Earnings Call Transcript - SEM Q3 2022

Operator, Operator

Good morning and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Third 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'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 call over to Mr. Robert Ortenzio.

Robert Ortenzio, Executive Chairman and Co-Founder

Thank you, operator. Good morning everyone. Welcome to Select Medical's earnings call for the third quarter of 2022. Before I provide some detail on each of our divisions, I'd like to provide some overall commentary on the quarter. This quarter we have continued to focus on recruitment, training, and retention of personnel throughout the organization and most specifically on the critical illness recovery hospital divisions. These efforts have been successful as we set the stage for future performance. I'd like to commend our entire team as they continue to meet the challenges head on while remaining committed to providing exceptional patient and employee experiences. Throughout 2022, our diversification has provided us the opportunity to offset difficulties we may have encountered in particular lines of business. We couldn't be more pleased with the performance of both our inpatient rehab hospital and Concentra divisions this quarter. The inpatient rehab division exceeded prior year revenue, occupancy, and adjusted EBITDA. We recently announced the expansion of our partnership with UPMC to open a 35-bed freestanding rehab hospital in central Pennsylvania, with a targeted 2023 opening. The development pipeline for the inpatient rehab division is strong and the division is poised for continued success. Concentra's volume continues to grow and they have consistently exceeded expectations. This quarter Concentra opened one de novo clinic in Waukesha, Wisconsin and signed four leases for additional de novo clinics. Three are expected to open by year end, with one located in Wisconsin and two in Lehigh Valley, Pennsylvania. The fourth de novo in Columbus, Ohio will open in 2023. On the acquisition front, an agreement has been signed to acquire a clinic in Tulsa, Oklahoma, which is set to close by the end of the year. There continues to be a healthy pipeline for potential future de novo and acquisition targets on the horizon. We expect Concentra's strong performance to continue in Q4 as we head into 2023. Our outpatient division surpassed prior year revenue with an increase in both volume and rate. Staffing and COVID leaves presented challenges this quarter, but it did improve as the quarter progressed. This positive trend has continued into the month of October. In Q3, we expanded our clinic count by 13 via acquisitions and de novo growth. Looking forward to the remainder of the year, we have leases executed for 17 de novo clinics. The outpatient division continues to have a strong pipeline of potential de novo and acquisitions. With the progress made in Q3 along with the continued improvement in October, we are confident the outpatient division will be in good shape heading into 2023. The critical illness recovery hospital division faced staffing headwinds in this quarter, but we continue to make strides in reducing RN agency rates and utilization. We've also been successful in hiring full-time RN nurses while improving retention. We are cautiously optimistic that as we continue to onboard full-time clinical staff, our cost structure will stabilize heading into 2023. Similar to last quarter, Martin Jackson will provide additional granular data on the direction of the critical illness recovery hospitals’ labor expenses. Overall, we experienced revenue growth in the quarter with an increase of 2.2% over the prior year. The impact of the full reimplementation of sequestration was a $9 million headwind when comparing Q3 to the prior year's same quarter. For the quarter, the total company adjusted EBITDA was $153.1 million compared to $208.6 million in the prior year. Our consolidated adjusted EBITDA margin was 9.8% for Q3 compared to 13.6% prior year. CARES Act grant income was recognized in Q3 of this year as well as Q3 of the prior year. This quarter we recognized $8.1 million of grant income versus $1.7 million in the prior year. At this point, I'll provide some further data points as commentary on each of our operating divisions. Our critical illness recovery hospital divisions' patient days are 2% higher than the prior year; however, we experienced a drop of 1% in net revenue due to a decline in our revenue per patient day. The full reimplementation of sequestration, lower case mix index, and an increase in threshold days contributed to the decrease in revenue rate. Occupancy decreased to 67% from 68% compared to the prior quarter. Many of our referring short-term acute care hospitals continued to experience lower volumes in their ICUs compared to the prior year, specifically vent patients, which contributed to both our drop in case mix index and occupancy. In the month of October, we've seen improvements in