Select Medical Balances Growth With Margin Pressures

Select Medical ((SEM)) has held its Q4 earnings call. Read on for the main highlights of the call.

Select Medical’s latest earnings call painted a cautiously optimistic picture for investors, blending solid revenue growth and improving full-year earnings with clear pressure on profitability. Management struck a constructive tone on long-term prospects, especially in inpatient rehabilitation and bed expansion, even as near-term margins suffered from outpatient weakness and unexpected health insurance costs.

Consolidated Revenue Growth

Select Medical reported more than 6% year-over-year revenue growth in Q4 2025 and over 5% for the full year, underscoring resilient demand across its portfolio. All three divisions contributed to the top-line expansion, giving the company a broader base of revenue even as profit metrics came under strain.

Inpatient Rehabilitation Outperformance

The inpatient rehabilitation segment was the standout, with revenue jumping more than 15% to $339.2 million and adjusted EBITDA up 11% to $69.2 million. Revenue per patient day climbed over 6% while average daily census grew nearly 10%, pushing occupancy to 82% overall and an impressive 86% on a same-store basis.

Critical Illness Recovery Stability

Critical illness recovery hospitals delivered steady progress, posting nearly 5% revenue growth to $629.7 million and a 5% rise in adjusted EBITDA to $66.4 million. Margins held at 10.5% with stable 67% occupancy and 3% higher admissions, signaling a mature but dependable earnings stream in this segment.

Development and Bed Growth Pipeline

Select Medical continued to invest in capacity, adding 150 beds in Q4 and 212 beds in 2025, largely through new hospitals and units. The company plans to add 399 beds across 2026–2027, including 166 already in place this year, with multiple joint-venture openings designed to fuel future revenue and earnings growth.

Full-Year EPS Improvement

Despite quarterly noise, full-year earnings showed meaningful improvement, with EPS from continuing operations rising to $1.16 from $0.51. Adjusted EPS increased to $1.00 from $0.94, a gain of about 6.4%, suggesting underlying profitability is trending higher even as certain divisions lag.

Labor and Operational Progress

Management highlighted improved labor stability, with staffing now about 70% full-time, 15% PRN and 15% agency. Labor-related margins are running just above 56%, reflecting better cost predictability after a period of elevated agency usage and wage volatility.

Shareholder Distribution

The board approved a cash dividend of $0.0625 per share payable in March 2026, reinforcing a commitment to capital returns even amid investment and leverage demands. For income-oriented investors, the continuation of dividends offers a tangible benefit while the company pursues its growth agenda.

Quarterly Adjusted EBITDA Decline

Headline profitability weakened in the quarter, with adjusted EBITDA down 10% year-over-year to $104.7 million and full-year adjusted EBITDA slipping about 3.4% to $493.2 million. Consolidated adjusted EBITDA margin compressed to 9.0% from 9.8%, highlighting the earnings drag from specific cost and mix headwinds.

Severe Outpatient Profitability Weakness

The outpatient division was the clear trouble spot, as adjusted EBITDA plunged to $11.2 million from $26.6 million, driving margins down to 3.4%. Net revenue per visit fell roughly 3.9% to $98, pressured by lower Medicare reimbursement, tougher payer mix and higher variable discounts.

Unexpected Health Insurance Cost Pressure

A spike in health insurance expense created an estimated $15 million hit in Q4, reflecting higher-cost claimants and increased medical and pharmacy utilization. About $5 million of this surprise impact landed in the outpatient segment, magnifying its margin deterioration and weighing on consolidated results.

Receivable Write-offs and Variable Discounts

Variable discounts, including write-offs of older receivables after collection efforts were exhausted, totaled roughly $6 million in the quarter. These write-offs pressured net revenue per visit and further undercut outpatient profitability, adding another hurdle to restoring margins.

Earnings Shortfall Versus Prior Guidance

The quarter’s adjusted EBITDA of about $105 million fell roughly $25–$30 million below the prior guidance midpoint, surprising investors expecting a tighter execution. Management attributed the gap mainly to the $15 million health insurance headwind, outpatient softness and timing effects tied to new inpatient facilities.

Balance Sheet Liquidity and Leverage

On the balance sheet, Select Medical ended the quarter with $26.5 million in cash against $1.8 billion of debt, equating to net leverage of 3.67x under its credit agreement. While revolver availability of $469.1 million provides liquidity, the combination of high debt and modest cash underscores the need for consistent cash generation.

Outpatient Market and Staffing Softness

Management also flagged localized softness in certain outpatient markets driven by therapist recruitment challenges and competitive pricing pressure. These staffing and rate issues are dampening volumes and yields in select regions, complicating the path to a swift outpatient margin recovery.

IRF Margin Pressure from Startups

Inpatient rehab margins slipped to 20.4% from 21.2%, with management pointing to startup and timing costs from newly opened facilities. Startup losses are expected to be just under $15 million in 2026, similar to current levels, implying near-term pressure but setting the stage for longer-term earnings contributions as sites mature.

2026 Outlook and Capital Plans

For 2026, Select Medical guided to revenue of $5.6–$5.8 billion, adjusted EBITDA of $520–$540 million and fully diluted EPS of $1.22–$1.32, indicating anticipated growth and margin improvement. Planned capital expenditures of $200–$220 million and a 399-bed expansion through 2027 show management leaning into growth, even as it manages $1.8 billion of debt and ongoing interest costs.

Select Medical’s earnings call ultimately mixed encouraging operational momentum with tangible near-term challenges, giving investors a nuanced picture. Robust inpatient rehab growth, improving EPS and a clear expansion pipeline support the long-term bull case, but outpatient profitability, cost volatility and leverage remain key watchpoints for the next few quarters.