PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

	Select Medical Holdings Corporation				Select Medical Corporation					Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		June 30,		December 31,			June 30,		December 31,		June 30,		December 31,			June 30,
	2015		2016		2015			2016		2016		2017		2016			2017

ASSETS
Current Assets:
Cash and cash equivalents	$	14,435	$	78,420	$	14,435		$	78,420	$	99,029	$	73,799	$	99,029		$	73,799
Accounts receivable, net of allowance for doubtful accounts
of $61,133 and $56,664 at 2015 and 2016, respectively	603,558		613,790		603,558			613,790
Current deferred tax asset	28,688		43,955		28,688			43,955
Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,769 at 2016 and 2017, respectively										573,752		714,236		573,752			714,236
Prepaid income taxes	16,694		—		16,694			—		12,423		—		12,423			—
Other current assets	85,779		88,862		85,779			88,862		77,699		83,211		77,699			83,211
Total Current Assets	749,154		825,027		749,154			825,027		762,903		871,246		762,903			871,246

Property and equipment, net	864,124		889,171		864,124			889,171		892,217		911,532		892,217			911,532
Goodwill	2,314,624		2,638,286		2,314,624			2,638,286		2,751,000		2,766,296		2,751,000			2,766,296
Other identifiable intangibles, net	318,675		343,928		318,675			343,928
Identifiable intangible assets, net										340,562		335,704		340,562			335,704
Other assets	142,101		141,937		142,101			141,937		173,944		169,433		173,944			169,433

Total Assets	$	4,388,678	$	4,838,349	$	4,388,678		$	4,838,349	$	4,920,626	$	5,054,211	$	4,920,626		$	5,054,211

LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	28,615	$	26,477	$	28,615		$	26,477	$	39,362	$	34,134	$	39,362		$	34,134
Current portion of long-term debt and notes payable	225,166		10,511		225,166			10,511		13,656		26,577		13,656			26,577
Accounts payable	137,409		118,420		137,409			118,420		126,558		123,631		126,558			123,631
Accrued payroll	120,989		135,552		120,989			135,552		146,397		119,187		146,397			119,187
Accrued vacation	73,977		81,074		73,977			81,074		83,261		92,250		83,261			92,250
Accrued interest	9,401		16,927		9,401			16,927		22,325		19,277		22,325			19,277
Accrued other	133,728		134,085		133,728			134,085		140,076		146,853		140,076			146,853
Income taxes payable	—		12,314		—			12,314		—		6,976		—			6,976
Total Current Liabilities	729,285		535,360		729,285			535,360		571,635		568,885		571,635			568,885

Long-term debt, net of current portion	2,160,730		2,707,311		2,160,730			2,707,311		2,685,333		2,734,132		2,685,333			2,734,132
Non-current deferred tax liability	218,705		201,538		218,705			201,538		199,078		197,411		199,078			197,411
Other non-current liabilities	133,220		131,699		133,220			131,699		136,520		141,279		136,520			141,279

Total Liabilities	3,241,940		3,575,908		3,241,940			3,575,908		3,592,566		3,641,707		3,592,566			3,641,707

Commitments and contingencies (Note 11)
Commitments and contingencies (Note 8)

Redeemable non-controlling interests	238,221		245,784		238,221			245,784		422,159		468,850		422,159			468,850

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,282,798 and 131,472,188 shares issued and outstanding at 2015 and 2016, respectively	131		131		—			—
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 132,929,545 shares issued and outstanding at 2016 and 2017, respectively										132		133		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0		—		—		0			0
Capital in excess of par	424,506		432,951		904,375			913,058		443,908		454,892		925,111			936,428
Retained earnings (accumulated deficit)	434,616		522,995		(45,122		)	43,019		371,685		393,294		(109,386		)	(88,109		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	859,253		956,077		859,253			956,077		815,725		848,319		815,725			848,319
Non-controlling interest	49,264		60,580		49,264			60,580		90,176		95,335		90,176			95,335
Total Equity	908,517		1,016,657		908,517			1,016,657		905,901		943,654		905,901			943,654

Total Liabilities and Equity	$	4,388,678	$	4,838,349	$	4,388,678		$	4,838,349	$	4,920,626	$	5,054,211	$	4,920,626		$	5,054,211

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended June 30,						For the Three Months Ended June 30,						For the Three Months Ended June 30,						For the Three Months Ended June 30,
	2015			2016			2015			2016			2016			2017			2016			2017

Net operating revenues	$	887,065		$	1,097,631		$	887,065		$	1,097,631		$	1,097,631		$	1,120,675		$	1,097,631		$	1,120,675

Costs and expenses:
Cost of services	743,879			916,985			743,879			916,985			916,985			920,230			916,985			920,230
General and administrative	24,041			25,870			24,041			25,870			25,870			28,275			25,870			28,275
Bad debt expense	12,286			17,517			12,286			17,517			17,517			18,174			17,517			18,174
Depreciation and amortization	21,848			36,205			21,848			36,205			36,205			38,333			36,205			38,333
Total costs and expenses	802,054			996,577			802,054			996,577			996,577			1,005,012			996,577			1,005,012

Income from operations	85,011			101,054			85,011			101,054			101,054			115,663			101,054			115,663

Other income and expense:
Equity in earnings of unconsolidated subsidiaries	3,848			4,546			3,848			4,546			4,546			5,666			4,546			5,666
Non-operating gain	—			13,035			—			13,035			13,035			—			13,035			—
Interest expense	(25,288		)	(44,332		)	(25,288		)	(44,332		)	(44,332		)	(37,655		)	(44,332		)	(37,655		)

Income before income taxes	63,571			74,303			63,571			74,303			74,303			83,674			74,303			83,674

Income tax expense	23,517			33,450			23,517			33,450			33,450			32,374			33,450			32,374
Net income	40,054			40,853			40,054			40,853			40,853			51,300			40,853			51,300

Less: Net income attributable to non-controlling interests	3,114			6,918			3,114			6,918			6,918			9,245			6,918			9,245

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	36,940		$	33,935		$	36,940		$	33,935		$	33,935		$	42,055		$	33,935		$	42,055