volume, acuity, and threshold days. We fully expect that when ICU volumes of our short-term acute care hospital referring hospitals increase, we will see these patients within our hospitals. The adjusted EBITDA margin for the critical illness division was 2% for the quarter compared to 11% the prior year, as our SWB to revenue ratio increased by 14%. An increase in indirect labor, which is comprised of orientation, education, incentive bonuses, sign-on bonuses, and administrative support was the main driver for the increase in labor costs. Orientation hours for RNs increased by 53% over the prior year, overall bonus expenses increased by 40%, and hospital administrative costs increased by 18%. Nursing agency rates and utilization are continuing to decline and are lower than the prior year's Q3. We saw a reduction of 16% in RN agency rates and a 27% reduction in RN agency utilization from prior year Q3. On the development front, we've signed agreements with JV partners to open three hospitals located in Jackson, Tennessee; Tucson, Arizona; and Alexandria, Virginia. We also plan to open a fourth hospital, which will be a satellite to the current Toledo, Ohio hospital. All are expected to open in 2023. Our inpatient rehabilitation hospital division experienced an increase of 8% in net revenue with patient volumes increasing by 6%. Occupancy increased to 85% compared to the prior year, which was 82%. Revenue per patient day increased by $50 from $1,881 to $1,931. The adjusted EBITDA margin for the inpatient rehab division was 21.7% for Q3 compared to 20.7% the prior year. Inpatient rehabilitation hospitals experienced a reduction in agency expense compared to the prior year, and overall SWB to revenue ratio increased by 1% from the prior year. RN nursing agency usage levels have increased from the prior year, but we've seen an improvement compared to the first half of this year, along with improvement each month throughout the third quarter. The agency rates for RNs in the rehab division decreased by 38% from the prior year and 22% from Q2. As previously noted, we announced that we are partnering with UPMC to open a 35-bed freestanding rehab hospital in Central Pennsylvania with a targeted 2023 opening. Concentra had another strong quarter with revenue increasing over the prior year despite a decline in demand for COVID-related testing and evaluation services. Last year, the services generated $21 million in revenue and $11 million in adjusted EBITDA compared to $3 million in revenue and $1 million in adjusted EBITDA in Q3 of this year. The revenue decline from COVID testing services was offset by positive performance in our standard services. Center patient volume increased by 2%, and Concentra's overall net revenue per visit increased by 3% to $128. Our adjusted EBITDA margin for Concentra was 20.2% for Q3 compared to 22.6% in the prior year. The results in Q3 of the prior year included $1.6 million in CARES grant income. Concentra experienced less than a 1% increase in the SWB to revenue ratio from the prior year Q3 and remained consistent with Q2. As previously highlighted, Concentra has a strong pipeline for development opportunities. Our outpatient rehabilitation hospital division experienced a 4% increase in net revenue, with patient volumes increasing by 3% compared to the same quarter prior year. Net revenue per visit increased to $103 from $102 the prior year, despite a 3% decline in Medicare reimbursement rates. Adjusted EBITDA decreased compared to the prior year with a decrease in margin to 9% from 14%. The decline in adjusted EBITDA margin is primarily due to a 5% increase in salary, wage and benefit to revenue ratio and a 14% increase in other operating expenses to revenue ratio compared to the same quarter in the prior year. The increase in SWB to revenue ratio compared to prior year is attributable to staffing challenges related to the number of employees on COVID leave, which resulted in decreased clinical productivity. As noted previously, we've continued to see improvement in these areas as Q3 progressed and through October. The increase in our other operating expenses was primarily comprised of an investment in our outpatient EMR system and minor equipment. The outpatient division continues to have a robust pipeline of potential de novo and acquisition opportunities. Earnings for fully diluted share were $0.21 for the third quarter, compared to $0.57 per share in the same quarter the prior year. In regards to our allocation and deployment of capital, our board of directors declared a cash dividend of $12.50 payable on November 29 to stockholders of record at the close of business on November 16. This past quarter, we bought back 315,762 shares of stock at an average share price of $23.70. We will continue to be opportunistic and evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks. With that, I'll turn it over to Martin Jackson for some additional financial details before we open the call up for questions.

