SEM Q3 Deep Dive: Regulatory Deferral Boosts Results Amid Outpatient Margin Pressures

Healthcare services company Select Medical (NYSE:SEM) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 7.2% year on year to $1.36 billion. The company expects the full year’s revenue to be around $5.4 billion, close to analysts’ estimates. Its GAAP profit of $0.24 per share was 43.4% above analysts’ consensus estimates.

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StockStory’s Take

Select Medical’s third quarter was marked by a regulatory delay that benefited revenue, but the market responded negatively, likely due to margin pressure in outpatient rehabilitation and persistent headwinds in payer mix. Management cited the Centers for Medicare & Medicaid Services’ (CMS) deferral of the 20% transmittal rule as a driver of higher revenue this quarter, with Executive Chairman Robert Ortenzio noting the adjustment “resulted in a favorable revenue adjustment recorded this quarter.” However, CFO Michael Malatesta acknowledged ongoing softness in the outpatient segment, pointing to both lower Medicare reimbursement and an unfavorable shift in payer mix as key challenges.

Looking forward, Select Medical’s guidance is shaped by a combination of growth in inpatient rehabilitation and expectations for more stable regulatory and labor environments. Management highlighted a robust development pipeline for new inpatient rehab hospitals and anticipated improvement in outpatient reimbursement, with Malatesta stating, “there will be an increase for Medicare—and our Medicare Advantage payers,” representing a modest tailwind. Still, the company remains cautious about regulatory risks and the timing of CMS rules, with Ortenzio emphasizing continued advocacy for more sustainable Medicare policy.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to the CMS rule deferral, steady growth in inpatient rehab, and margin pressure in outpatient rehab. Regulatory shifts and reimbursement trends were key discussion points.

• Regulatory rule deferral: The CMS delay of the 20% transmittal rule provided a one-time revenue and EBITDA boost in the critical illness recovery hospital segment, reducing the number of hospitals subject to outlier payment reconciliation.
• Inpatient rehab momentum: The inpatient rehabilitation segment delivered strong year-over-year revenue and patient census growth, driven by higher occupancy and new bed openings, though margins dipped slightly due to startup costs for new facilities.
• Outpatient margin headwinds: Management reported that while outpatient rehabilitation volumes grew, net revenue per visit declined due to reduced Medicare rates and a less favorable payer mix, leading to a notable margin contraction.
• Development pipeline expansion: Select Medical continued to invest in new rehabilitation hospitals, with multiple facilities under development through 2027 and joint ventures with academic medical centers, supporting long-term growth.
• Labor stabilization: Management noted that labor costs and agency staffing rates have stabilized, returning to pre-pandemic levels, which should reduce future cost volatility across business lines.

Drivers of Future Performance

Select Medical’s outlook is anchored in new rehab hospital openings, improving Medicare reimbursement, and cautious navigation of regulatory changes.

• Rehab development pipeline: Management expects additional revenue and occupancy growth from opening new inpatient rehab hospitals, particularly through partnerships with major health systems. This initiative is projected to expand capacity and meet rising demand for post-acute care services.
• Improved outpatient reimbursement: The company anticipates modest Medicare and Medicare Advantage rate increases for outpatient rehab in the coming year, which management believes will help offset recent headwinds from rate cuts and unfavorable payer mix.
• Regulatory and payer risks: While the regulatory environment has recently been more favorable, management remains watchful of potential CMS changes—such as the reintroduction of the 20% transmittal rule and rising fixed loss thresholds—that could impact reimbursement and margins, especially in the critical illness recovery hospital segment.

Catalysts in Upcoming Quarters

In the coming quarters, our team will be focusing on (1) execution and ramp-up of new inpatient rehabilitation hospitals; (2) stabilization of outpatient rehabilitation margins as new Medicare reimbursement rates take effect; and (3) regulatory developments around CMS rules, particularly the 20% transmittal and fixed loss thresholds, which could materially impact reimbursement. Labor cost stability and payer mix trends are also important watchpoints.

Select Medical currently trades at $13.83, down from $14.22 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free for active Edge members).

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