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Q4 2023 Select Medical Holdings Corp Earnings Call

Participants

Robert Ortenzio; Executive Chairman of the Board & Co-Founder; Select Medical Holdings Corp

Martin Jackson; SVP of Strategic Finance and Operations; Select Medical Holdings Corp

Dan Bower; Analyst; Deutsche Bank

Kevin Fischbeck; Analyst; Bank of America

Ben Hendrix; Analyst; RBC Capital Markets

Bill Sutherland; Analyst; The Benchmark Company, LLC

A.J. Rice; Analyst; UBS

Presentation

Operator

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the fourth quarter 2023 results and the Company's business outlook. Speaking, today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; and the Company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. They 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 conference call over to Mr. Robert Ortenzio.

Robert Ortenzio

Thanks, operator. Good morning, everyone, and welcome to Select Medical's earnings call for the fourth quarter of 2023. Before providing details on each of our four operating divisions. I will provide some updates and commentary on the business. As most of you know, in January third, 2024, we announced that our Board of Directors has approved a plan to pursue the separation of Select Medical's wholly-owned occupational health services business Concentra. As I have previously stated, we are pursuing the separation of Concentra with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets. The potential separation is intended to be effected in a tax-free manner to Select Medical and its stockholders and to be completed in 2024. We expect in the very near future to receive a private letter ruling from the US Internal Revenue Service with an opinion confirming the tax-free status of the potential separation of the Concentra business. The completion of the of the separation is still subject to customary conditions including favorable market conditions, completion of necessary financing transactions and final approval by Select Medical Board Directors.
I will now provide commentary on our four business lines. Overall, we had a very successful fourth quarter and year, we experienced double digit adjusted EBITDA growth over prior year in every quarter of this year. In the third quarter of 2023, adjusted EBITDA grew 21% and revenue grew by 5% with all four of our operating divisions, again exceeding prior year revenue and EBITDA. For the quarter, total Company adjusted EBITDA was $180.1 million compared to $148.9 million in the prior year. Our consolidated adjusted EBITDA margin was 10.9% for Q4 compared to 9.4% in the prior year. Our critical illness recovery hospital division continued to see margin improvement in Q4 with a 28% increase in adjusted EBITDA margin along with a 4% reduction in their salary wages and benefits to revenue ratio compared to the prior year. Consistent with prior quarters, Marty Jackson will provide additional detail regarding critical illness continuing continued progress with labor critical illness incurred $3.6 million of start-up losses related to new hospitals in this quarter compared to $3.1 million in the same quarter prior year. The opening of critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with Rush University system for health remains on target for Q2 this year.
As we mentioned last quarter, we also have hospital expansions underway, which are expected to be completed in 2025, including in our Orlando market, which will also include a 48 bed rehab distinct part units.
On the inpatient rehab development front, we're excited to announce that we signed an agreement with Cox health system to construct a new freestanding 63 bed inpatient rehab hospital in Ozark, Missouri, in which we will have a majority interest. This hospital's projected open early 2026. As previously noted, we have agreements with the University of Florida health Shands to open a 48 bed hospital in Jacksonville, Florida in Q3 of 2024. And with the Cleveland Clinic two open, a fourth inpatient rehab hospital, which is a 32 bed hospital scheduled to open in the first half of 2025. In the latter half of 2024, we plan to begin construction on a new inpatient rehab hospital in southern New Jersey, the Bakken's two for rehab in partnership with Atlantic care, we anticipate that our inpatient rehab division will continue their strong performance and have a successful 2024.