Martin Jackson, Executive Vice President and Chief Financial Officer

Great. Thank you, Bob, and good morning, everyone. I would first like to provide some additional detail regarding our labor costs within the critical illness recovery hospitals division. As in the prior quarter, we've seen a significant sequential reduction from Q2 of '22 to Q3 of '22 on agency rates, utilization, and total agency expenses. We realized a 22% reduction in agency rates during the period from $111 an hour to $86 an hour. We saw a 33% drop in agency utilization from 32.9% to 21.9%. And a 51% reduction in agency costs from $56.4 million, down to $29.7 million. Also, consistent with the prior quarter, we continue to see significant reductions of these categories within the third quarter. We saw a reduction from July to September of 11% on the rate from $93 to $83, a 12% reduction in agency utilization from 23.4% to 20.5%, and a 21% reduction for overall agency expense from $11.2 million to $8.8 million. While we have seen significant improvement in our direct RN agency costs, we have continued to experience elevated costs in orientation and signing bonuses as we hire nurses to replace agency staff. We expect orientation and bonus costs to start returning to normalized levels in Q1 '23, taking into account the appropriate amount of training time to onboard nurses, which is approximately seven to eight weeks. In other areas of opportunity we have our hospital administrative costs, which are fixed. During the pandemic, our focus was on providing all the necessary resources needed to care for our patients. Now that we're coming out of the other side of the pandemic, there appear to be some opportunities to reduce administrative costs at the hospital level. With the continued improvements in our indirect labor costs along with the anticipated reductions in orientation, education, incentive bonuses, administrative fixed costs, and increased revenue, we are confident that our SWB to revenue ratio should be in the 55% to 57% range in Q1 of 2023. Moving on to our financials in Q3, equity and earnings of unconsolidated subsidiaries were $8.1 million. This compares to $11.5 million in the same quarter last year. The decline in earnings was primarily the result of recording CARES grant income in Q3 of the prior year in our unconsolidated joint ventures. Net income attributable to non-controlling interest was $11 million as compared to $23.3 million in the same quarter last year. This decrease is primarily due to the purchase of membership interest in Concentra in Q4 of 2021, which we now own 100% of the voting interest. Interest expense was $45.2 million in the third quarter. This compares to $33.8 million in the same quarter last year. The increase in interest expense was primarily attributable to an increase in the one month LIBOR rate compared to Q3 of 2021, as well as borrowings made under our revolving credit facility. The LIBOR rate on $2 billion of our term loan is capped at 1%. This is through September 30, 2024, which provides us a level of protection and predictability moving forward in the current interest rate environment. At the end of the quarter, we had $3.8 billion of debt outstanding and $108.2 million of cash on the balance sheet. Our debt balance at the end of the quarter was $2.1 billion in term loans, $380 million in revolving loans, $1.225 billion in 6.25% senior notes, and $84.2 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 5.9 times. As of September 30th, we had $213.5 million of availability on our revolving loans. For the third quarter operating activities provided $94.3 million in cash flow of which $5.5 million was recouped in the quarter related to the repayment of Medicare advances. At the end of September, there was less than $1 million to be repaid on the original $325 million Medicare advance we received. Day sales outstanding was 53 days at September 30, 2022 compared to 53 days at June 30, 2022 and 52 days at the end of 2021. Investing activities used $55 million of cash in the third quarter. This includes $41.9 million in purchases of property and equipment and $13.1 million in acquisition and investment activity during the quarter. Financing activities used $25.7 million of cash for the third quarter. This was primarily due to common share repurchases, totaling $15 million, dividends on our common stock at $15.9 million, and $22 million in distributions to non-controlling interests. These were offset in part by $30 million in net borrowings on a revolving line of credit. We have the capacity to purchase an additional $400 million of shares under the 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 for 2022. We are also reaffirming our previously issued three-year compounded annual growth rate target for revenue to be in the 4%-6% range. We still expect capital expenditures to be in the range of $180 million to $200 million for the year. 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. At this time, we would like to turn it back over to the operator to open up the call for questions.

Operator, Operator

Our first question will come from Justin Bowers with Deutsche Bank. You may proceed.