Basic	$	0.28		$	0.26								$	0.26		$	0.32
Diluted	$	0.28		$	0.26								$	0.26		$	0.32

Weighted average shares outstanding:
Basic	127,674			127,626									127,626			128,624
Diluted	128,009			127,820									127,820			128,777

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,						For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2015			2016			2015			2016			2016			2017			2016			2017

Net operating revenues	$	1,682,408		$	2,185,961		$	1,682,408		$	2,185,961		$	2,185,961		$	2,232,036		$	2,185,961		$	2,232,036

Costs and expenses:
Cost of services	1,408,264			1,839,247			1,408,264			1,839,247			1,839,247			1,848,587			1,839,247			1,848,587
General and administrative	45,716			54,138			45,716			54,138			54,138			56,350			54,138			56,350
Bad debt expense	24,956			33,914			24,956			33,914			33,914			38,799			33,914			38,799
Depreciation and amortization	39,196			70,722			39,196			70,722			70,722			80,872			70,722			80,872
Total costs and expenses	1,518,132			1,998,021			1,518,132			1,998,021			1,998,021			2,024,608			1,998,021			2,024,608

Income from operations	164,276			187,940			164,276			187,940			187,940			207,428			187,940			207,428

Other income and expense:
Loss on early retirement of debt	—			(773		)	—			(773		)	(773		)	(19,719		)	(773		)	(19,719		)
Equity in earnings of unconsolidated subsidiaries	6,440			9,198			6,440			9,198			9,198			11,187			9,198			11,187
Non-operating gain	—			38,122			—			38,122
Non-operating gain (loss)													38,122			(49		)	38,122			(49		)
Interest expense	(46,676		)	(83,180		)	(46,676		)	(83,180		)	(83,180		)	(78,508		)	(83,180		)	(78,508		)

Income before income taxes	124,040			151,307			124,040			151,307			151,307			120,339			151,307			120,339

Income tax expense	46,701			50,510			46,701			50,510			50,510			45,576			50,510			45,576
Net income	77,339			100,797			77,339			100,797			100,797			74,763			100,797			74,763

Less: Net income attributable to non-controlling interests	5,336			12,029			5,336			12,029			12,029			16,838			12,029			16,838

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	72,003		$	88,768		$	72,003		$	88,768		$	88,768		$	57,925		$	88,768		$	57,925

Basic	$	0.55		$	0.68								$	0.68		$	0.44
Diluted	$	0.55		$	0.68								$	0.68		$	0.44

Dividends paid per share	$	0.10		$	—

Weighted average shares outstanding:
Basic	127,620			127,563									127,563			128,544
Diluted	127,944			127,709									127,709			128,703

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated ~~Statement~~Statements of Changes in Equity and Income

(unaudited)

(in thousands)

Select Medical Holdings Corporation Stockholders

Non-

Comprehensive Income

Total

Common Stock
Issued

Common Stock Par
Value

Capital in Excess
of Par

Retained Earnings

controlling
Interests

Balance at December 31, 2015

$
908,517

131,283

$
131

$
424,506

$
434,616

$
49,264

Net income

$
90,774

90,774

88,768

2,006

Net income - attributable to redeemable non-controlling interests

10,023

Total comprehensive income

$
100,797

Issuance and vesting of restricted stock

7,786

149

0

7,786

Tax benefit from stock based awards

269

269

Repurchase of common shares

(506
)
(38
)
0

(238
)
(268
)

Stock option expense

4

4

Exercise of stock options

657

78

0

657

Non-controlling interests acquired in business combination

2,514

2,514

Distributions to non-controlling interests

(3,505
)

(3,505
)
Issuance of non-controlling interests

9,831

9,831

Purchase of redeemable non-controlling interests

320

320

Other

(4
)

(33
)
(441
)
470

Balance at June 30, 2016

$
1,016,657

131,472

$
131

$
432,951

$
522,995

$
60,580

Select Medical Corporation Stockholders

Non-

Comprehensive Income

Total

Common Stock
Issued

Common Stock Par
Value

Capital in Excess
of Par

Retained Earnings
(Accumulated Deficit)

controlling
Interests

Balance at December 31, 2015

$
908,517

0

$
0

$
904,375

$
(45,122
)
$
49,264

Net income

$
90,774

90,774

88,768

2,006

Net income - attributable to redeemable non-controlling interests

10,023

Total comprehensive income

$
100,797

Additional investment by Holdings

657

657

Dividends declared and paid to Holdings

(506
)

(506
)

Contribution related to restricted stock awards and stock option issuances by Holdings

7,790

7,790

Tax benefit from stock based awards

269

269

Non-controlling interests acquired in business combination

2,514

2,514

Distributions to non-controlling interests

(3,505
)

(3,505
)
Issuance of non-controlling interests

9,831

9,831

Purchase of redeemable non-controlling interests

320

320

Other

(4
)

(33
)
(441
)
470

Balance at June 30, 2016

$
1,016,657

0

$
0

$
913,058

$
43,019

$
60,580

				Select Medical Holdings Corporation Stockholders
	Redeemable Non-controlling interests			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2016	$	422,159		132,597		$	132	$	443,908		$	371,685		$	815,725		$	90,176		$	905,901
Net income attributable to Select Medical Holdings Corporation											57,925			57,925						57,925
Net income attributable to non-controlling interests	13,140													—			3,698			3,698
Issuance and vesting of restricted stock				268		1		8,700						8,701						8,701
Repurchase of common shares				(45	)	0		(332		)	(268		)	(600		)				(600		)
Exercise of stock options				109		0		963						963						963
Issuance of non-controlling interests								1,653						1,653			3,634			5,287
Purchase of non-controlling interests	(127		)								7			7						7
Distributions to non-controlling interests	(3,113		)											—			(2,303		)	(2,303		)
Redemption adjustment on non-controlling interests	36,292										(36,292		)	(36,292		)				(36,292		)
Other	499										237			237			130			367
Balance at June 30, 2017	$	468,850		132,929		$	133	$	454,892		$	393,294		$	848,319		$	95,335		$	943,654

