Select Medical Corporation

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Select Medical Corporation

4716 Old Gettysburg Road
Mechanicsburg, Pennsylvania 17055
Telephone: (717) 972-1100
Fax: (717) 972-1042
Web site:

Public Company
Incorporated: 1996
Employees: 20,800
Sales: $1.4 billion (2003)
Stock Exchanges: New York
Ticker Symbol: SEM
NAIC: 621610 Home Health Care Services

Based in Mechanicsburg, Pennsylvania, Select Medical Corporation specializes in two niches of the hospital and rehabilitation care business. The company operates a network of more than 80 "hospitals within hospitals," located in some 25 states. Using leased spaced in hospitals, Select Medical provides specialty and long-term acute care for patients with complex medical conditions, such as kidney, cardiac, brain and spinal cord injuries, and neuromuscular disorders. After patients have been stabilized in the host hospital, they are moved to these long-term units, thus freeing up beds for the host hospital while providing patients with better specialty care. Select Medical also operates approximately 800 outpatient rehabilitation clinics in about 30 states. In addition, the company does contract work, providing rehabilitation services to hospitals, nursing homes, assisted living and senior centers, as well as school and worksites. The 2003 acquisition of Kessler Rehabilitation Corporation also has positioned the company to become a player in the inpatient rehabilitation industry. Select Medical is publicly traded on the New York Stock Exchange.

Cofounder a Physical Therapist in 1950

Select Medical was founded by Rocco A. Ortenzio and his son Robert A. Ortenzio. Rocco Ortenzio had previously launched three publicly traded healthcare companies and gained legendary status in the rehabilitation field. Ortenzio, whose father worked in a Bethlehem Steel mill, grew up one of six children in Steelton, Pennsylvania. His first intention was to become a football coach, but he became sidetracked because of his interest in physical therapy. After earning a bachelor's degree from West Chester University, he graduated from the University of Pennsylvania School of Physical Therapy in 1956. He now decided to go on to medical school. He finished up some pre-med coursework at Dickinson College and was accepted to medical school, but because he had to wait a year to enroll, he elected to put his training as a physical therapist to use as a way to "test the waters." He took a job with Carlisle Hospital in Carlisle, Pennsylvania, but soon realized he preferred to work for himself. In 1958, with $10,000 borrowed from his brother, the 26-year-old Ortenzio launched his own physical therapy practice in Harrisburg, Pennsylvania. A solo practitioner was a rarity at the time because physical therapists could only work with patients with a direct referral from a physician. Thus physical therapists aligned themselves with hospitals and other institutions. Ortenzio tried a different approach, using direct mail and other ways to market his service directly to physicians. A main selling point was his promise to write detailed reports on each patient, a service that hospital therapists did not provide. Within just four months Ortenzio was turning a profit and he soon added a second office located in Mechanicsburg.

Ortenzio never enrolled in medical school, but he was far from content with his solo physical therapy practice, however prosperous it may have been. He developed a bigger dream. All too often he saw patients at his office come in for a 30-minute session, knowing that what they truly needed was five or six hours of therapy a day. In 1969 Ortenzio envisioned a chain of rehabilitation hospitals where cardiac patients and others could receive more in-depth rehabilitation services, but the concept was well ahead of its time. It was not certain that the state would license such a hospital, nor was it certain that insurance companies would pay for such care. As a result, one bank after another turned him down. According to Ortenzio, "They thought I was from another planet." He refused to give up and finally found a backer in Pennsylvania National Mutual Casualty Insurance Co., which provided $400,000after he had helped the wife of the insurer's chairman rehabilitate a sore ankle. Ortenzio forged ahead and built Rehab Hospital of Mechanicsburg even though he had no state license for the facility. It came through the day before the facility was set to open. Out of this hospital grew Rehab Corp.

Starting a Second Company in 1979

In 1972 Ortenzio took Rehab Corp. public and two years later it merged with American Sterilizer Co. Ortenzio started his second company, Rehab Hospital Services Corp., in 1979. The purpose of this company was to open rehabilitation hospitals in underserved locations. Over the next five years, this company also went public and grew into a six-hospital chain. Helping him to run the business was his son, Robert, a 1982 graduate of Dickinson Law School, who started out as legal counsel. Rehab Hospital Services would be acquired by National Medical Enterprises Inc. in 1985. In the meantime, Ortenzio endured some medical problems of his own. He underwent heart-bypass surgery in 1982, but it did not sideline him for very long. After the sale of Rehab Hospital Services, he wasted little time in starting his third company, launching Continental Medical Systems (CMS) in 1986. With a solid reputation in the field, Ortenzio no longer had problems finding backers: Within two weeks he raised $26 million. He also was able to take the company public in its first year. CMS grew into a chain of rehabilitation hospitals that offered community-based rehabilitation programs and services for patients suffering from the effects of strokes, head and spinal cord injuries, orthopedic problems, neurological problems, and work-related disabilities. Again, Robert joined his father at this new venture, becoming chief operating officer and later president of the company.

