace agency nurses and the agency rates continue their downward trend. Our target for the end of the year is to be in the range of 55% to 57% with the clear path of returning to a more normalized range closer to our historical rate throughout 2023. Moving over to our financials. In Q2, equity and earnings of unconsolidated subsidiaries were $6.2 million as compared to $11.8 million in the same quarter of prior year. The decrease is a result of lower earnings in our minority-owned inpatient rehab hospitals and outpatient clinics. The new Banner East Hospital opened in April and incurred losses within the quarter related to startup costs. A few other joint ventures experienced lower earnings caused by unfavorable shifts in payer mix, which resulted in reductions to our net revenue rate. Net income attributable to non-controlling interest was $11.1 million. This compares to $31.3 million in the same quarter of the prior year. The decrease is primarily due to the repurchase of membership interest in Concentra in Q4 of 2021, which we now own 100% of the voting interest. In addition, we experienced lower earnings in a few of our large joint venture hospitals, primarily as a result of the elevated nurse agency cost compared to the second quarter of 2021. Interest expense was $41.1 million in the second quarter. This compares to $33.9 million in the same quarter of the prior year. The increase in interest expense was primarily attributed to an increase in one-month LIBOR rates compared to Q2 of 2021, as well as borrowings made under our revolving credit facility. At the end of the quarter, we had $3.8 billion of debt outstanding and $94.7 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $350 million in revolving loans, $1.2 billion in 6.25% senior notes, and $88.4 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 5.44 times. As of June 30th, we had $243 million remaining availability on our revolving loans. For the second quarter, operating activities provided $186.1 million in cash flow, of which $14.4 million was recouped in the quarter related to the repayment of Medicare advances. At the end of June, there was $6.5 million remaining of the Medicare advances to be repaid. Our day sales outstanding or DSO was 53 days at June 30, 2022. This compares to 53 days at March 31, 2022 and 52 days at the end of 2021. Investing activities used $58.8 million of cash in the second quarter. This includes $46.3 million in purchase of property and equipment and $17.8 million in acquisition and investment activity during the quarter. We also generated $5.3 million in proceeds from the sale of assets in the quarter. Financing activities used $149.1 million of cash for the second quarter. This was primarily due to common share repurchases, totaling $126 million. As Bob indicated, we acquired a little bit north of 5.4 million shares. Also included dividends on our common stock of $16.1 million. We have the capacity to repurchase an additional $407 million worth of shares under this program, which remains in effect until December 31, 2023 unless further extended or earlier terminated by the Board. We are reaffirming our revenue outlook for the year and expect revenue to be in the range of $6.25 billion to $6.4 billion in 2022. We are also reaffirming our previously issued three-year compounded annual growth rate target for revenue to be in the range of 4% to 6%. We still expect capital expenditures to be in the range of $180 million to $200 million for the year. And as stated last quarter, we will readdress our business outlook and target growth rates for adjusted EBITDA and earnings per share when we believe the labor market has stabilized and is predictable. This concludes our prepared remarks. And at this time, we would like to turn it back over to the operator to open up the call for questions.

Thank you, sir. Our first question will come from Justin Bowers of DB.

Thank you for all the detailed KPIs and trends with respect to the LTAC segments. Just curious, it sounds like you've made a lot of progress with hiring, and we're just really trying to get a sense of some of the initiatives that you're taking? And then what do you think the changes are, whether it's company specific or just more macro or market specific in terms of your ability to really improve the hiring? And it sounds like you guys see that continuing throughout the rest of the year. And then the second part to that would be just what are some of the dynamics you're seeing in the other modalities too, like it looks like there's an improvement in outpatient rehab? Seems like it's still tough. Kind of what are some of the dynamics there as well?

Let me make some general comments. This is Bob, and then I’ll obviously let Marty take a little bit of that through the details. I think the big takeaway for investors that we would like to share is that the trends are very good in terms of us being able to replace agency with RN, and particularly I'm talking about the critical illness recovery hospitals. But I think the important thing to understand is, because of the acuity of the patients that we take in the LTAC or our Critical Illness segment, these nurses that we recruit do require a significant amount of training before they can really fully engage in patient care. And that's the thing that's going to keep all of our quality indicators high. The other thing that I think we're doing, which is an investment in the longer term, is we have to continue to be focused on keeping the nurses and our retention attributes in our critical illness division rather than just recruiting. And we think that the enhanced dollars that we're spending on training is going to help us with retention down the road. So we do see good trends even though the cost data is still high for the quarter. If you really dig into the statistics that Marty gave you in his prepared comments, the trends do look pretty good. So I'll let Marty supplement that and then maybe take a shot at the second half of this question, Marty.