Justin Bowers, Analyst

Hi, good morning, everyone. Marty, just in Bob, you laid out a pretty substantial year-over-year increase in bonuses and indirect costs and admin costs in the LTACH segment and the kind of the labor environment was running a little high then as well. Just trying to get a sense of where the opportunity is. In addition, obviously, you have the agency labor that's under pretty decent control levels at this point. But in terms of helping us bridge from Q3 and Q4 to Q1 to that 55% to 57% target rate, is it the kind of assumption that you'd be able to go back to the Q3 2021 levels or, you know, are you able to maybe bring a little more savings on some of those increased indirect costs that you've been having? And at a high level, is there any way to help us quantify kind of where the opportunity is on maybe a quarterly or annual basis?

Robert Ortenzio, Executive Chairman and Co-Founder

Yeah, Justin. Great question. I think the way to take a look at it is obviously, we went through a once-in-a-lifetime issue with the nursing costs, which rose very significantly. To get back to the norm, we basically utilized three pools of nurses: full-time nurses, PRN, and agency nurses. Historically, what you've seen is direct RN nursing hours for full-time was about 70%. For PRN, it was about 15% to 16%, and agencies made up the difference. What we observed during the latter part of last year and the first two quarters of this year was significant increases in the dollars paid to travel nurses. Those nurses essentially left the full-time workforce to go travel. We saw as I mentioned, the full-time percentage go well under 50%, as rates went from historically $72 to $78 an hour, to in January of this year touching $151 an hour. Those rates, as I mentioned on the call, are now down for us to $83 an hour. So what we're seeing, are nurses leaving the travel area and moving back to full-time. As they move back to full-time, we're hiring them. I mean, if you take a look at year-to-date, between 2021 and 2022, we've hired 70% more nurses. So as we see it, that really is an investment in the future and getting back to that full-time percentage of 66% to 70%. The other way to think about it is during this period of time, we are paying for 1 RN per full-time equivalent. We're training nurses, which typically takes about two months. We're also having agency nurses take care of the patients. Once they go through training, those nurses will replace the agency nurses, and you'll see the costs come down significantly. So, I'll leave it at that and see if you have any follow-up questions.

Justin Bowers, Analyst

One way to simplify this situation is to consider that if you are hiring 300 nurses in a quarter, they may not be productive right away due to the training involved. You can view those 300 as essentially being part of a double count for nurses you're managing during that quarter. Is that an accurate understanding? Additionally, regarding base wages, some of your competitors are experiencing pressure in that area, and you've discussed what their underlying rates are. Can you share where you stand in terms of base wages this year or during the pandemic, and what you anticipate regarding underlying inflation moving forward? That information would be helpful.

Robert Ortenzio, Executive Chairman and Co-Founder

Yeah. As far as the base salary for our full-time employees, what we've seen over the past two years is about a 10% increase. We've actually supplemented that with incentive bonuses, but what we're looking at is an annual increase in the 5% range, customer, Justin.

Justin Bowers, Analyst

Okay. That's helpful. And just one quick question. Can you go ahead?

Robert Ortenzio, Executive Chairman and Co-Founder

No. You had mentioned the – assuming the $300 million was the number is much higher than that. But in essence, those are – they're not just inefficient. I mean, they're basically being trained, so they're not in the direct workforce at all. So again, getting back to that – the thought that in essence, we have two full-time nurses for one full-time position.

Justin Bowers, Analyst

Understood. And then the – I think that's where people are having difficulty bridging the gap, and not seeing the flow through from the increased agency savings? And then just on the new facilities that you guys have coming online, what's kind of the phasing for the LTACH roughly?

Robert Ortenzio, Executive Chairman and Co-Founder

For the – you're talking about for the four new critical illness hospitals that we have that I mentioned in my comments? Yeah. They come – I think – I think we have them as coming throughout the year probably Q2 through the end of the year.

Operator, Operator

Thank you. Our next question comes from Kevin Fischbeck with Bank of America. You may proceed.

Joanna Gajuk, Analyst

This is Joanna Gajuk, filling in for Kevin. Thanks for taking the question here. So just to follow up on the one of the last comments around the wage increases. You said experienced about an average 5% annually in the last two years. So as we look forward, do you expect similar increases to continue at least into next year, or are you expecting something different?

