10-Q: Select Medical Reports Q3 Growth Amidst Regulatory Headwinds

Select Medical Holdings Corporation reported increased revenue and income from continuing operations for Q3 2025, driven by rehabilitation segments, but faces challenges from new healthcare regulations and ongoing litigation.

Summary

• Revenue for the three months ended September 30, 2025, increased by 7.2% to $1.36 billion, compared to $1.27 billion in the prior year period.
• Income from continuing operations before other income and expense rose 32.9% to $73.0 million for Q3 2025, up from $54.9 million in Q3 2024.
• Adjusted EBITDA for Q3 2025 was $111.7 million, a 7.5% increase from $103.9 million in Q3 2024, maintaining an 8.2% margin.
• For the nine months ended September 30, 2025, revenue grew 4.7% to $4.06 billion, while Adjusted EBITDA decreased 1.5% to $388.5 million, with the margin declining to 9.6% from 10.2%.
• Net income attributable to Select Medical Holdings Corporation's common stockholders from continuing operations increased to $28.8 million ($0.23 EPS) for Q3 2025, from $24.8 million ($0.19 EPS) in Q3 2024.
• The Critical Illness Recovery Hospital segment saw Q3 revenue increase 4.6% to $609.9 million and Adjusted EBITDA increase 10.5% to $56.1 million, despite a decrease in patient days.
• The Rehabilitation Hospital segment's Q3 revenue surged 16.2% to $328.6 million, with Adjusted EBITDA up 13.0% to $68.0 million, driven by an 11.1% increase in patient days.
• The Outpatient Rehabilitation segment's Q3 revenue increased 4.3% to $325.4 million, but Adjusted EBITDA declined 14.6% to $24.2 million, primarily due to increased personnel expenses and a slight decrease in revenue per visit.
• Net working capital significantly increased to $80.9 million at September 30, 2025, from $42.1 million at December 31, 2024.
• The company repurchased 6,375,512 shares for approximately $96.5 million during the nine months ended September 30, 2025.

Sentiment

Score: 5

Explanation: While the company demonstrated revenue growth and improved Q3 income from continuing operations, particularly in its rehabilitation segment, the nine-month Adjusted EBITDA declined, and the critical illness recovery and outpatient segments faced margin pressures. The newly enacted "One Big Beautiful Bill Act" and potential Medicare cuts introduce substantial future regulatory and financial uncertainty, alongside ongoing litigation risks. The stock repurchase program and dividend are positive for shareholders, but the overall outlook is tempered by these significant external challenges.

Positives

• Overall revenue increased by 7.2% for the three months ended September 30, 2025, and 4.7% for the nine months ended September 30, 2025.
• Income from continuing operations before other income and expense increased significantly by 32.9% for Q3 2025 and 10.1% for the nine months ended September 30, 2025.
• Earnings per common share from continuing operations increased to $0.23 for Q3 2025 from $0.19 in Q3 2024, and to $1.00 for the nine months ended September 30, 2025, from $0.69 in the prior year period.
• The Rehabilitation Hospital segment demonstrated strong growth with Q3 revenue up 16.2% and Adjusted EBITDA up 13.0%, driven by an 11.1% increase in patient days.
• The Critical Illness Recovery Hospital segment showed Q3 revenue growth of 4.6% and Adjusted EBITDA growth of 10.5%, with revenue per patient day increasing by 6.6%.
• Net working capital improved significantly to $80.9 million at September 30, 2025, from $42.1 million at December 31, 2024.
• The Board of Directors extended the common stock repurchase program to December 31, 2027, and the company repurchased $96.5 million in shares during the nine-month period.
• The company entered into a new interest rate cap effective March 31, 2025, limiting exposure to increases in the variable Term SOFR rate to 4.5% on $1.0 billion of principal outstanding until March 31, 2028.

Negatives

• Adjusted EBITDA for the nine months ended September 30, 2025, decreased by 1.5% to $388.5 million, and the Adjusted EBITDA margin declined to 9.6% from 10.2% in the prior year period.
• The Outpatient Rehabilitation segment experienced a 14.6% decrease in Adjusted EBITDA for Q3 2025 and a 3.7% decrease for the nine months ended September 30, 2025, primarily due to increased personnel expenses and a slight reduction in revenue per visit.
• The Critical Illness Recovery Hospital segment's Adjusted EBITDA for the nine months ended September 30, 2025, decreased significantly by 16.6% to $199.0 million, with the margin declining to 10.8% from 12.9%, primarily due to increased operating expenses.
• Net cash provided by operating activities decreased to $282.1 million for the nine months ended September 30, 2025, from $392.4 million in the prior year, mainly due to the exclusion of discontinued operations.
• Equity in earnings of unconsolidated subsidiaries decreased to $13.0 million for Q3 2025 from $33.1 million in Q3 2024, and to $39.1 million for the nine months ended September 30, 2025, from $53.5 million in the prior year, primarily due to a gain recognized in Q3 2024 from gaining a controlling interest in a subsidiary.
• Medicare payments for the therapy specialty are expected to decrease by approximately 3% for calendar year 2025 due to CMS policies.