Justin, yes, we've really seen, as we indicated, some significant improvement, both in terms of utilization and rate reductions. And one of the interesting stats, if you took a look at the month of April, 96% of our hospitals, their agency rates were over $100. In July, that percentage is 13%. So, I mean, we've really seen the rate come down pretty significantly. And as we indicated, utilization is coming down too. The other interesting thing is when you take a look at the utilization, probably about 6% to 7% of that utilization come June and July will be replaced with the new RNs coming in. So again, all the trends are pointing towards significant improvement. With regards to the IRF, I would say that the IRF was really only impacted in two specific geographical locations as far as labor was concerned, and that's Southern California and Northern Jersey. And we continue to see those rates come down but not nearly as much as the other rates have come down.

And just a quick follow-up. I missed in June, what was the utilization in June with the LTAC?

It was 26.9%.

So you're saying that in terms of that additional 6% to 7%, that should result in somewhere in the low 20. Is that how we should interpret that?

Yes, that’s right.

And then on the headline rates, the market baskets that came out for IRF and LTAC, all else being equal like acuity stays constant. Are those good proxies for what you guys would realize or are there other moving parts we should take into consideration? And then what was the CMI for LTAC in the quarter?

The final rates for LTAC exceeded our expectations and were better than the proposed rule, which we are pleased about, especially regarding the outlier thresholds. The IRF rates were somewhat aligned and appeared to be solid. We have encountered new rates that are much less favorable, but internally, I believe things look pretty good and strong. What about the CMI?

Justin, the CMI for this past quarter is 1.29, which is down from 1.32 in the second quarter of '21. Bob mentioned earlier that this decrease is related to the reduction of inpatients, and that's what has driven the decline. We don't expect any long-term impact or trend from this; it is simply a decrease for this quarter.

Our next question will come from Kevin Fischbeck of Bank of America.

Just to follow up on that last point. I guess, normally, we think of patients being a bit more high acuity and maybe not tied to the ebbs and flows of hospital volumes broadly. Is there anything you would point to as to why patients would be down, occupancy would be down as a result of that?

So is the question, is there anything we can point to for why the acuity or the vent population was down this quarter? Was that the question, Kevin?

Yes, exactly.

No, I don't think there is anything specific we can identify. We did notice a general decline in the ICUs at several of our referral hospitals, which may be related to their scheduling of surgeries, transplants, and staffing. I don't have a clear explanation for that, and sometimes there isn't a concrete answer. Occasionally, there will be a dip in ICU usage, and I can't provide any definitive insights. However, I can assure you that we do not see any long-term systemic reduction in the acuity or the number of patients coming out of ICUs in short-term acute care hospitals across the country. The notion that there has been a widespread improvement in wellness, leading to decreased utilization of these services in short-term acute care hospitals, is simply incorrect. We expect that activity to return, especially as winter approaches, and we will likely see an increase. So the short answer is that I don't have a definitive reason for the reduced vent population this quarter, but it's not the first time we've experienced this.

One of the things that several companies, as providers, have mentioned is an improvement in agency labor this quarter. However, to your point, volumes have been somewhat softer. I'm trying to understand if there's a way to break down how much of the improvement was due to the lighter volumes that reduced the need for temporary staffing compared to the actual progress made in hiring. Is there a belief that if occupancy increases, we won't end up back in the same situation with temporary labor as we were a couple of quarters ago?

I believe there is a reason to be optimistic. We are in a post-pandemic phase and experiencing a slowdown in the economy. Generally, the nursing workforce does not see the high agency rates from a year ago as sustainable; they view it as a one-time event and are now moving towards a more stable work environment. Consequently, I expect to see more nurses returning to the labor market. While we often discuss the nursing shortage, it's essential to recognize that it's largely due to nurses leaving the workforce. It's not that there aren't individuals with nursing degrees; rather, they've chosen not to work for various reasons. However, we are beginning to see a return to permanent positions, and this trend appears to be ongoing. Therefore, even with an increase in occupancy, I anticipate that reliance on agency staffing will decrease across all providers, with more nurses re-entering the workforce.