Martin Jackson, Executive Vice President and Chief Financial Officer

Yeah. I mean, for us, Joanna, it really is – it depends on what's going on in the marketplace. We could certainly see a 5% increase if the economy is high, if there's a recession. That's normally timeframes where we see the rates really moderate. If you take a look at where we were in 2008, 2009, we literally saw increases in that 1% range through that period of time through 2014. So we think if there is a recession, that will certainly be a benefit to the additional supply of nurses in the market, therefore, moderating the base rate.

Robert Ortenzio, Executive Chairman and Co-Founder

Yeah. I think that's an important point that Marty makes. I mean, there is some uncertainty around – even though we're seeing a downturn in the economy, as most of you know, the labor market still remains pretty robust. I think there is some expectation around that softening as well as the Fed continues to be aggressive. We'll see. There are some people who feel that this economy and inflation is not going to come under control until we start seeing unemployment tick up a little bit. If that's the case, that will actually be a benefit for us in terms of labor at our hospitals. Because as you know, particularly in nursing, there are a lot of people with nursing licenses, and they can come off the sidelines pretty quickly and add to your labor force, particularly in PRN, or taking some shifts, which can really quickly assist with the ability to bring them on.

Kevin Fischbeck, Analyst

Exactly. And I guess also on the flip side in terms of pricing outlook. So can you talk about that by your segments? Is we have the redevelopment for the critical hospitals, but also can you talk about the commercial payers and their positiveness, I guess, to the labor pressure? What rate increases specifically, if you can give us ranges you expect going into next year and after that? And I guess in other segments any color there in terms of the IRF or Concentra and outpatient processing outlook? Thank you.

Martin Jackson, Executive Vice President and Chief Financial Officer

Sure, Joanna. As you know, on the Medicare side that's basically fixed, primarily on the inpatient side. There's typically about an 18- to 24-month lag on that. With regards to commercial, as you might expect, it's hand-to-hand combat. We're looking for high single-digit rate increases just like CPI. We've been moderately successful at achieving that in a number of cases, but we still have a long way to go.

Kevin Fischbeck, Analyst

And also I guess on that from the pricing commentary in your IRF segment, are your relationships in your joint ventures helping at all with rates? Thank you.

Robert Ortenzio, Executive Chairman and Co-Founder

I'd say very much so. Marty's comments on the negotiation for the commercial rates on the critical illness side are really different when you look at different segments and pockets of our geographic scope. But I think on the IRF side because most of our hospitals are partnered with large systems, we have much more pricing power there than we do probably on the critical side.

Kevin Fischbeck, Analyst

Great. Thank you for the color.

Operator, Operator

Thank you. One moment for questions. Our next question comes from Ben Hendrix with RBC Capital Markets. You may proceed.

Ben Hendrix, Analyst

Thank you very much. Could you talk a little bit more about capital allocation priorities and how you're balancing your de novo and M&A opportunities versus the returning capital to shareholders? And then also debt pay down kind of considering where leverage is. Can maybe how those priorities have evolved and how you believe they will kind of evolve into next year? Thanks.

Robert Ortenzio, Executive Chairman and Co-Founder

Well, first of all, we think that the Board declaring the dividend for this quarter you can expect that to continue. We made a point of calling out some of the de novo and acquisition opportunities at both Concentra and outpatient. We'll continue to allocate capital in that area, as frankly the valuations are very compelling and the nominal dollars are just frankly not that high. Where we tend to have bigger capital allocation is when we build new rehab hospitals, but we have really strong partners, and that will continue to be a priority. If we can do a hospital with a strong partner or add a hospital in one of our joint venture markets, that's something you could expect us to do. I think the thing that would be a much lower priority would be any acquisitions of size. I wouldn't expect over the next year to see the company really take on anything that's of significant capital requirement for a larger acquisition inside any of the four divisions for right now. I mean, we have the labor to focus on bringing EBITDA back to hit some of our 2023 goals. So that's how we would generally think about capital allocation. Marty, do you want to add anything to that?