				Select Medical Corporation Stockholders
	Redeemable Non-controlling interests			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2016	$	422,159		0		$	0	$	925,111		$	(109,386	)	$	815,725		$	90,176		$	905,901
Net income attributable to Select Medical Corporation											57,925			57,925						57,925
Net income attributable to non-controlling interests	13,140													—			3,698			3,698
Additional investment by Holdings								963						963						963
Dividends declared and paid to Holdings											(600		)	(600		)				(600		)
Contribution related to restricted stock awards and stock option issuances by Holdings								8,701						8,701						8,701
Issuance of non-controlling interests								1,653						1,653			3,634			5,287
Purchase of non-controlling interests	(127		)								7			7						7
Distributions to non-controlling interests	(3,113		)											—			(2,303		)	(2,303		)
Redemption adjustment on non-controlling interests	36,292										(36,292		)	(36,292		)				(36,292		)
Other	499										237			237			130			367
Balance at June 30, 2017	$	468,850		0		$	0	$	936,428		$	(88,109	)	$	848,319		$	95,335		$	943,654

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,						For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2015			2016			2015			2016			2016			2017			2016			2017

Operating activities
Net income	$	77,339		$	100,797		$	77,339		$	100,797		$	100,797		$	74,763		$	100,797		$	74,763
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	52			12,039			52			12,039			12,039			10,933			12,039			10,933
Depreciation and amortization	39,196			70,722			39,196			70,722			70,722			80,872			70,722			80,872
Amortization of leasehold interests	—			295			—			295
Provision for bad debts	24,956			33,914			24,956			33,914			33,914			38,799			33,914			38,799
Equity in earnings of unconsolidated subsidiaries	(6,440		)	(9,198		)	(6,440		)	(9,198		)	(9,198		)	(11,187		)	(9,198		)	(11,187		)
Loss on early retirement of debt	—			773			—			773
Loss on extinguishment of debt													773			6,527			773			6,527
Gain on sale of assets and businesses													(43,461		)	(9,523		)	(43,461		)	(9,523		)
Loss on disposal of assets	251			55			251			55			55			—			55			—
Gain on sale of assets and business	—			(43,461		)	—			(43,461		)
Impairment of equity investment	—			5,339			—			5,339			5,339			—			5,339			—
Stock compensation expense	5,794			8,174			5,794			8,174			8,174			9,270			8,174			9,270
Amortization of debt discount, premium and issuance costs	4,027			7,077			4,027			7,077			7,077			5,974			7,077			5,974
Deferred income taxes	(4,428		)	(13,286		)	(4,428		)	(13,286		)	(13,286		)	(1,474		)	(13,286		)	(1,474		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(89,265		)	(44,096		)	(89,265		)	(44,096		)	(44,096		)	(179,003		)	(44,096		)	(179,003		)
Other current assets	(8,038		)	11,011			(8,038		)	11,011			11,011			(5,557		)	11,011			(5,557		)
Other assets	3,568			4,213			3,568			4,213			4,508			4,621			4,508			4,621
Accounts payable	8,925			(15,852		)	8,925			(15,852		)	(15,852		)	759			(15,852		)	759
Accrued expenses	707			20,632			707			20,632			20,632			(4,833		)	20,632			(4,833		)
Income taxes	18,416			28,821			18,416			28,821			29,090			19,399			29,090			19,399
Net cash provided by operating activities	75,060			177,969			75,060			177,969			178,238			40,340			178,238			40,340

Investing activities
Acquisition of businesses, net of cash acquired													(421,519		)	(18,508		)	(421,519		)	(18,508		)
Purchases of property and equipment	(68,912		)	(80,258		)	(68,912		)	(80,258		)	(80,258		)	(105,302		)	(80,258		)	(105,302		)
Proceeds from sale of assets and business	—			71,366			—			71,366
Investment in businesses	(855		)	(1,590		)	(855		)	(1,590		)	(1,590		)	(9,874		)	(1,590		)	(9,874		)
Acquisition of businesses, net of cash acquired	(1,047,997		)	(421,519		)	(1,047,997		)	(421,519		)
Proceeds from sale of assets and businesses													71,366			34,552			71,366			34,552
Net cash used in investing activities	(1,117,764		)	(432,001		)	(1,117,764		)	(432,001		)	(432,001		)	(99,132		)	(432,001		)	(99,132		)

Financing activities
Borrowings on revolving facilities	660,000			320,000			660,000			320,000			320,000			630,000			320,000			630,000
Payments on revolving facilities	(400,000		)	(380,000		)	(400,000		)	(380,000		)	(380,000		)	(550,000		)	(380,000		)	(550,000		)
Net proceeds from Select term loans	—			600,127			—			600,127
Net proceeds from Concentra term loans	623,575			—			623,575			—
Proceeds from term loans													600,127			1,139,487			600,127			1,139,487
Payments on term loans	(26,884		)	(229,649		)	(26,884		)	(229,649		)	(229,649		)	(1,173,692		)	(229,649		)	(1,173,692		)
Revolving facility debt issuance costs													—			(4,392		)	—			(4,392		)
Borrowings of other debt	9,590			22,082			9,590			22,082			22,082			9,444			22,082			9,444
Principal payments on other debt	(8,320		)	(9,926		)	(8,320		)	(9,926		)	(9,926		)	(10,437		)	(9,926		)	(10,437		)
Dividends paid to common stockholders	(13,129		)	—			—			—
Repayments of bank overdrafts													(2,138		)	(5,228		)	(2,138		)	(5,228		)
Repurchase of common stock													(506		)	(600		)	—			—
Dividends paid to Holdings	—			—			(13,129		)	(506		)	—			—			(506		)	(600		)
Repurchase of common stock	—			(506		)	—			—
Proceeds from issuance of common stock	1,325			657			—			—
Proceeds from exercise of stock options													657			963			—			—
Equity investment by Holdings	—			—			1,325			657			—			—			657			963
Proceeds from issuance of non-controlling interest	217,065			3,103			217,065			3,103
Proceeds from (repayments of) bank overdrafts	5,590			(2,138		)	5,590			(2,138		)
Tax benefit from stock based awards	11			269			11			269
Proceeds from issuance of non-controlling interests													3,103			3,553			3,103			3,553
Purchase of non-controlling interests	—			(1,294		)	—			(1,294		)	(1,294		)	(120		)	(1,294		)	(120		)
Distributions to non-controlling interests	(4,282		)	(4,708		)	(4,282		)	(4,708		)	(4,708		)	(5,416		)	(4,708		)	(5,416		)
Net cash provided by financing activities	1,064,541			318,017			1,064,541			318,017			317,748			33,562			317,748			33,562