Risks

• Changes in government reimbursement for services and/or new payment policies may reduce revenue, increase costs, and decrease profitability.
• Adverse economic conditions, including inflation, could continue to increase labor and other operating costs, negatively impacting business, operating results, cash flows, and financial condition.
• Shortages in qualified nurses, therapists, physicians, or other licensed providers could limit the ability to staff facilities and increase dependence on contract labor, significantly raising operating costs.
• The "One Big Beautiful Bill Act" (OBBBA) is estimated to reduce federal funding for Medicaid and CHIP by approximately $1 trillion over the next 10 years, potentially leading to decreased reimbursement from governmental healthcare programs.
• OBBBA is estimated to increase the federal deficit, potentially triggering Pay-As-You-Go (PAYGO) Act cuts to government spending, with Medicare cuts capped at 4% (an estimated $45 billion for fiscal year 2026) without Congressional relief.
• CMS's revised policy for LTCH outlier reconciliations (20% CCR change threshold, effective October 1, 2025) increases the likelihood of outlier payment recoupment and delays reimbursement appeals.
• Ongoing government investigations, including the Oklahoma City Investigation (qui tam lawsuit alleging billing fraud related to respiratory therapy) and the Physical Therapy Billing investigation (DOJ investigation and qui tam lawsuit alleging False Claims Act violations for physical therapy services), could result in sanctions, damages, or reputational harm.
• The failure of Medicare-certified long-term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications could cause revenue and profitability to decline.
• Private third-party payors may adopt payment policies that limit future revenue and profitability.
• Security breaches of information technology systems could lead to legal and reputational harm and HIPAA violations.

Future Outlook

The company expects the "One Big Beautiful Bill Act" (OBBBA) to reduce federal funding for Medicaid and CHIP by approximately $1 trillion over the next 10 years, likely leading states to reform their Medicaid programs, potentially impacting reimbursement rates. The Congressional Budget Office (CBO) estimates OBBBA will increase the federal deficit, potentially triggering a 4% Medicare spending cut for fiscal year 2026 without Congressional relief. CMS's proposed policies for calendar year 2026, after factoring in statutory increases from OBBBA, are expected to increase Medicare payments for physical and occupational therapy services by approximately 2%. The revised LTCH outlier reconciliation policy (20% CCR change threshold), effective October 1, 2025, is expected to result in more outlier reconciliations, increasing the likelihood of recoupment and delaying reimbursement appeals. The company intends to pursue opportunities to develop new joint venture relationships with large, regional health systems and other healthcare providers, and plans to open new outpatient rehabilitation clinics in existing service areas to leverage referral relationships and brand awareness for incremental growth. The company may also grow through opportunistic acquisitions.

Management Comments

• "We believe our internally generated cash flows and borrowing capacity under our revolving facility will allow us to finance our operations in both the short and long term."
• "We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise."
• "There is no assurance that future dividends will be declared. The declaration and payment of dividends in the future are at the discretion of our Board of Directors after taking into account various factors, including, but not limited to, our financial condition, operating results, available cash and current and anticipated cash needs, the terms of our indebtedness, and other factors our Board of Directors may deem to be relevant."
• "We have recently experienced higher labor costs related to an inflationary environment and competitive labor market. In addition, suppliers have passed along rising costs to us in the form of higher prices. Higher prices could also result from the impact of proposed tariffs. We cannot predict our ability to pass along cost increases to our customers."

Industry Context

The healthcare industry is facing significant regulatory changes, including the "One Big Beautiful Bill Act" (OBBBA), which is projected to substantially reduce federal Medicaid and CHIP funding, forcing states to potentially cut provider reimbursement rates. Medicare reimbursement policies continue to evolve, with mixed impacts across different segments; while some therapy services may see a slight increase in 2026 due to statutory adjustments, overall payment reductions and increased scrutiny (like the revised LTCH outlier reconciliation) present ongoing challenges. The industry continues to grapple with inflationary pressures and competitive labor markets, leading to higher operating costs, particularly for labor-intensive services. Telehealth flexibilities, initially expanded during the COVID-19 pandemic, are being selectively extended, indicating a gradual return to pre-pandemic norms while retaining some virtual care options.