Martin Jackson, Executive Vice President and Chief Financial Officer

Sure. I think the other thing Ben is when you take a look at paying down debt, the only area I think we'd be focused on is paying down the revolver. Our other debt obligations are senior notes and our term loan right now we're pretty well protected by the cap through September 24. That rate is on the $2.1 billion that rate maximum is 3.5%. So from that perspective we will certainly keep that in place.

Ben Hendrix, Analyst

Thanks, guys.

Operator, Operator

Thank you. One moment for questions. Our next question comes from Bill Sutherland with The Benchmark Company. You may proceed.

Bill Sutherland, Analyst

Thanks. Good morning, everybody. I just wanted to think about the SWB to revenue ratio a little bit, Marty. I appreciate the color on that. What was that ratio pre-COVID marked in a range that you saw there?

Martin Jackson, Executive Vice President and Chief Financial Officer

Yes, Bill, that range was in the 51% to 52% range. That period of time is from 2018 to 2020.

Bill Sutherland, Analyst

Okay. Based on all the steps you're taking, including the indirect factors I hadn't considered, do you believe you can return to the mid-50s?

Martin Jackson, Executive Vice President and Chief Financial Officer

Our expectation is by beginning of next year, I mean, we'll be in the 55% to 57% range.

Bill Sutherland, Analyst

Okay.

Martin Jackson, Executive Vice President and Chief Financial Officer

And that's based on the cost side. As you know, that's really made up of, not just the cost, but also the revenue. So if we were getting some higher rate increases, that should be beneficial to potentially take that down even further.

Bill Sutherland, Analyst

We need to consider the new normal. The mix of permanent PRN and agency is clearly a significant factor. I believe we’ve caught up with the new rates for nurses, both permanent and agency, and given the shortage, I anticipate that after a substantial initial increase, we will likely see a more gradual rise moving forward. Is that in line with your thoughts?

Martin Jackson, Executive Vice President and Chief Financial Officer

Well, I think again, Bill, our focus is, what's going to happen in the future is going to be difficult to predict, right? So I think we have mentioned to the extent that there's a recession in place, that's going to have a moderating effect on any increases. So I think going through 2023, we'll be taking a look at that on a consistent basis. But as I had mentioned going from 2020 to 2022, we saw increases of about 10% or annualized about 5%. I mean, we can certainly continue to take a look at that. I think we're assuming somewhere in that 4% range for an increase.

Bill Sutherland, Analyst

You all haven't had any labor disruption issues, have you, like the acute care systems?

Robert Ortenzio, Executive Chairman and Co-Founder

Define disruption.

Bill Sutherland, Analyst

Ticketing, staying out.

Robert Ortenzio, Executive Chairman and Co-Founder

No, we have not.

Bill Sutherland, Analyst

Yes. Bob, you mentioned the outpatient rehab had an issue with increased COVID leave. I was a little surprised at that in the quarter. Were you all surprised?

Robert Ortenzio, Executive Chairman and Co-Founder

Yes, a little bit. I think we were surprised. These outpatient locations are small and can be viewed as almost retail spaces, with therapists needing to be close to their patients. If anyone gets sick, even before taking a COVID test, the therapist and staff would properly call off. In a typical therapy setting, unlike a hospital, there may be only one or two therapists available. So if one is absent for a day, it results in a significant loss of revenue. There's no treatment or income until we can either bring someone else in to cover, which is often challenging, or until the absent therapist can return after being tested or feeling well enough. This quarter, we had 706 individuals on COVID leave, which can have a substantial impact. You can see it reflected in the numbers. It would depend on how you define "meaningful," but it certainly does affect our operations. The number I just mentioned was the highest since January of this year, when we faced a much more serious situation. So, yes, we were surprised, but we do see it moderating as time goes on.

Bill Sutherland, Analyst

The only thing I'm thinking is you may have part of this is just an issue of more vulnerability. I'm thinking flu. So, fingers crossed on that.