Overall, I am pleased with the development results and pipeline for our specialty hospital divisions. In 2023, we developed or acquired and put in operation, 128 inpatient rehab beds and 227 critical illness recovery hospital beds. In 2024, we plan to be under construction or complete construction of 533 inpatient rehab facility beds and 70 critical illness recovery hospital beds that will begin operations in the current year or 2025, Concentra continued their strong performance exceed exceeding prior year revenue, EBITDA and patient volumes. As we mentioned on the last call, Concentra had significant development activity in October with the acquisition of three occupational medicine centers in Delaware and Maryland and the opening of three denovos and Norfolk, Virginia, Columbus, Ohio and Fort Myers, Florida. We have five signed leases for denovo slated to open in 2024 and to sign leases for de novo expected to be opened in Q1 2025. There is a strong pipeline of acquisitions, including one currently under letter of intent, another universe that we continue to evaluate this quarter. Our outpatient rehab division generated a 41% increase in adjusted EBITDA and a 11% increase in visits per day. The division added seven clinics this quarter via denovos, which offset the closure of 12 underperforming clinics and the fold in of eight clinics into existing operations as their leases expire the pipeline for future growth remains strong, with 19 executed leases for de novo clinics, of which 10 are scheduled to open in the first half of 2024. There are also many additional opportunities for acquisitions and denovo development that are under consideration.
Despite I'll provide some further data points on each of our operating divisions.
Our critical illness recovery hospital division experienced increases of 1% in net revenue and 29% in adjusted EBITDA. While our occupancy was down from same quarter last year, an increase in our case mix index and favorable payer contract negotiations contributed to an increase in our revenue per patient day. We've experienced very nice volume increases thus far in the first quarter of 2024 and are now at levels that exceed prior year.
Our adjusted EBITDA margin was 10.1% for the comparable quarter compared to 7.9% in the prior year. Q4 the reduction in labor costs contributed to the improvement of our EBITDA margin with a 4% reduction in our salary wages and benefit to revenue ratio, both nursing agency rates and utilization decreased 24% when compared to prior year. Q4 orientation hours decreased 10% compared to prior year Q4 and decreased 26% compared to Q. three of 2023. Nursing sign-on incentive bonus dollars decreased 36% from prior year Q4 and 5% from the prior sequential quarter. Our inpatient rehab hospital division experienced 9% increase in net revenue and a 19% increase in adjusted EBITDA. Patient volumes increased 7% and our rate per patient day increased 3% and our occupancy of 85% was consistent with prior year. The adjusted EBITDA margin for inpatient rehab was 25.5% for Q4, higher than the prior year of 23.6. Concentra experienced an increase of 6% in net revenue, driven primarily by rate. Our workers' comp volume increased 6%. That was offset primarily by a decrease in employer base visits, which are reimbursed at lower rates that resulted in an overall visit increase of 1% in sensors.
Adjusted EBITDA margin increased to 15.5% for the quarter compared to 15% for the same quarter prior year. Outpatient rehab division experienced an increase of 6% in net revenue, with patient volumes increasing by 11%, offset by a decrease in rate from $102 net revenue per visit to 100 organizational activities, focusing on improving clinical productivity via patient access contributed to additional volume where the decline in rate was due to a decline in the outpatient Medicare fee schedule, payer mix for and variable discounts. The outpatient division adjusted EBITDA increased by 40.9% compared to prior year with a 33% increase in EBITDA margin to 7.5% from 5.7%. Earnings per fully diluted share were $0.36 in the fourth quarter compared to $0.22 per share in the same quarter prior year. For the full year, earnings per fully diluted share were $1.91 compared to $1.23 per share in the prior year. Adjusted earnings per fully diluted share were $1.99 this year, which excludes the loss from early retirement of debt and its related costs and tax effect.
In regards to our allocation and deployment of capital, our Board of Directors declared a cash dividend of $0.125 payable on March 13th, 2024 to stockholders of record as of the close of business on March first, 2020. For this past quarter, we did not repurchase shares under our Board authorized share repurchase program, and we will continue to evaluate stock repurchases, reduction of debt and development opportunities, which includes my remarks, and I'll turn the call over to Marty Jackson for some additional financial details and commentary before we open the call up for questions.