Net increase in cash and cash equivalents	21,837			63,985			21,837			63,985
Net increase (decrease) in cash and cash equivalents													63,985			(25,230		)	63,985			(25,230		)

Cash and cash equivalents at beginning of period	3,354			14,435			3,354			14,435			14,435			99,029			14,435			99,029
Cash and cash equivalents at end of period	$	25,191		$	78,420		$	25,191		$	78,420		$	78,420		$	73,799		$	78,420		$	73,799

Supplemental Cash Flow Information
Supplemental Information
Cash paid for interest	$	39,932		$	69,315		$	39,932		$	69,315		$	69,315		$	76,650		$	69,315		$	76,650
Cash paid for taxes	$	32,702		$	35,518		$	32,702		$	35,518		$	35,518		$	27,626		$	35,518		$	27,626

The accompanying notes are an integral part of these condensed consolidated financial statements.

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) ~~and~~include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of June 30, ~~2016,~~2017, and for the three and six month periods ended June 30, ~~2015~~2016 and ~~2016,~~2017, have been prepared ~~in accordance with~~pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted ~~accounting principles~~in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three and six months ended June 30, ~~2016~~2017 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2016. Holdings and Select and their subsidiaries are collectively referred to as the “Company.” The condensed consolidated financial statements of Holdings include the accounts of its wholly owned subsidiary, Select. Holdings conducts substantially all of its business through Select and its subsidiaries.

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted consistent with the rules and regulations of the Securities and Exchange Commission (the “SEC”), although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying2017. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2015~~2016 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~26, 2016.~~23, 2017.

2. Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, ~~and~~including disclosure of ~~contingent assets and liabilities~~contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ ~~materially~~ from those estimates.

Recent Accounting Pronouncements

In ~~March 2016,~~January 2017, the Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) issued Accounting Standards Update (“ASU”) ~~2016-09,~~2017-01, ~~Compensation-Stock Compensation~~Business Combinations (Topic 805), Clarifying the Definition of a Business, which ~~simplifies various aspects~~clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for ~~share-based payments~~annual periods beginning after December 15, 2017. Early adoption is permitted.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to ~~employees.~~an outside party. The ~~areas for simplification involve several aspects of the accounting for employee share-based payment transactions, including~~ASU requires an entity to recognize the income tax consequences ~~classification~~ of ~~awards as either equity or liabilities, and classification on~~an intra-entity transfer of an asset other than inventory when the ~~statement of cash flows.~~transfer occurs. The standard will be effective for fiscal years beginning after December 15, ~~2016.~~2017. The Company ~~is currently evaluating~~plans to adopt the ~~standard~~guidance effective January 1, 2018. Adoption of the guidance will be applied on a modified retrospective approach through a cumulative effect adjustment to ~~determine~~retained earnings as of the ~~impact it will have on its consolidated financial statements.~~effective date.

lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. A modified retrospective approach is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. ~~The Company is evaluating the adoption methodology and the impact of this update on its consolidated financial statements.~~

~~In November 2015,~~Upon adoption, the ~~FASB issued ASU No. 2015-17,~~ ~~Balance Sheet Classification~~Company will recognize significant assets and liabilities on the consolidated balance sheets as a result of ~~Deferred Taxes~~~~, which changes~~ the ~~presentation~~operating lease obligations of ~~deferred income taxes. The intent is to simplify~~ the ~~presentation~~Company. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of deferred income taxes through the requirement that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The revised guidance is effective for annual fiscal periods beginning after December 15, 2016. Early adoption is permitted. operations.

The Company ~~is currently evaluating~~will implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.

In May 2014, March 2016, April 2016, and ~~April~~December 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ~~and~~ ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), respectively, which supersede most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The original standards were effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards, with a new effective date for fiscal years beginning after December��15, 2017. The standards require the selection of a ~~modified~~ retrospective or cumulative effect transition ~~method for retrospective application. The Company is currently evaluating the standards to determine the impact they will have on its consolidated financial statements.~~method.

The Company will implement the new standard beginning January 1, 2018 using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change is how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of June 30, 2016 and June 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards on January 1, 2018.

The Company’s remaining implementation efforts are focused principally on refining the accounting processes, disclosure processes, and internal controls.

Recently Adopted Accounting Pronouncements

In ~~April and August~~November 2015, the FASB issued ASU ~~2015-03 and ASU 2015-15, each titled~~No. 2015-17, ~~Interest- Imputation~~Balance Sheet Classification of ~~Interest~~Deferred Taxes, ~~to simplify~~which changed the presentation of ~~debt issuance costs.~~deferred income taxes. The standard ~~requires debt issuance costs~~changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be ~~presented~~classified as noncurrent in ~~the balance sheet as~~ a ~~direct deduction from the carrying value~~classified statement of ~~the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as an asset and amortized over the term of the arrangement.~~financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at ~~the beginning~~December 31, 2016 has been retrospectively adjusted. Adoption of the ~~first quarter of 2016. The~~new standard impacted the Company’s previously reported results as follows:

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626

Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

Reclassifications

Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the condensed consolidated balance sheet ~~as of~~at December 31, ~~2015 was retrospectively conformed~~2016 has been changed in order to ~~reflect~~conform to the current year balance sheet presentation for the adoption of ~~the standard and approximately $38.0 million~~ASU No. 2015-17, Balance Sheet Classification of ~~unamortized debt issuance costs are now classified as a direct reduction of debt, rather than a component of other assets.~~Deferred Taxes.

