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.
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Select Medical (SEM) Q3 CY2025 Highlights:
- Revenue: $1.36 billion vs analyst estimates of $1.33 billion (7.2% year-on-year growth, 2.7% beat)
- EPS (GAAP): $0.23 vs analyst estimates of $0.17 (38% beat)
- Adjusted EBITDA: $111.7 million vs analyst estimates of $112.7 million (8.2% margin, 0.9% miss)
- The company reconfirmed its revenue guidance for the full year of $5.4 billion at the midpoint
- EPS (GAAP) guidance for the full year is $1.19 at the midpoint, beating analyst estimates by 2%
- EBITDA guidance for the full year is $520 million at the midpoint, in line with analyst expectations
- Operating Margin: 5.4%, up from 4.3% in the same quarter last year
- Sales Volumes rose 2.1% year on year (-0.7% in the same quarter last year)
- Market Capitalization: $1.67 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From Select Medical’s Q3 Earnings Call
- Benjamin Hendrix (RBC Capital Markets) asked about the ongoing impact of high-cost outlier thresholds on admissions and volumes. CEO Thomas Mullin explained the negative effect on patient mix and outlined mitigation through patient flow between segments.
- Justin Bowers (Deutsche Bank) inquired about whether CMS could raise the outlier pool percentage or alter payment targets, and what levers could address industry headwinds. Executive Chairman Robert Ortenzio described ongoing advocacy for a range of regulatory relief measures.
- Ann Hynes (Mizuho Securities) questioned why EBITDA guidance was not raised despite the regulatory benefit. CFO Michael Malatesta cited softness in the outpatient segment, particularly from lower reimbursement and payer mix.
- Joanna Gajuk (Bank of America) probed the persistence of outpatient margin pressures and management’s mitigation plans. Malatesta pointed to upcoming Medicare rate increases and investments in scheduling systems as key responses.
- Albert Rice (UBS) asked about start-up losses and facility sizing for new rehab hospitals. Mullin and Malatesta indicated consistent start-up costs and a focus on partnership-driven growth, with potential for larger hospital footprints in high-demand markets.
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 $13.47, down from $14.22 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).
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