Martin Jackson

Thanks, Bob. Good morning, everyone. I would like to first provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our salaries, wages and benefits as a percentage of revenue decreased from 59.8% in Q4 prior year, down to 57.6% this past quarter. Our SW&B as a percentage of revenue improved as the quarter progressed our year to date basis, all with regards to SW&B as a percentage of revenue decreased from 63.4% in 22, down to 57.2% in 23 thus far in 2024. Our SW&B as a percentage to revenue has continued to trend favorably, and we expect to finish at or below 55% in Q1 this past quarter, we had a sequential reduction from Q3 to Q4 in our agency costs with a decrease in both utilization and agency rates. The reductions realized were 17% in our and agency costs, a drop in our utilization from 15% to 14% and a decrease in agency rate from $78 to $70 R in agency utilization decreased throughout the quarter from 14.4% in October 13.8% in November and 13% in December. Nursing sign-on and incentive bonuses dollars also in decreased by 5%. And we had a 26% decrease in orientation hours.
Moving on to our financials and Q4. Equity and earnings of unconsolidated subsidiaries was $10.2 million compared to $6.8 million in the same quarter prior year. Adjusted net income attributable to noncontrolling interests was $15.5 million compared to $10.2 million in the same quarter prior year. Interest expense was $50.8 million in the fourth quarter. This compares to $47.3 million in the same quarter prior year. The increase in interest expense was attributable to an increase in interest rates. This was offset by a decrease in our revolving credit facility when compared to Q4 of 22. Although at the end of the quarter, we had $3.7 billion of debt outstanding and $84 million of cash on the balance sheet.
Our debt balance at the end of the quarter included $2.1 billion in term loans, $280 million in revolving loans, $1.2 billion in our 6.25% senior notes and $68.2 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.54 times. As of December 31st, we had $434 million of availability on our revolver. The interest rate on $2 billion of our term loans capped at 1%, so for plus 300 basis points through September 30th of 2024.
For the fourth quarter, operating activities provided us with $179.4 million in cash flows. Our days sales outstanding or DSO was 52 days as of December 31st, 2023 days compared to 55 days at December 31st of 2022 and 52 days at September 30th, 2023. Investing activities used $69.6 million of cash in the fourth quarter. This includes $60.6 million in purchases of property equipment and other assets and $9 million in acquisition and investment activities.
Financing activities used $103.3 million of cash in the fourth quarter. This was primarily due to $60 million in net payments on our revolving line of credit, $16 million in dividends on our common stock, $13.4 million net payments on other debt, which included $5.3 million of term loan payments and $12.5 million in net payments and distributions to noncontrolling interest. As stated previously, we did not purchase any shares under our Board authorized repurchase program this quarter. Last quarter, the Board approved a two year extension of the share repurchase program, which now remains in effect until December 31st, 2025, unless further extended or earlier terminated by the board, we are issuing our business outlook for 2024 and expect revenue to be in the range of $6.9 billion to $7.1 billion adjusted EBITDA. It is expected to be in the range of $830 million to $880 million. And finally, our expected range for earnings per fully diluted common share is $1.88 to $2.18. We expect capital expenditures to be in the range of $225 million to $275 million for 2024. This concludes our prepared remarks. And at this time, we'd like to turn it back over to the operator to open up the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Dan Bower, Deutsche Bank.

Dan Bower

Hi, good morning, everyone. On, could you talk about some of the moving parts and the guide on? And then any any additional color you can give us by segment would would be appreciated as well, how you're thinking about some of the segments playing out for the year?

Martin Jackson

Yes, Justin, this is Marty. A the outlook that we provided is really a function of taking a look at the four business segments, taking a look at some of the headwinds as well as the tailwinds. Obviously, the inpatient rehab, as doing quite well. Concentra is doing quite well. But we did have some headwinds, though in the both our critical illness recovery hospitals with regards to the high cost outlier. And we had cuts on the Medicare portion of our outpatient rehab. So and all of that's reflected in the outlook so I think you can expect that the critical illness recovery, hospitals and outpatient rehab was a little bit muted because of that. But both inpatient rehab and Concentra continues to do quite well, both in tough in terms of revenue growth and EBITDA growth.