Kevin, I also think that, I mean, the increase in agency nursing that we saw was truly a function of price elasticity. To the extent that health systems were offering substantial dollars for those nurses, I mean, for every incremental $10 more they could make, you're going to have a whole bunch of more nurses going. And I think the reverse is the same way. To the extent that pricing is going down then you're going to see nurses leave the travel nursing programs and move into a full-time program. The other thing that's happening is sign-on bonuses are dropping. Sign-on bonuses were in that $20,000, $25,000 range and those are coming down. So what we're hearing is that nurses are saying, I better get a sign-on bonus before there isn't any anymore.

So I think, Kevin, kind of last comment on this, is what Marty are giving you is a combination of facts and opinions, particularly on my side opinion. I mean, Marty has given enough detail and data that shows that as a factual matter, the environment is improving. My opinion that comes with that is that it will continue and that this crisis we had in nursing will eventually return to something that looks like trend and that's my opinion. But I obviously believe the fact support my opinion. Although, I need to acknowledge that there are still people out there that think that this nursing shortage is going to be exacerbated, it’s going to continue and agency rates are going to be high. And I've heard some of that commentary and I simply don't agree with it, but they're certainly entitled to their opinion.

I guess, can you maybe talk about margins in the LTAC business? Has anything that's happened over the last few years made you think differently about what target margins in that business should be? And maybe just remind us where you think target margins in that business should be over time?

I mean, we still believe that 15% to 16% margins are certainly achievable in the critical illness recovery hospitals. It's interesting, Kevin, if you take a look at this past quarter, we were running at 64% SW&B as a percentage of revenue and historically, we've run in 52%. I mean, there's 12 points right there. And to the extent we're in that 54% to 56% range, that's going to bring the margins back up very significantly.

Our next question will come from Ben Hendrix of RBC Capital Markets.

I was hoping we could dig a little bit deeper into specific retention efforts. And you mentioned the extensive training and the investments you make to onboard new nurses. But where else are you focusing, whether it be wage increases or shift bonuses, etc. We're trying to get an idea of what it takes to keep a nurse and then by extension, kind of what's giving you confidence in the levers that you can pull to get back to reducing agency to normal in the next year?

I believe part of what you're mentioning is that retention will depend on the economics, and there is a significant portion that does not. Once nurses join on a full-time basis, they remain for various reasons that aren't solely related to bonuses, state incentives, or salary hikes. We have several initiatives aimed at increasing job satisfaction and overall retention. The financial aspect is a different issue, which Marty can address. However, we believe that if we effectively recruit nurses and offer what is now considered a fair market rate, we simply need to enhance our operational efforts towards retention. Marty, do you have any thoughts on the economic factors affecting retention? My focus is more on what happens after nurses are recruited. They come on board for a rate they find reasonable and we hope fair, and they stay for many other reasons.

Ben, we consider a few different variables, but I focus on two main ones. First, the increase in the base rate we are observing. Over the last two years, our base rate increase has been significantly higher than historical levels, which have typically ranged from 2% to 3%. Recently, we have seen an annual increase of around 5%. The second factor is the increase in travel rates, which has been driven by demand from health systems. In the first quarter of this past year, many major health systems experienced significant losses, which I believe will reduce their willingness to maintain those rate levels. As rates decline, nurses may be less inclined to travel unless they can earn those higher amounts.

And our next question will come from A.J. Rice of Credit Suisse.

A couple of things maybe. First of all, as you're pointing to a number of sort of green shoots that make you a little bit more optimistic about the labor dynamic in the back half of the year and into '23. What are you waiting for, what are you looking for before you start to go back to giving guidance? Because the company has a lot of moving parts and the opportunity for us to get off track and modeling is pretty substantial. It would be helpful but I understand the issues around labor. What specifically, relative to what you don't have right now, are you looking for? And is there something in your mind that's a trigger that says, okay, if we have this, we'll go.

A.J., we have observed significant month-over-month reductions, actually double-digit ones. As we begin to see these levels stabilize, maintaining a mid-single digit rate reduction for a few months would increase our confidence in providing numbers. While we have issued revenue guidance, the current macroeconomic labor issues have made us hesitant. We're becoming more at ease with the situation, but at this moment, as we close the second quarter, we are not ready to provide updated guidance. Bob and I are continuously assessing the situation, and we will make that decision in the next quarter.