3. Acquisitions~~Acquisitions~~

Physiotherapy Acquisition

On March 4, 2016, Select acquired 100% of the issued and outstanding equity securities of Physiotherapy Associates Holdings, Inc. (“Physiotherapy”) for ~~$408.7~~$406.3 million, ~~which is subject to a post closing purchase price adjustment,~~ net of $12.3 million of cash acquired. ~~Select financed~~

For the acquisition using a combination of cash on hand and proceeds from an incremental term loan facility under the Select credit facilities, as defined below (see note 7 for more details). During the six months ended June 30, 2016, $3.2 million of Physiotherapy acquisition, ~~costs were recognized in general and administrative expense.~~

Physiotherapy is a national provider of outpatient physical rehabilitation care offering a wide range of services, including general orthopedics, spinal care and neurological rehabilitation, as well as orthotics and prosthetics services.

~~The Physiotherapy acquisition is being accounted for under~~ the ~~provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. The~~ Company ~~has prepared a preliminary allocation of~~allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair ~~values. The~~value in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. During the quarter ended March 31, 2017, the Company ~~is in~~finalized the process of completing its assessment of fair values for identifiable tangible and intangible assets, and liabilities assumed; therefore, the values set forth below are subject to adjustment during the measurement period for such activities as estimating useful lives of long-lived assets and finite lived intangibles and completing assessment of fair values by obtaining appraisals. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price ~~allocation activities by December 31, 2016.~~allocation.

The following table ~~summarizes~~reconciles the ~~preliminary~~ allocation of the ~~purchase price~~consideration given for identifiable net assets and goodwill acquired to the net cash paid for the acquired business (in thousands):

Cash and cash equivalents	$	12,340
Identifiable tangible assets, excluding cash and cash equivalents	87,832
Identifiable intangible assets	32,484
Goodwill	343,187
Total assets	475,843
Total liabilities	54,685
Acquired non-controlling interests	2,514
Net assets acquired	418,644
Less: Cash and cash equivalents acquired	(12,340		)
Net cash paid	$	406,304

Goodwill of $343.2 million has been recognized in the business combination, representing the excess of the consideration given over the fair value of identifiable net assets ~~acquired and liabilities assumed, in accordance with the acquisition method of accounting (in thousands):~~

Cash and cash equivalents

$
12,340

Identifiable tangible assets, excluding cash and cash equivalents

93,426

Identifiable intangible assets

33,495

Goodwill

319,203

Total assets

458,464

Total liabilities

34,956

Acquired non-controlling interests

2,514

Net assets acquired

420,994

Less: Cash and cash equivalents acquired

(12,340
)
Net cash paid

$
408,654

~~Goodwill of $319.2 million has been preliminarily recognized in the transaction, representing the excess of the purchase price over the~~acquired. The value of ~~the tangible and intangible assets acquired and liabilities assumed. The factors considered in determining the~~ goodwill ~~that resulted~~is derived from ~~the Physiotherapy purchase price included~~ Physiotherapy’s future earnings potential and ~~the value of the~~its assembled workforce. ~~The goodwill~~Goodwill has been ~~allocated~~assigned to the outpatient rehabilitation ~~segment~~reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $8.8 million, ~~that is deductible for tax purposes,~~ which the Company will deduct through 2030.

Due to the ~~integrated nature~~integration of Physiotherapy into our outpatient rehabilitation operations, it is not practicable to separately identify net revenue and earnings of Physiotherapy on a stand-alone basis.

~~Concentra Acquisition~~

On June 1, 2015, MJ Acquisition Corporation, a joint venture that Select created with Welsh, Carson, Anderson & Stowe XII, L.P., consummated the acquisition of Concentra, Inc. (“Concentra”), the indirect operating subsidiary of Concentra Group Holdings, LLC, and its subsidiaries. Pursuant to the terms of the stock purchase agreement, dated as of March 22, 2015, by and among MJ Acquisition Corporation, Concentra and Humana Inc., MJ Acquisition Corporation acquired 100% of the issued and outstanding equity securities of Concentra from Humana, Inc. for $1,047.2 million, net of $3.8 million of cash acquired.

During the year ended December 31, 2015, the Company finalized the purchase price allocation to identifiable intangible assets, fixed assets, non-controlling interests, and certain pre-acquisition contingencies. During the quarter ended June 30, 2016, the Company completed the accounting for certain deferred tax matters.

The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed, in accordance with the acquisition method of accounting (in thousands):

Cash and cash equivalents

$
3,772

Identifiable tangible assets, excluding cash and cash equivalents

406,926

Identifiable intangible assets

254,990

Goodwill

651,152

Total assets

1,316,840

Total liabilities

248,797

Acquired non-controlling interests

17,084

Net assets acquired

1,050,959

Less: Cash and cash equivalents acquired

(3,772
)
Net cash paid

$
1,047,187

Goodwill of $651.2 million was recognized in the transaction, representing the excess of the purchase price over the value of the tangible and intangible assets acquired and liabilities assumed. The factors considered in determining the goodwill that resulted from the Concentra purchase price included Concentra’s future earnings potential and the value of Concentra’s assembled workforce. The goodwill is allocated to the Concentra segment and is not deductible for tax purposes. However, prior to its acquisition by MJ Acquisition Corporation, Concentra completed certain acquisitions that resulted in goodwill with an estimated value of $23.9 million that is deductible for tax purposes, which the Company will deduct through 2025.

For the three months ended June 30, 2016, Concentra contributed net revenue of $254.9 million and net income of approximately $4.7 million, which are reflected in the Company’s consolidated statements of operations. For the six months ended June 30, 2016, Concentra contributed net revenue of $505.7 million and net income of approximately $7.0 million, which are reflected in the Company’s consolidated statements of operations.

~~Pro Forma Results~~

The following pro forma unaudited results of operations have been prepared assuming the ~~acquisitions~~acquisition of ~~Concentra and~~ Physiotherapy occurred on January 1, ~~2014 and 2015, respectively.~~2015. These results are not necessarily indicative of results of future operations nor of the results that would have actually occurred had the ~~acquisitions~~acquisition been consummated on the aforementioned ~~dates.~~date. The Company’s results of operations for the three months ended June 30, 2016 ~~includes both Concentra~~ and for the three and six months ended June 30, 2017 include Physiotherapy for the entire ~~period and there are~~period. There were no pro forma ~~adjustments;~~adjustments during these periods; therefore, no pro forma information is presented for the ~~period.~~periods.

