Healthcare services company Select Medical (NYSE: SEM) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 4.5% year on year to $1.34 billion. The company’s outlook for the full year was close to analysts’ estimates with revenue guided to $5.4 billion at the midpoint. Its GAAP profit of $0.32 per share was 13.9% above analysts’ consensus estimates.

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StockStory’s Take

Select Medical’s results for Q2 saw revenue and GAAP EPS come in ahead of or meeting Wall Street expectations, but the market responded negatively, with shares falling sharply. Management cited ongoing reimbursement pressures in its critical illness recovery hospitals as a key reason for margin compression, particularly related to regulatory changes affecting Medicare payments. CEO Robert Ortenzio acknowledged, “This has resulted in a significant reduction in reimbursement for the higher acuity patients,” and noted that new CMS rules continued to challenge profitability in this segment. Meanwhile, the inpatient rehab and outpatient rehab divisions showed growth, aided by new facility openings and operational improvements, but these bright spots were not enough to offset sector-wide headwinds.

Looking forward, Select Medical’s outlook remains shaped by both growth initiatives and persistent regulatory uncertainty. Management reaffirmed its full-year guidance, emphasizing a strong development pipeline in the inpatient rehabilitation division and ongoing investments in outpatient clinic efficiency. CFO Michael Malatesta highlighted that Medicare policy changes and startup costs for new facilities will continue to affect margins, stating, “We are reaffirming our business outlook for 2025…We expect revenue to be in the range of $5.3 billion to $5.5 billion.” Management remains focused on growing its rehabilitation footprint, engaging with regulators on policy reform, and maintaining capital discipline as it faces continued reimbursement challenges.

Key Insights from Management’s Remarks

Management attributed Q2’s performance to regulatory headwinds in the critical illness segment, stable growth in rehabilitation, and continued network expansion, while also flagging persistent margin pressures from policy changes.

• Critical illness reimbursement pressures: Regulatory changes affecting Medicare payments, particularly the high-cost outlier threshold and the 20% “transmittal” rule, significantly reduced EBITDA margins in the critical illness recovery hospitals division, according to CEO Robert Ortenzio. The company is engaging with CMS (Centers for Medicare & Medicaid Services) to address these policies, but near-term relief is uncertain.

• Inpatient rehab expansion: The inpatient rehabilitation hospital division posted continued growth, with management highlighting the opening of new hospitals and bed additions in key markets. Ortenzio emphasized ongoing demand for rehabilitation services, supported by new partnerships and market entries such as UPMC in Pennsylvania and SSM Health in Missouri.

• Outpatient rehab operational improvements: Outpatient rehabilitation saw margin improvement driven by higher patient volumes and system upgrades. Management expects further operational benefits as scheduling initiatives and platform enhancements are rolled out, with CFO Michael Malatesta noting the division’s potential to approach a 10% EBITDA margin in the future.

• Labor cost stabilization: After elevated labor costs during the COVID-19 pandemic, management reported that wage growth has slowed and agency staffing costs have moderated. This trend has contributed to improved expense management, though some pressure remains in critical illness recovery due to regulatory-driven revenue declines.

• Shareholder returns strategy: Select Medical continued its capital return strategy, repurchasing over 5.7 million shares and declaring a cash dividend. Management reiterated its focus on balancing capital allocation between growth investments, debt reduction, and shareholder returns.

Drivers of Future Performance

Looking ahead, Select Medical’s guidance reflects optimism for rehabilitation growth and outpatient improvements, tempered by regulatory reimbursement and startup cost headwinds.

• Regulatory reimbursement risks: Management identified ongoing uncertainty around Medicare and CMS rules as a key challenge, particularly in the critical illness recovery segment. CFO Michael Malatesta stated that while the latest CMS update was less punitive than expected, reimbursement pressure remains a significant headwind for margins and profitability.

• Rehabilitation division growth: The company expects robust expansion in its inpatient rehabilitation hospital network, with multiple new openings and bed additions planned through 2027. Management believes this pipeline will support long-term revenue growth, especially in states with favorable certificate-of-need (CON) law changes.

• Efficiency and margin improvement initiatives: Select Medical is focused on driving operational efficiency in its outpatient rehab clinics through digital scheduling, system upgrades, and scale benefits. Management expects these efforts to gradually improve EBITDA margins, despite ongoing Medicare fee schedule reductions.

Catalysts in Upcoming Quarters

In the upcoming quarters, the StockStory team will be monitoring (1) Select Medical’s ability to execute on its ambitious inpatient rehab expansion pipeline, (2) progress on outpatient rehabilitation margin improvement through system upgrades and scheduling initiatives, and (3) any regulatory developments from CMS that could alter reimbursement rates for critical illness recovery hospitals. The evolution of labor costs and the company’s capacity to balance capital allocation between growth and shareholder returns will also be important signposts.

Select Medical currently trades at $12.20, down from $14.81 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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