Dan Bower

Okay, understood. And then I just wanted to ask one on about a couple about Altec and then one on outpatient rehab. So I think you said that Altec is tracking towards 55% SWB in first quarter. I just want to clarify on that. I heard that correctly and then is that on is that is sort of the implication there that the volumes are up from sequentially? And then just one more. Do you have do you have another LTE coming online in 2020, 24 this year, I guess, a bit of a three-parter.

Martin Jackson

Sure. The first part of the question with the 55% and yes, you did hear that correctly, we are trending towards 55% on. We have seen volumes up in the first quarter, and we do have a hospital coming on as critical illness recovery hospital in Q2.

Dan Bower

Okay, got it. And then just on outpatient rehab, I know that, Tom, there's obviously there's been some headwinds with Medicare too, but you you guys have been on a chopping somewhat operationally as well over the last, I think, four to four to six quarters. Is that segment likely like why are you expecting margins to improve in that segment?
This year and sort of any thoughts on that trajectory to get back to one? Is that that low to mid 10s on margin that you guys target?

Martin Jackson

Yes. On as I mentioned before, we did have the cuts from Medicare and that had of that muted the growth there. We do expect receiving clinical efficiencies improve on and we expect within probably within the next two, three years that we will be in that low to mid range 10s as far as margins are concerned.

Dan Bower

Okay, thanks. I'll jump back in queue.

Martin Jackson

Thanks, Justin.

Operator

Kevin Fischbeck, Bank of America.

Kevin Fischbeck

Great, thanks. And maybe just to get back to the guidance range I guess for percentage Factive looks a little wide. What are the things that you think are kind of the things that could push you to the high end or the low end of the guidance range.

Martin Jackson

And I think the primary item for us, Kevin, is the potential impact on the high cost outliers on the critical illness recovery hospitals on. And that's why we were pretty pretty wide on the rate.

Kevin Fischbeck

Okay. And then I guess the improvement you made in the Q4 on the labor side of things happened with volume being a little bit weak, I guess want to see it seems you should be easier to staff and order volumes are a little bit light. It sounds like you're expecting volumes to kind of come back, is there anything you need to do on the hiring side or any trends you could point to on the hiring side that kind of say as volumes normalize you'll still be able to make progress on the on that.

Martin Jackson

And so you have for us, you know, what we've seen is we are back to pre pandemic with regards to our staffing. If you recall, we talked about, you know, on average pre-pandemic. What would are what are different buckets of nurses are in. So we are full-time nurses. That's pretty much back to on where we've been pre-pandemic. We think we're seeing PRN actually increase, which is a good thing. And historically, we've been in that 15% to 18% as far as agency nursing and we're down to of 13%, 14%.

Kevin Fischbeck

What slide I am I think was a EBITDA level, but then if you're if you're kind of back from a staffing level, what's the lever to get, you know, further down as a percentage of SW&B because it just occupancy deleverage from that? Or is it RATES?

Martin Jackson

Yes, it really is volume, we'll do wonders to get that to get that percentage down. Yes. I mean, volume is going to increase your top line.

Kevin Fischbeck

Okay. And then maybe on the Concentra spin-off sounds really interesting. I was wondering, could you just maybe provide us remind us kind of how you're thinking about the growth of Concentra and what that company might look like as a standalone company. You've done a really good job bringing the margins up in that business. Is there still room on the margin side or is it more about organic growth, denovos and tuck-in acquisitions? Or how should we think about the growth of that business as a separate company?

Robert Ortenzio

Well, Bob, I think Concentra is just a fabulous company because that because of their their their dominance in that occupational medicine space and their various levers they have to grow mean they can grow by de novo. They can grow by acquisitions, either in new markets or existing markets. So they have a lot of levers that they can suppress. And I think that they they enjoyed solid margins. Now, I'm not sure that I could sit here and project that their margins are going to go very much higher than they are right now, but they they do have a lot of opportunities for growth. So we're pretty excited to have Concentra, as you know, all these years that we've had it, and I'm pretty enthusiastic about their prospects as a stand-alone company.