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2015		2015		2016		For the Six Months Ended June 30, 2016
	(in thousands, except per share amounts)						(in thousands, except per share amounts)
Net revenue	$	1,135,268	$	2,250,274	$	2,239,491	$	2,239,491
Net income attributable to Holdings	38,671		64,069		85,820		86,948
Income per common share:
Basic	$	0.29	$	0.49	$	0.64	$	0.66
Diluted	$	0.29	$	0.49	$	0.64	$	0.66

The pro forma financial information is based on the preliminary allocation of the purchase price of the Physiotherapy acquisition, and therefore subject to adjustment upon finalizing the purchase price allocation, as described above, during the measurement period. The net income tax impact was calculated at a statutory rate, as if ~~Concentra and~~ Physiotherapy had been ~~subsidiaries~~a subsidiary of the Company as of January 1, ~~2014 and 2015, respectively.~~

~~Pro forma results for the six months ended June 30, 2015 were adjusted to include $3.2 million of Physiotherapy acquisition costs and exclude $4.7 million of Concentra acquisition costs.~~2015. Pro forma results for the six months ended June 30, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

Other Acquisitions

~~In addition to the acquisition of Physiotherapy,~~The Company completed acquisitions within our specialty hospitals, outpatient rehabilitation, and Concentra segments during the six months ended June 30, ~~2016, the Company acquired interests in several businesses.~~2017. The Company provided total consideration of ~~$49.7~~$20.2 million, consisting principally of $18.5 million of cash, ~~amounting to $12.5 million (net~~net of cash ~~acquired), minority interest issued~~received, and the issuance of ~~$9.8 million, and liabilities assumed of $1.3 million, for identifiable tangible net~~non-controlling interests. The assets ~~consisting~~received in these acquisitions consisted principally of accounts receivable, ~~and~~ property and equipment, ~~with an aggregate fair value~~identifiable intangible assets, and goodwill, of ~~$11.0 million. Based on the preliminary purchase price allocations, these acquisitions resulted in recognition~~which $0.7 million, $0.3 million, and $14.5 million of goodwill ~~of $14.6 million~~was recognized in ~~the~~our specialty ~~hospital segment, $0.5 million in the~~hospitals, outpatient rehabilitation, ~~segment~~ and ~~$3.5 million in the~~ Concentra ~~segment.~~reporting units, respectively.

4. Intangible Assets and Liabilities

4.Goodwill~~Sale of Businesses~~

The ~~Company recognized a non-operating gain~~following table shows changes in the carrying amount of ~~$43.4 million~~goodwill by reporting unit for the six months ended June 30, 2016. The Company sold its contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million. The Company also transferred five specialty hospitals in an exchange transaction and sold nine outpatient rehabilitation clinics, which resulted in non-operating gains of $7.8 million and $1.7 million, respectively.

5.~~Impairment of Equity Investment~~2017:

	Specialty Hospitals			Outpatient Rehabilitation		Concentra		Total
	(in thousands)
Balance as of December 31, 2016	$	1,447,406		$	643,557	$	660,037	$	2,751,000
Acquired	654			311		14,505		15,470
Measurement period adjustment	(342		)	168		—		(174		)
Balance as of June 30, 2017	$	1,447,718		$	644,036	$	674,542	$	2,766,296

~~During the six months ended June 30, 2016, the Company recognized an impairment loss of $5.3 million on one of its equity investments. The loss, which was triggered by a planned sale~~

See Note 3 for details of the ~~investee by~~goodwill acquired during the ~~controlling interest, is reflected as part of non-operating gain on the Company’s consolidated statements of operations.~~period.

6.Identifiable Intangible Assets and Liabilities

The following table provides the gross carrying amounts, accumulated amortization, and net carrying ~~value of~~amounts for the Company’s ~~goodwill and~~ identifiable intangible assets ~~consist of the following:~~and liabilities:

	December 31, 2015		June 30, 2016		December 31, 2016							June 30, 2017
	(in thousands)				Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Goodwill	$	2,314,624	$	2,638,286
Identifiable intangibles—Indefinite lived assets:
					(in thousands)
Indefinite-lived assets:
Trademarks	162,609		166,419		$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	13,022		13,156		17,026		—			17,026		19,207		—			19,207
Accreditations	2,045		2,135		2,235		—			2,235		2,074		—			2,074
Identifiable intangibles—Finite lived assets:
Finite-lived assets:
Customer relationships	132,751		125,765		142,198		(23,185		)	119,013		143,953		(30,681		)	113,272
Favorable leasehold interests	8,248		11,699		13,089		(2,317		)	10,772		13,295		(3,255		)	10,040
Non-compete agreements	—		24,754		26,655		(1,837		)	24,818		27,267		(2,854		)	24,413
Total identifiable intangibles	$	2,633,299	$	2,982,214
Total identifiable intangible assets					$	367,901	$	(27,339	)	$	340,562	$	372,494	$	(36,790	)	$	335,704

Finite-lived liabilities:
Unfavorable leasehold interests					$	5,139	$	(1,410	)	$	3,729	$	5,343	$	(1,957	)	$	3,386

The Company’s customer relationships and non-compete ~~agreement assets~~agreements amortize over their estimated useful lives. Amortization expense ~~for the Company’s customer relationships and non-compete agreements~~ was $4.3 million ~~and $1.1 million~~ for both the three months ended June 30, 2016 and ~~2015, respectively.~~2017. Amortization expense was $8.1 million and ~~$1.2~~$8.7 million for the six months ended June 30, 2016 and ~~2015, respectively. Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $16.4 million.~~

In addition, the Company has recognized unfavorable leasehold interests which are recorded as liabilities. The net carrying value of unfavorable leasehold interests was $4.3 million and $3.0 million as of June 30, 2016 and December 31, 2015,2017, respectively.

The Company’s favorable ~~leasehold assets~~ and unfavorable leasehold ~~liabilities~~interests are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date. The ~~net effect~~Company’s unfavorable leasehold interests are not separately presented on the condensed consolidated balance sheets but are included as a component of ~~this amortization increased rent expense by $0.2 million for the three months ended June 30, 2016~~accrued other and ~~$0.3 million for the six months ended June 30, 2016.~~other non-current liabilities.