Management Changes

Corporate Governance

Legal Proceedings

• Oklahoma City Investigation: Civil investigative demands from the U.S. Attorney's Office for the Western District of Oklahoma since August 24, 2020, seeking information related to documentation, billing, and reviews of medical services at Select Specialty Hospital – Oklahoma City, Inc. The investigation arose from a qui tam lawsuit alleging billing fraud related to respiratory therapy services. The company is cooperating but unable to predict the timing and outcome.
• Physical Therapy Billing Investigation: U.S. Department of Justice (DOJ) investigation since October 7, 2021, into potential False Claims Act violations related to the company's billing for physical therapy services. A related qui tam lawsuit, filed by a former physical therapist, was unsealed in May 2024, amended in July 2024, dismissed in June 2025, and a third amended complaint was filed in July 2025. The company filed a motion to dismiss the third amended complaint in August 2025. The company is cooperating but unable to predict the timing and outcome.

Related Party Transactions

• Related party lease costs were $1,834 thousand for the three months ended September 30, 2025, and $5,501 thousand for the nine months ended September 30, 2025.
• The company provides support services to Concentra under a transition services agreement (TSA) following its spin-off. Fees for these services were $2.7 million for Q3 2025 and $9.9 million for the nine months ended September 30, 2025.

Stakeholder Impact

• Shareholders: Positively impacted by the extension of the common stock repurchase program and continued cash dividends. However, potential negative impacts from regulatory changes (OBBBA, Medicare cuts) and ongoing litigation could affect share value.
• Employees: Potential impact from labor shortages and increased competition for qualified healthcare professionals, which could lead to higher wages but also increased reliance on contract labor.
• Patients: Potential impact from changes in Medicare and Medicaid reimbursement policies, which could affect service availability or quality if states cut services or providers face financial strain.
• Government Payors (Medicare/Medicaid): Significant changes in federal funding and reimbursement policies (OBBBA, MPFS, LTCH-PPS, IRF-PPS) will directly affect the company's revenue from these programs.
• Suppliers/Creditors: Inflationary environment and rising costs could impact supplier relationships. Debt levels and interest rate management are key for creditors.

Next Steps

• The company will adopt ASU 2023-09 (Income Taxes) beginning with its annual reporting period ending December 31, 2025.
• The company is reviewing the impact of ASU 2024-03 (Expense Disaggregation Disclosures), effective for annual periods beginning after December 15, 2026.
• The company intends to pursue opportunities to develop new joint venture relationships with large, regional health systems and other healthcare providers.
• Plans include opening new outpatient rehabilitation clinics in local areas to produce incremental growth.
• The company may grow through opportunistic acquisitions.
• The Board of Directors declared a cash dividend of $0.0625 per share, payable on or about November 25, 2025, to stockholders of record as of November 12, 2025.
• The common stock repurchase program has been extended to December 31, 2027.
• The company will continue to cooperate with the U.S. Attorney's Office and DOJ on the Oklahoma City and Physical Therapy Billing investigations, respectively.
• The company will continue to monitor the impact of the "One Big Beautiful Bill Act" (OBBBA) and potential PAYGO Act cuts.

Key Dates

Recommendation

Select Medical Holdings Corporation reported mixed results for the nine months ended September 30, 2025, with overall revenue growth driven by strong performance in the Rehabilitation Hospital segment, but a decline in Adjusted EBITDA and margin compression in the Critical Illness Recovery Hospital and Outpatient Rehabilitation segments. While the company continues to return capital to shareholders through dividends and an extended stock repurchase program, significant regulatory headwinds, particularly from the "One Big Beautiful Bill Act" (OBBBA) and potential Medicare cuts, introduce substantial uncertainty regarding future reimbursement and profitability. Ongoing legal proceedings also present unquantified risks. Given the balance of positive operational growth in some segments against considerable external pressures and risks, a "Hold" recommendation is appropriate for a seasoned investor awaiting clearer visibility on the impact of these regulatory changes and litigation outcomes.

Keywords

Healthcare, Hospitals, Rehabilitation, Outpatient Therapy, SEC Filing, 10-Q, Financial Results, Medicare, Medicaid, Adjusted EBITDA, Patient Services, Regulatory Risk, Litigation, Stock Repurchase, Select Medical