You mentioned the $111 an hour as the rate you're observing. Is that for the second quarter, or is that the rate you exited with at the end of the second quarter? With contracts coming to an end, many of which I believe are short-term or travel contracts, are you finding that the renewal rate is lower than $111, or is it stabilizing at this level?

A.J., what we saw in June was a rate of $95, so when we saw that drop in July to $90. So we continue to see that. Historically, we've been in the $72 to $78 range. There's probably more than half of our hospitals have rates below $90.

I guess that…

No, go ahead, ask your question.

I guess, I take this for granted. But I probably should ask you. Are most of your agency costs more what they call for the local guys, or are you using a lot of travelers?

In the fourth and the first quarter we used a lot of travelers. And we had some contracts that were 13 weeks, that's dropped down and we have also included clauses allowance to get out with two weeks' notice. Our PRN percentage of total nursing hours has remained pretty consistent throughout the pandemic, we're in that 14% to 15% rate and that really hasn't changed.

One of your peers in the outpatient rehab area made the comment on their call earlier in the week that, they were starting to see some pressure on physical therapists and rates, that's the first time I've heard anything like that. Are you guys seeing anything along those lines?

We're not seeing a significant issue in that to that extent. There are some geographical areas where there is a little bit of pressure, but it's not really that significant for us.

And maybe just the last question, you talked about the more favorable headline rate for the critical access hospitals, the LTAC, and you singled out not just the rate itself but the outlier impact. We can look at sort of the nominal rate and say, okay, that's probably worth this much. But when the outliers are sort of hard things for us to adjust or when you're looking at that, or us to estimate. When you look at that, how much, I mean, on a year-to-year basis, do you think that the totality of the updated rule is worth to get, how much more is it worth in the proposed rule? Is there any way to size that?

I think the main point is that there was about a 30% increase in the market basket itself. We were at 2.8%, which has now changed to 3.8%, leading to a reduction in the overall high-cost outlier percentage. This means the final rule is significantly better for the company. We haven't put numbers to this yet since it just came out, but we anticipate it will have a positive impact.

We have a question from Miles Highsmith of Deutsche Bank.

I want to just to go back and maybe clarify just a couple of things. So Marty, when we're talking about the LTAC, SW&B, historically, 51% to 52%, this quarter, 64% and you put some kind of loose targets out for end of the year and next year. Just want to make sure I'm thinking about that right. So that's all SW&B within LTAC, right? So it's agency expenses, existing bonus, sign on, education. Just want to make sure I'm thinking about that correctly. And if I am, I wanted to triangulate that with and you gave some helpful information about Q2 sequentially, rates being down, utilization being down, and then the expense on a dollar basis, I think you said went from $89 million down to somewhere in the mid 50s. Are those numbers just related to contracts or agency, or is that like a total SW&B number for the LTAC?

Agency numbers so those are coming down. And the reason you're not really seeing it filtered through to SW&B coming down is because offsetting that is those seven to eight weeks of training and orientation we talked about. So I mean, what you have to do is think about that in terms of during that seven to eight weeks, we're actually employing two nurses. One's going through the training and orientation, and one’s taking care of the patients. The one’s taking care of the patients, the agency, when the new nurses come on board and they're starting to treat patients will see a reduction in the agency.

So you may choose to not want to disclose it. But I was just curious if you be able or willing to disclose what that incremental sequential number was for some of the double counting and the training and the upfront bonuses. Is that a number that you have?

No, I think the way you want to take a look at it, Miles, is to the extent that we get back to historical trends. I would think about it as, at 64% SW&B as a percentage of revenue. If that gets back to 54% or 56%, that 8 to 10 points you just multiply it by our revenue line. So you're looking at in the neighborhood of $200 million of incremental EBITDA coming through if that's normalized.

And then just one other numbers question. Thanks for all the utilization data, I can't remember if you said it before. But can you give us a reminder of what utilization was on the contract side pre-COVID and are in more historical timeframes?

Yes, it was in that 16% to 20% range.

Thank you. And I'm seeing no further questions in the queue. I would now like to turn the conference back to Robert Ortenzio for closing remarks.

No closing remarks. Thanks everybody for joining us for the call. Have a good weekend.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day, and enjoy your weekend.