CMS was sold in 1995. Rocco Ortenzio made an attempt to retire, but he soon grew restless. He decided to start yet another company, Select Medical, but only if he could meet three conditions. First, he wanted Robert involved. After his son came on board, he then wanted to make sure they could recruit key employees from past endeavors. He finally wanted to make sure the new company had sufficient seed money. Two venture capital firms that had worked with him in the pastNew York's Welsh, Carson, Anderson & Store and Chicago's Golder, Thoma, Cressey, Rauner Inc.each put up $25 million. The company was incorporated in December 1996. According to the Patriot News, "With the people and money in place, the only remaining issue was finding a niche for their health-care operations." It was hardly surprising that Ortenzio would decide to work within the rehabilitation field.

In February 1997 Select Medical made the first of many acquisitions, acquiring Sports and Orthopedic Rehabilitation Services, a central Florida full-service, outpatient rehabilitation company that grew out of a therapist-owned practice founded in 1988. Three months later Select Medical attempted to make a much larger acquisition, the $565 million purchase of Las Vegas-based Transitional Hospitals Corp., which operated long-term-care hospitals. An agreement was signed, but at the 11th hour Vencor Inc. offered $650 million for the business and Transitional Hospitals backed out of the deal with Select Medical, which received $20 million in compensation. Nonetheless, the aggressive bid at the very least announced to the world that Rocco Ortenzio was once again a player to be reckoned with.

Select Medical's first major deal came in June 1998 when it acquired American Transitional Hospitals, a subsidiary of Beverly Enterprises Inc., America's largest nursing home operator. At a cost of $62.8 million in cash and the assumption of $15 million in liabilities, Select Medical in one stroke became a significant force in the long-term, acute-care hospital industry. Select Medical picked up 15 long-term acute-care hospitals located in eight states: Arizona, Georgia, Indiana, Mississippi, Ohio, Oklahoma, Tennessee, and Texas. Only two were free-standing facilities, with the rest operating as hospitals within hospitals. They mostly handled complicated treatment programs on both an inpatient and outpatient basis. Long-term acute care was a promising field, filling a void in the hospital industry. Although the average stay in a hospital intensive-care unit was around five days, patients who moved to a long-term acute hospital remained much longer. To be certified by Medicare, in fact, a facility had to demonstrate that on average patients stayed at least 25 days. Moreover, studies indicated that all parties benefited from long-term acute hospitals: They were 10 percent to 40 percent less expensive than hospital intensive-care units, and they could provide more focused care.

Select Medical added a 16th hospital, located in its home state of Pennsylvania, but before the end of 1998, it also would complete another major acquisition, paying $103.6 million in cash, plus the assumption of $56.5 million in liabilities, for St. Louis-based Intensiva HealthCare Corporation. Intensiva was founded in 1994, went public two years later, and now generated more than $100 million in annual revenues from 22 long-term, acute-care hospitals. With 38 hospitals in its network and another 13 contracted to open, Select Medical had established a strong base, which was a key in the hospital industry. Rocco Ortenzio commented to the press, "Critical mass is of paramount importance in today's health-care environment." In 1998, Select Medical generated revenues of close to $150 million, but that amount would grow at a strong clip over the ensuing years.

The next major step in the development of Select Medical came in November 1999 with the acquisition of NovaCare Physical Rehabilitation and Occupational Health Group, a division of King of Prussia, Pennsylvania-based NovaCare Inc. At a cost of $160.4 million in cash and the assumption of $64.7 million in liabilities, Select Medical entered the outpatient rehab business, picking up 500 clinics and in the process becoming the second largest player in the industry, trailing only Health-South Corporation. As a result, Select Medical was now well established in two branches of the healthcare industry.

Company Perspectives:

The Mission of Select Medical Corporation is to ensure high-quality health care and cost-effective outcomes by providing specialty inpatient long-term acute care and rehabilitation, and outpatient rehabilitation services to those we serve, while providing a positive work environment for staff and a reasonable return to our shareholders.

