Healthcare services company Select Medical (NYSE: SEM) announced better-than-expected revenue in Q1 CY2026, with sales up 5% year on year to $1.42 billion. The company expects the full year’s revenue to be around $5.7 billion, close to analysts’ estimates. Its GAAP profit of $0.36 per share was 20.6% below analysts’ consensus estimates.

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StockStory’s Take

Select Medical’s first quarter results reflected continued revenue growth across all three operating divisions, but profit margins compressed due to operational challenges. Management attributed the slower earnings growth to increased costs in the outpatient rehabilitation segment—partly from exiting underperforming markets like Oregon—and lower conversion rates for Medicare Advantage in the critical illness recovery hospital division. CEO Thomas Mullen explained, “There was one market in particular in the first quarter that suppressed our earnings to a degree as we exited that market, and that was approximately $1 million of costs that flowed through in the first quarter for us, and that was Oregon, where we closed four clinics.”

Looking forward, Select Medical’s guidance is underpinned by ongoing expansion in inpatient rehabilitation capacity, a stable regulatory backdrop, and the expected completion of its take-private transaction. Management expects to add 275 more beds through new hospital openings and unit expansions over the next 18 months. CFO Michael Malatesta highlighted that, despite recent margin pressures, “We do expect to still be within our expectations for the remainder of the year.” The company is also navigating increased denials from Medicare Advantage, but sees growth opportunities from commercial and Medicare patient admissions and ongoing development projects.

Key Insights from Management’s Remarks

Management highlighted the main themes shaping first quarter results, including the costs of strategic market exits, inpatient rehabilitation growth, and the impact of Medicare Advantage conversion rates.

• Take-private transaction update: Select Medical's Board approved an agreement to be acquired by a consortium led by Executive Chairman Robert Ortenzio, with the deal expected to close in mid-2026. This move will transition the company to private ownership, affecting future reporting and capital structure.
• Ongoing inpatient rehabilitation expansion: The company opened three new inpatient rehabilitation hospitals and added 166 beds, with partnerships including Baylor Scott & White, CoxHealth, and Banner Health. Management expects this segment’s capacity to grow further with multiple projects in the pipeline through 2027.
• Outpatient rehabilitation consolidation: Management initiated closures in underperforming outpatient markets, including four clinic exits in Oregon, aiming to improve operational efficiency and segment profitability. CEO Thomas Mullen indicated further consolidations are likely in 2026 as the company assesses market performance.
• Critical illness recovery headwinds: Lower Medicare Advantage conversion rates contributed to margin pressure in the critical illness division, with management noting a $13–$14 million impact versus last year. The segment remains sensitive to payer mix and regulatory shifts.
• Regulatory stability and reimbursement: Proposed rules from CMS for both inpatient rehab and long-term acute care hospitals project modest payment increases, providing a relatively stable regulatory environment. Management sees the high-cost outlier threshold remaining steady, with potential for future flexibility as CMS evaluates industry data.

Drivers of Future Performance

Management’s outlook for the rest of 2026 centers on capacity expansion, operational efficiency initiatives, and adapting to payer dynamics.

• Hospital and bed growth pipeline: Select Medical plans to add 275 beds by the end of 2027 through new hospital openings and expansions in both inpatient rehabilitation and critical illness facilities. Management believes this will drive long-term revenue growth and increase market presence.
• Operational efficiency focus: The company is undertaking market assessments in outpatient rehabilitation, consolidating clinics, and optimizing scheduling. Management expects these actions to support margin recovery, though costs associated with market exits could remain a headwind in the near term.
• Payer and regulatory environment: Increased denials from Medicare Advantage and evolving CMS reimbursement policies present ongoing challenges. Management is engaging in industry advocacy to influence future payment models and is monitoring the impact of both commercial and Medicare patient mix on census and profitability.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be watching (1) progress on hospital openings and capacity expansions in both inpatient rehabilitation and critical illness divisions, (2) the impact of ongoing outpatient rehabilitation market consolidations on segment margins, and (3) developments in Medicare Advantage and CMS reimbursement policy, which could influence overall patient mix and profitability. The pending take-private transaction and capital structure changes also remain key milestones.

Select Medical currently trades at $16.45, in line with $16.41 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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