The Company’s accreditations and trademarks have renewal ~~terms. The~~terms and the costs to renew these ~~intangibles~~intangible assets are expensed as incurred. At June 30, ~~2016,~~2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and ~~3.1~~2.4 years, respectively.

~~The changes in the carrying amount of goodwill for the Company’s reportable segments for the six months ended June 30, 2016 are as follows:~~

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Total

(in thousands)

Balance as of December 31, 2015

$
1,357,379

$
306,595

$
650,650

$
2,314,624

Acquired

14,600

357,808

3,545

375,953

Measurement period adjustment

—

(38,090
)
4,825

(33,265
)
Disposed

(10,633
)
(8,393
)
—

(19,026
)
Balance as of June 30, 2016

$
1,361,346

$
617,920

$
659,020

$
2,638,286

~~See Note 3 for details of the goodwill acquired during the period.~~

~~7. Indebtedness~~5. Long-Term Debt and Notes Payable

For purposes of this indebtedness footnote, references to Select exclude Concentra because the Concentra credit facilities are non-recourse to Holdings and Select.

The ~~components~~Company’s long-term debt and notes payable as of June 30, 2017 are as follows (in thousands):

	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	892		$	(7,510	)	$	703,382	$	732,152
Credit facilities:
Revolving facility	300,000		—			—			300,000		276,000
Term loan	1,147,125		(13,480		)	(13,540		)	1,120,105		1,158,596
Other	25,700		—			—			25,700		25,700
Total Select debt	$	2,182,825	$	(12,588	)	$	(21,050	)	$	2,149,187	$	2,192,448

Concentra:
Credit facilities:
Term loan	$	619,175	$	(2,513	)	$	(11,867	)	$	604,795	$	617,434
Other	6,727		—			—			6,727		6,727
Total Concentra debt	$	625,902	$	(2,513	)	$	(11,867	)	$	611,522	$	624,161

Total debt	$	2,808,727	$	(15,101	)	$	(32,917	)	$	2,760,709	$	2,816,609

Principal maturities of the Company’s long-term debt and notes payable are ~~shown in the following tables:~~approximately as follows (in thousands):

December 31,
2015

June 30,
2016

(in thousands)

Select 6.375% senior notes(1)

$
700,867

$
701,703

Select credit facilities:

Select revolving facility

295,000

240,000

Select term loans(2)

743,071

1,121,105

Other—Select

11,987

24,158

Total Select debt

1,750,925

2,086,966

Less: Select current maturities

222,905

6,778

Select long-term debt maturities

$
1,528,020

$
2,080,188

Concentra credit facilities:

Concentra revolving facility

$
5,000

$
—

Concentra term loans(3)

624,659

624,113

Other—Concentra

5,312

6,743

Total Concentra debt

634,971

630,856

Less: Concentra current maturities

2,261

3,733

Concentra long-term debt maturities

$
632,710

$
627,123

Total current maturities

$
225,166

$
10,511

Total long-term debt maturities

2,160,730

2,707,311

Total debt

$
2,385,896

$
2,717,822

~~(1)~~ Includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $10.4 million and $9.4 million at December 31, 2015 and June 30, 2016, respectively.

	2017		2018		2019		2020		2021		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	—	$	—	$	710,000	$	—	$	710,000
Credit facilities:
Revolving facility	—		—		—		—		—		300,000		300,000
Term loan	5,750		11,500		11,500		11,500		11,500		1,095,375		1,147,125
Other	10,251		3,530		11,827		68		14		10		25,700
Total Select debt	$	16,001	$	15,030	$	23,327	$	11,568	$	721,514	$	1,395,385	$	2,182,825

Concentra:
Credit facilities:
Term loan	$	—	$	—	$	—	$	3,016	$	6,520	$	609,639	$	619,175
Other	1,309		1,394		144		161		160		3,559		6,727
Total Concentra debt	$	1,309	$	1,394	$	144	$	3,177	$	6,680	$	613,198	$	625,902

Total debt	$	17,310	$	16,424	$	23,471	$	14,745	$	728,194	$	2,008,583	$	2,808,727

~~(2)~~ Includes unamortized discounts of $2.8 million and $13.8 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $16.0 million at December 31, 2015 and June 30, 2016, respectively.

~~(3)~~ Includes unamortized discounts of $2.9 million and $2.7 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $20.2 million and $18.7 million at December 31, 2015 and June 30, 2016, respectively.

~~Maturities of Long-Term Debt and Notes Payable~~

~~Maturities of the~~The Company’s long-term debt ~~for the period from July 1, 2016 through~~and notes payable as of December 31, 2016 ~~and the years after 2016~~ are ~~approximately~~ as ~~follows:~~follows (in thousands):

Select

Concentra

Total

(in thousands)

July 1, 2016 — December 31, 2016

$
8,880

$
3,559

$
12,439

2017

15,257

5,871

21,128

2018

771,228

4,597

775,825

2019

18,070

4,615

22,685

2020

6,288

4,636

10,924

2021 and beyond

1,305,313

628,965

1,934,278

Total principal

2,125,036

652,243

2,777,279

Unamortized discounts and premiums

(12,663
)
(2,677
)
(15,340
)
Unamortized debt issuance costs

(25,407
)
(18,710
)
(44,117
)
Total

$
2,086,966

$
630,856

$
2,717,822

	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	1,006		$	(8,461	)	$	702,545	$	710,000
Credit facilities:
Revolving facility	220,000		—			—			220,000		204,600
Term loans	1,147,751		(11,967		)	(13,581		)	1,122,203		1,165,860
Other	22,688		—			—			22,688		22,688
Total Select debt	$	2,100,439	$	(10,961	)	$	(22,042	)	$	2,067,436	$	2,103,148

Concentra:
Credit facilities:
Term loan	$	642,239	$	(2,773	)	$	(13,091	)	$	626,375	$	644,648
Other	5,178		—			—			5,178		5,178
Total Concentra debt	$	647,417	$	(2,773	)	$	(13,091	)	$	631,553	$	649,826

Total debt	$	2,747,856	$	(13,734	)	$	(35,133	)	$	2,698,989	$	2,752,974

~~Excess Cash Flow Payment~~Select Credit Facilities

On March ~~2, 2016,~~6, 2017, Select entered into a new senior secured credit agreement (the “Select credit agreement”) that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan (the “Select term loan”) and a $450.0 million, five-year revolving credit facility (the “Select revolving facility” and together with the Select term loan, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.