Robert Ortenzio, Executive Chairman and Co-Founder

Yes, of course. This relates back to the companies, which I’ve mentioned before, highlighting the benefit and strength of our diversification. The flu may impact staffing in that area, but a severe flu season could also provide support for our hospitals. We’ve discussed the labor market; a significant recession might actually help with staffing for critical illness, but it would pose challenges for our Concentra division, which has performed exceptionally well over the past year and beyond. We are experiencing effects on both sides. Over the past 25 years, as we built the company, this balance has been somewhat intentional as we’ve worked to stabilize our overall Medicare. Our company has about an equal mix of outpatient and inpatient services. Concentra serves as a great support, performing well in strong economic conditions, while staffing in our hospitals benefits in tougher economic times.

Bill Sutherland, Analyst

Yeah. No. I appreciate the portfolio balance you guys have created. Thanks again. That's it for me.

Operator, Operator

Thank you. One moment for questions. Our next question comes from Miles Highsmith with Deutsche Bank. You may proceed.

Miles Highsmith, Analyst

Hi. Good morning, guys. Thanks for taking my questions. I guess I just wanted to go back to the critical illness margins and expenses. Sorry if you covered it; there are a lot of numbers coming through. I guess first, just to clarify, when you hire somebody and they're in that training period, am I right to think that they're getting paid their full-time rate during that eight-week period, or is it different?

Martin Jackson, Executive Vice President and Chief Financial Officer

Yes. They're full-time rate, Miles, as well as we're still experiencing sign-on bonuses. So it's a full-time rate, plus some bonuses.

Miles Highsmith, Analyst

Okay. And then that was kind of my second question. I don't know if you've given us or willing to give it, but I was trying to kind of parse out the nuances of potentially paying for two nurses one during the training period and then another to care for the patient in many cases that the agency versus just kind of these indirect costs. I know you gave some percentages on the bonus expenses being up 40% in the quarter. Are you willing to give us like what that dollar amount was, the additional dollar amount either relative to last year or just on an absolute basis this quarter? Or maybe asking it differently, are you willing to give us kind of indirect costs this quarter that might be considered more investments for the future, so we can try to parse out what's that duplicative piece versus kind of that temporary indirect piece?

Martin Jackson, Executive Vice President and Chief Financial Officer

We can provide you with an idea of the investment we're making in nominal dollars moving forward. In looking at our hiring of nurses over the first three quarters, we saw an increase of $7 million from the first to the second quarter as we added more nurses. The difference between the second and third quarters contributed an additional $20 million. Overall, this amounts to $27 million, which we consider an investment in replenishing our full-time nurse pool on a quarterly basis. If you annualize that, it represents a substantial amount. However, our priority is to ensure that our full-time nurse pool meets our expectations for 2023, and we believe we are nearly there.

Miles Highsmith, Analyst

Okay. That's super helpful. Thanks for that information. Last question, I believe I heard you mention that your leverage calculation is 5.9% for the quarter. Is that correct?

Martin Jackson, Executive Vice President and Chief Financial Officer

Yes, that's correct.

Miles Highsmith, Analyst

Okay. Anything just in terms of kind of where you have a comfort level for target leverage as we get into more normalized times in 2022 and beyond?

Martin Jackson, Executive Vice President and Chief Financial Officer

Yes. I mean, I think for 2023, with what we're looking at now, Miles, we anticipate to be in the four times range.

Miles Highsmith, Analyst

Okay. Yes. Okay. Thanks a lot, guys. Appreciate the time.

Operator, Operator

Thank you. One moment for questions. Our next question comes from A.J. Rice with Credit Suisse. You may proceed.

A.J. Rice, Analyst

Hi, everyone. I have a couple of quick questions. First, regarding the margin variation in the outpatient business, it seems you are attributing part of it to labor and part to your work with the EMR system. Can you clarify if the labor component is solely due to COVID-related call outs, or is there anything else in the labor area that you think is important to highlight in that division? Also, with respect to the EMR, is this just a third-quarter issue or will it continue to be a factor for a while? What are your thoughts on that?

Martin Jackson, Executive Vice President and Chief Financial Officer

Let me address the EMR question first, A.J. Yes, it's elevated in the third quarter. There will be a slight increase in the fourth quarter, but then we should have a reduced number moving forward. When I say reduced from the third and fourth quarter, you can expect that the grades or costs for that EMR will return to what they were before the third and fourth quarter.