In 2000 Select Medical added ten hospitals to the fold, a yearly rate that the company hoped to maintain. The target was hospitals with at least 250 beds, serving markets of more than 500,000 people. Revenues during 2000 improved to $806 million, almost double the $456 million posted in 1999. To achieve that growth, the company took on considerable debt, which climbed to about $335 million. To help pay down that amount, as well as to fund further acquisitions, the company began taking steps in 2000 to make an initial public offering (IPO) of stock. With Wall Street heavy hitters Merrill Lynch, Credit Suisse First Boston, and J.P. Morgan managing the offering, Select Medical launched a road show in March 2001 to promote the company. What made the company an attractive opportunity to many investors was the aging of the American population. As the Baby Boom generation became seniors, the need for Select Medical's services would only grow. The hope was to sell 12.5 million shares for $11 to $13 each, but the stock market staggered after a series of losing sessions, putting a damper on all IPOs. Select Medical postponed its offering, lowered its price range to $10 to $11 per share, then seized upon a momentary rebound in the market to conduct the sale, priced even lower at $9.50. At the end of the day, the company netted approximately $85.5 million.

A changing of the guard also took place in September 2001, when Rocco Ortenzio stepped down as chief executive officer in favor of his son Robert. After working closely together for more than 20 years in three start-up companies, they felt the time was right for the 44-year-old Ortenzio to step up to the next level. His father, however, remained chairman of the board and very much involved in the affairs of Select Medical. Rocco Ortenzio stated at the time: "We have a common vision for Select Medical's strategic direction and its approach to building shareholder value. This appointment recognizes Bob's knowledge, experience and leadership ability and does not reflect any significant change in my duties."

After adding another ten long-term acute-care hospitals and 35 outpatient rehabilitation clinics in 2001, Select Medical saw its revenues in 2001 improve by 19 percent over the previous year to $959 million, with a net profit of $29.7 million. The company continued to grow in 2002, adding eight new hospitals and 20 rehabilitation clinics. Revenues topped the $1 billion mark, reaching $1.3 billion, and net income totaled $44.2 million. The company also was paying down the debt it incurred while building its base of operations. The debt load now stood at slightly more than $200 million, a significant improvement over the amount the company owed in 1999. Moreover, cash flow from operations grew at an impressive rate, from $22.5 million in 2000 to $120.8 million in 2002. The company also was recognized by Business Week magazine, which ranked it among the nation's top 100 "hot growth companies" in its annual listing of smaller public corporations.

Select Medical had not completed a major acquisition since 1999, but because of its strong financial position it was able to add a major asset in 2003, paying $230 million for Kessler Rehabilitation Corporation. As a result, Select Medical added 92 outpatient clinics in Delaware, Florida, Georgia, Illinois, Massachusetts, New Jersey, North Carolina, Pennsylvania, and Virginia. In addition, it picked up four rehabilitation hospitals in New Jersey and a rehabilitation hospital joint venture in Marylandmoving Select Medical into the inpatient rehab business as well as supplementing its offsite contract therapy services. Kessler also added about $225 million in annual revenues. Furthermore, in 2003 Select Medical added seven new hospitals and 53 rehabilitation clinics. Revenues for 2003 grew to nearly $1.4 billion, and net income improved to $74.5 million. With its specialty hospitals and outpatient rehabilitation businesses well established, and having gained a platform in the inpatient rehabilitation industry through the Kessler acquisition, Select Medical was now well positioned to continue its record of strong growth.

Principal Subsidiaries

American Transitional Hospitals, Ltd.; Intensiva Healthcare Corporation; Kessler Rehabilitation Corporation; NovaCare Rehabilitation, Inc.

Key Dates:

The company is incorporated.
American Transitional Hospitals and Intensiva Healthcare Corporation is acquired.
NovaCare Physical Rehabilitation and Occupations Health Group is acquired.
An initial public offering of stock is made.
Kessler Rehabilitation Corporation is acquired.

Principal Competitors

HCA Inc.; HealthSouth Corporation; Kindred Healthcare, Inc.

Further Reading

Dochat, Tom, "Father-Son Team to Take Fourth Health-Care Business Public," Patriot News, August 2, 1998.

Gupta, Udayan, "Rocco Ortenzio Succeeds in a Field Filled with Pitfalls," Wall Street Journal, June 28, 1990, p. B2.

Slavinsky, Cheryl, "Rocco Ortenzio: Ortenzio Leads CMS to Phenomenal Heights," Central Penn Business Journal, March 1, 1991, p. 1.

Vadum, Matthew, "They're Back: Ortenzios Buy Hospitals in 8 States from Beverly Chain," Central Penn Business Journal, June 12, 1998, p. 1.

Warner, Mary, "Ex-Therapist Led Rehabilitation Revolution," Harrisburg Patriot, October 17, 1988, p. 2.

Zweig, Jason, "Rocky III," Forbes, July 20, 1992, p. 45.

Ed Dinger

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Select Medical Corporation

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