Kevin Fischbeck

Thank you.

Operator

Ben Hendrix, RBC Capital Markets.

Ben Hendrix

Thank you very much. You guys are continuing to deliver a really impressive margin in the inpatient rehab business despite what looks like a fairly aggressive our development strategy. I just wonder if you could kind of go in a little bit more into your development pipeline how you're thinking about that if there's any risk that we could see some drag on the margin over the next several quarters given the expansion? Thanks.

Robert Ortenzio

And yes, as you point out, we are a pretty feel pretty good about the development pipelines or inpatient rehab, given our strategy and our strategy is our new development is in partnership with a large acute care system. So in some regards, we don't have complete control over the cadence of when those hospitals come on.
Now, as you know that we our policy is not to announce them and our rehab projects until they're until they're signed and commenced. But we did go a little bit further on disclosure today when I talked about the hospitals in 2024 that we had hoped to have under construction are complete. So that's 533 on rehab beds and a much smaller number of critical illness beds in 2024, any drag on earnings as a result of that development you can assume is factored into the guidance?
So I'm so I think that we're of a size and the platform there is that we feel we can bring these on and not really compromised our growth rate in that division.

Ben Hendrix

Thanks. And just if I may ask a different question here. We're getting questions about the recently announced subpoena in California for Concentra. And I know these types of things pop up from time to time, but is there anything unique or notable about the subpoena? And is there any potential for it to delay your timeline?

Robert Ortenzio

Yes. Now we do not believe that it will have any delay on the on the but on the separation of Concentra, these subpoenas, you can get for all kinds of reasons. This one comes from the California State Department of Insurance and you can have, you know, I think investors in health care are used to the various CAMs that are oftentimes announced because of whistle-blower suits and that could happen in state agencies as well as well as federal. We never like to get them back. And I'm a little of the say that these are routine, but they have become routine over the years. And so a week and disclosed it as we feel is our obligation. But beyond that, I really can't predict the outcome and us, but I can tell you that we will we will vigorously defend our business practices in California with Concentra.

Ben Hendrix

Thank you.

Operator

Bill Sutherland, the Benchmark Company.

Bill Sutherland

Okay, thank you. Good morning, guys. Bob, you mentioned that volumes were starting to improve quarter to date for critical illness. Can you just give some more color on that and maybe the and how you think about the sustainability?

Robert Ortenzio

Well, I can't give you much more color on that. I mean, you know where we are are trying to give a little bit more disclosure and, you know, for us to give you know how the first quarter is shaping up is, as you know, probably a little unusual for us, but we were pleased that volumes volumes volumes are up now it is seasonally this is the time I know that those volumes can be affected by lots of things, but it was it was pretty broad-based across across the country for our critical illness hospital.
So I thought that was noteworthy. I mean, I I it's hard to say without more current data, whether it's because you have more respiratory cases or whether there's COVID or other other acute illnesses that are driving that. Volume normally are critical illness volumes go up when the ICUs that acute care hospitals volumes go up. So when we look at our volumes, I think you can assume that in large measure, it's because volumes at our referral hospitals and their ICUs are up as well. So sustainable, I'd like to think so. I mean, I don't think there's anything to suggest that there has been a outbreak of health in the United States. I think we'll continue to see patients that, particularly with it with an aging population that have the kind of respiratory conditions that land them in ICUs and make them appropriate for our level of care. So I'd like to think so. But as you've seen over the years that that census can go up and down and Q1 is seasonally one of the better quarters because of the because of the winter and the colder months.

Bill Sutherland

Yes, it's just it was interesting on a year-over-year basis. So because you were kind of flattish slide here. I think last year on it could be at Concentra. I'm curious if you could give us a little more color on the blend the blend of the business and why the employer visit side is on not as strong and and what might be the outlook for that? I know it helps the mix, but just curious.