A.J. Rice, Analyst

Okay. And then how about the labor? Was that strictly this COVID call out in the outpatient rehab business, or was there – are you starting to see pressure there as well on the labor issue?

Martin Jackson, Executive Vice President and Chief Financial Officer

The COVID really was the predominant item that impacted clinical efficiency.

A.J. Rice, Analyst

Okay, I understand. Regarding your mention of agency usage, it seems you've decreased to approximately $30 million in the third quarter. My impression is that pre-COVID, your agency labor usage was around $25 million to $30 million. Does this indicate that the agency aspect has largely stabilized, and the focus is now on normalizing the permanent staff and eliminating redundant training costs? Is that how you're evaluating the labor situation?

Martin Jackson, Executive Vice President and Chief Financial Officer

Yes. If you look at the agency before the pandemic, we were likely in the range of $80 million to $100 million a year. So yes, I believe it really comes down to the investment costs. We view that as a one-time expense associated with the training and onboarding of new nurses.

A.J. Rice, Analyst

Okay, okay. I mean it sounds like you sort of have a timeframe in which these onboarded nurses training will be done and you're expressing confidence in the 55% to 57% SWB as a percent of revenue. What incremental piece of information are you looking for to get back to starting to give guidance again on the operating income?

Martin Jackson, Executive Vice President and Chief Financial Officer

Well, right now A.J. the big item is labor. And as – I mean if you take a look at what's going on in labor market if the labor market continues the way we think it will, which we'll probably see over the next quarter or two, we'll be in a position to determine whether we feel comfortable giving guidance on EBITDA and EPS.

Robert Ortenzio, Executive Chairman and Co-Founder

Yes, A.J. we are considering it. It's already November, and we will soon enter the holiday season with Thanksgiving and Christmas, which will carry us into 2023. Everything we've discussed during this call has been focused on the upcoming year. As we reduce this training expense and so on, we expect 2023 to return to a normal year. If that happens, we will start providing guidance again. At this moment, it doesn’t seem sensible to offer guidance based solely on our current revenue line. For us, even last quarter, the management team was not questioning whether we would reach our expected targets; rather, it was about the pace and duration of recruitment and onboarding, along with unexpected challenges arising. For instance, I was surprised by the impact of COVID leave on outpatient services. These issues may not significantly affect the company but do arise. I believe there is a strong chance that these factors will normalize by the end of this year. Once we get through Christmas, we anticipate being in a position to resume normal business operations and provide more guidance to the market.

A.J. Rice, Analyst

Okay. That's helpful. I have one more question regarding the comments about the cap on the floating rate $2 billion of debt. Are you currently at that 1% cap, so there won't be any near-term effects from rising interest rates? And are you entirely fixed on that? Could you provide a bit more detail on this?

Martin Jackson, Executive Vice President and Chief Financial Officer

Sure, A.J. Yes, we're well in excess of the 1% cap. I mean, I think...

A.J. Rice, Analyst

I do not know if that 1% over some benchmark right or whether that was absolutely 1%.

Martin Jackson, Executive Vice President and Chief Financial Officer

The LIBOR rate is currently at 1%, and when you add our spread, which is in the $250 million range, the total maximum you're looking at is 3.5%.

A.J. Rice, Analyst

I got you. You're – obviously, you're there at this point.

Martin Jackson, Executive Vice President and Chief Financial Officer

Yes, it's everything. However, we currently don't have any coverage on the revolver, which is leading to some higher costs. Nonetheless, we believe that our ability to pay that down over the next year is quite likely.

A.J. Rice, Analyst

Okay. How much is the revolver drawn now at this point just roughly?

Martin Jackson, Executive Vice President and Chief Financial Officer

I think it's about $310, I'm sorry, $380.

A.J. Rice, Analyst

Okay. All right. That’s great. Thanks so much.

Operator, Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Ortenzio for any further remarks.

Robert Ortenzio, Executive Chairman and Co-Founder

No further comments. Thank all of you for joining us. And thank you, operator.

Operator, Operator

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.