Martin Jackson

Okay. Yes, Bill, this is Marty. Yes, the employer side that there's different things that they have there, the different activities they perform on his pre-employment, our physicals drug testing to a certain extent it has to do with the drug testing is down a little bit. And I think that may have to do with some of the part. We've increased some of our pricing and there is some there is a lot of price elasticity associated with that product, but that's a bit.

Bill Sutherland

It has a pretty standard I mean, steady demand side, the drug testing yes, yes, there is.

Martin Jackson

But you know, as you as you probably know, there is Department of Transportation requires drug testing for all truck drivers. So that's certainly been good. And there is some note as far as the employment employment has been pretty steady.

Bill Sutherland

I'm thinking about outpatient rehab for a second and the revenue per visit. And I know the pressure there from Medicare of how do you think of things could go this year for that number?

Martin Jackson

And so I think we're going to see, yes, I think we're going to see net revenue per visit increase on our expectation to see that increase at least a couple of dollars, whether it's $2 or $3 on income, but by the end of the year, right.

Bill Sutherland

And then kind of one, just kind of a more high-level question, Bob, I'm looking at this big expansion plan for beds for rehab hospital relative to critical illness. And I'm wondering if this is just timing or is this kind of a Board and management view of capital allocation relative to any given the margin profile of rehab hospitals and the I think the market growth opportunities relative to critically on this?

Robert Ortenzio

It's a good question about how we think about allocating capital, which are truly an allocation of capital assessment the rehab, the critical illnesses are historically being our largest division. We have a footprint of over 107 hospitals. I see that there are and there will always be I think opportunities there, although we have brought some reimbursement headwinds in the critical illness and this high cost outlier threshold issue that we've talked about is certainly a headwind that's not to say that rehab hospitals will not have headwinds in the future. But I think the way we look at it is as we work with the kind of large partners of the type that we have signed when you have those opportunities to do those deals, I think those are the ones that become a priority for our capital. And typically they involve using capital to build new hospitals, which are not at not inexpensive. The critical illness opportunities do come about and we tend to triage. Those are the ones that are absolutely the most compelling.
So we will continue to do that and add new hospitals to critical illness. But when we have an opportunity to work with a great partner as the profile, the ones that we have for inpatient rehab. We certainly want to move on those. And our development pipeline that we've been working for years and years and years is just it's just very robust right now. And there are some great opportunities to sign some rehab deals with system, great partners. And what we've seen over the history of the Company is these partnership deals and returns and growth within the partnerships is absolutely compelling. And so we'll and I think because of the way we structured those with the partners, they tend to have you know a larger moat around them and give you the comfort that even in the face of perhaps some reimbursement headwinds, if and when they come, you'll be able to navigate them better with us, but with a very large system.
And I think the other thing that's not particularly well recognized is not only the signing of the new partnerships, but the growth within the partnerships. And I mentioned today that we are but getting underway with the construction of our fourth inpatient rehab facility in partnership with the Cleveland Clinic in their market and so these are these opportunities. It just are really compelling and sometimes building replacement facilities or taking units out of hospitals and partnership and building those are just really, really great deals so I think you'll continue to see growth in both, but perhaps a bit more of an acceleration of the inpatient rehab. And with the with the planned separation of Concentra, you know, as we look at the growth rate for the Company, we'll see it in outpatient rehab, inpatient and the critical illness. But the rehab is a good opportunity.

Bill Sutherland

Thanks, Bob.

Operator

A.J. Rice, UBS.

A.J. Rice

Hi, everybody. A couple of questions. Maybe I just want to make sure I understand on the tough times in response to questions about the outlier threshold, increasing on the critical access facilities or critical illness facilities, what that went into effect, I think October one do you get a pretty good read right away as to how that impact is. I guess I'm trying to figure out why it still is a big swing factor in the guidance if you've got a quarter's experience.

Martin Jackson

All right, A.J., it really takes some time to evaluate something that's significant.
With regards to the high cost outlier, I mean, we went from 38 a little bit north of $38,000 up to $59,000. So and remember, the length of stay of our patients is not five to six days it's over 30 days.

Robert Ortenzio

I think the other thing, A.J., is it's not hard for us, but are kind of a robust systems and data collection to understand the impact we understood the well understood the impact way in advance of it going into effect. It's a question of how your mitigation strategies are going to work. And so it's not so much understanding the impact. But over the course of this year, how will how successful will the operators be in the mitigation? And that is that it tends to play out and is not as easy as you would think because it's you want to keep your referral sources happy, but at the same time, you have to appreciate that the more high cost outliers that you hit the more of the losses you're going to sustain. So and I think that is a reason why we've left ourselves some some room on the guidance.

A.J. Rice

Okay. Can you I know you probably have given this for you just around May, what percentage of your admissions or your volume or however you want to describe it end up falling into that status. Typically, I know it will change with the increased threshold, but is there can we get an order of magnitude of how many percentage of your patients are impacted in that business?

Martin Jackson

Yes, A.J., it varies pretty significantly hospital by hospital and then on average also on.

Robert Ortenzio

So we really have not provided that because that variation, I can tell you that as we look over the entire industry, Select Medical probably has more higher cost outliers than the average of the rest of the industry because we take higher acuity patients. You'll recall that our strategy. Our long-held was not to take site-neutral patients and to only take the highest acuity patients. We believed that that was the intent of the 2014 criteria we built our clinical programs around being able to take care of those very complex patients. And so and this has been part of our part of our efforts with CMS is that the high cost outlier increase of the threshold actually hurts those providers that are actually taking care of the very patients that the policy once the L tax to take care of. So Southern ours to be tend to be higher. And so we're affected more of it.

A.J. Rice

That makes sense. And I think in the fourth quarter, you called out that you had about $3 million of start-up costs from development, and that's similar to what you had in the fourth quarter. 22 of you talked about the total amount given the development projects that are underway, joint ventures, et cetera, on how much 24 start-up costs will be compared to what startup costs ended up being up 23? Is that a headwind tailwind has shakeout.

Robert Ortenzio

I think for two for 24, our projected start-up losses $12.3 million, and that is reflected in the business outlook.

A.J. Rice

And that is that kind of off the top of your head, do you have how that compares with 23? Is it a similar?

Robert Ortenzio

Yeah, in fact a similar amount in 2023.

A.J. Rice

Okay. All right. And then I just last question, Marty, you called out that obviously some of these interest rate caps and swaps, et cetera, expire in September. What what is your assumption? What do you think about your outlook as to what happens in the fourth quarter with respect to your borrowing costs or what mitigation strategies are you thinking about or any comment on that?

Martin Jackson

Yes, Jay, we anticipate that we'll see probably about a $20 million increase in interest expense for the fourth quarter. On an EPS basis, that's about $0.12 a share.

A.J. Rice

Okay. And is there anything any way to mitigate that in any way or not particularly that sort of it is what rates are what rates are?

Martin Jackson

Yes, at this point in time, particularly way we've mitigated that the the indices come down.

A.J. Rice

Right. Okay. I will take it maybe a pivot to pay down a retiring debt or something like that. I know you said you didn't do any buybacks this quarter. I don't know if anything like that was in the was under review or not.

Martin Jackson

We will take any we will be very opportunistic as we always are AJ and take advantage of any opportunity we can to get that interest expense down.

Robert Ortenzio

Yes, we'll look at that this time that we've got a good six months for us to think about what opportunities they are. And that is, as Marty pointed out, that's $0.12 of the EPS that we reflected in the guidance, which because of the cap going off, but we'll we will find opportunities on them.

A.J. Rice

All right. Thanks a lot.

Operator

Thank you. At this time, I would now like to turn the conference back over to Mr. Ortenzio for closing remarks.

Robert Ortenzio

Thank you, operator, and thanks, everybody, for joining us.

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect.

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