Select used borrowings under the Select credit facilities to: (i) repay in full the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing, which resulted in $6.5 million of debt extinguishment losses and $13.2 million of debt modification losses during the first quarter of 2017.

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.

The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017. The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.

Select will be required to prepay borrowings under the Select credit facilities with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (ii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00. Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of June 30, 2017, Select’s leverage ratio was 5.86 to 1.00.

The Select credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Select credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.

Excess Cash Flow Payment

On March 1, 2017, Concentra made a principal prepayment of ~~$10.2~~$23.1 million associated with ~~its~~the Concentra first lien term loans ~~(the “Select term loans”)~~ in accordance with the provision in the ~~Select~~Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the ~~Select~~Concentra credit facilities.

~~Select Credit Facilities~~Fair Value

On March 4, 2016, Select entered into an Additional Credit Extension Amendment (the “Additional Credit Extension Amendment”) to Select’s senior secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and lender, and the additional lenders named therein (the “Select credit facilities”). The Additional Credit Extension Amendment (i) provides for the lenders named therein to make available an aggregate of $625.0 million of Series F Tranche B Term Loans, (ii) extends the financial covenants through March 3, 2021, (iii) adds a 1.00% prepayment premium for prepayments made with new term loans on or prior to March 4, 2017 if such new term loans have a lower yield than the Series F Tranche B Term Loans, and (iv) makes certain other technical amendments to the Select credit facilities. The Series F Tranche B Term Loans will bear interest at a rate per annum equal to the Adjusted LIBO Rate (as defined in the Select credit facilities, subject to an Adjusted LIBO Rate floor of 1.00%) plus 5.00% for Eurodollar Loans or the Alternate Base Rate (as defined in the Select credit facilities) plus 4.00% for Alternate Base Rate Loans (as defined in the Select credit facilities). Select is required to make principal payments on the Series F Tranche B Term Loans in quarterly installments on the last day of each of March, June, September and December, beginning June 30, 2016, in amounts equal to 0.25% of the aggregate principal amount of the Series F Tranche B Term Loans outstanding as of the date of the Additional Credit Extension Amendment. The balance of the Series F Tranche

B Term Loans will be payable on March 3, 2021. Except as specifically set forth in the Additional Credit Extension Amendment, the terms and conditions of the Series F Tranche B Term Loans are identical to the terms of the outstanding Series E Term B Loans under the Select credit facilities and the other loan documents to which Select is party.

Select used the proceeds of the Series F Tranche B Term Loans to (i) refinance in full the Series D Tranche B Term Loans due December 20, 2016, (ii) consummate the acquisition of Physiotherapy, and (iii) pay fees and expenses incurred in connection with the acquisition of Physiotherapy, the refinancing, and the Additional Credit Extension Amendment.

As a result of the Additional Credit Extension Amendment relating to the Series F Tranche B Term Loans, the interest rate payable on the Series E Tranche B Term Loans was increased from Adjusted LIBO plus 4.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternative Base Rate plus 3.00%, to Adjusted LIBO plus 5.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternative Base Rate plus 4.00%.

During the six months ended June 30, 2016, the Company recognized a loss on early retirement of debt of $0.8 million relating to the repayment of the Series D Tranche B Term Loans under the Select credit facilities.

~~8. Fair Value~~

Financial instruments include cash and cash equivalents, notes payable and long-term debt. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

December 31, 2015

June 30, 2016

Face
Value

Carrying
Value

Fair
Value

Face
Value

Carrying
Value

Fair
Value

(in thousands)

Select 6.375% senior notes(1)

$
710,000

$
700,867

$
623,948

$
710,000

$
701,703

$
674,926

Select credit facilities(2)

1,048,277

1,038,071

1,023,616

1,390,877

1,361,105

1,376,415

Concentra credit facilities(3)

652,750

629,659

645,392

645,500

624,113

638,159

~~(1)~~ The carrying value includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $10.4 million and $9.4 million at December 31, 2015 and June 30, 2016, respectively.

~~(2)~~ �� The carrying value includes unamortized discounts of $2.8 million and $13.8 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $16.0 million at December 31, 2015 and June 30, 2016, respectively.

~~(3)~~ The carrying value includes unamortized discounts of $2.9 million and $2.7 million at December 31, 2015 and June 30, 2016, respectively. Includes unamortized debt issuance costs of $20.2 million and $18.7 million at December 31, 2015 and June 30, 2016, respectively.

The fair value of the Select credit facilities and the Concentra credit facilities was based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes debt was based on quoted market prices.

The Company considers the inputs in the valuation process to be Level 2 in the fair value ~~hierarchy.~~hierarchy for Select’s 6.375% senior notes and for its credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.

9. 6. Segment Information

The Company’s reportable segments consist of: ~~(i)~~ specialty hospitals, ~~(ii)~~ outpatient rehabilitation, and ~~(iii)~~ Concentra. Other activities include the Company’s corporate shared services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. ~~The accounting policies of the segments are the same as those described in the summary of significant accounting policies.~~ The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~Concentra acquisition costs,~~ Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

The following tables summarize selected financial data for the Company’s reportable segments. The segment results of Holdings are identical to those of Select.

Three Months Ended June 30, 2015

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra(1)

Other

Total

(in thousands)

Net operating revenues

$
592,336

$
207,795

$
86,829

$
105

$
887,065

Adjusted EBITDA

91,447

28,722

11,199

(16,471
)
114,897

Total assets

2,372,723

538,586

1,320,941

109,085

4,341,335

Capital expenditures

31,042

3,103

3,854

3,065

41,064

Three Months Ended June 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Net operating revenues

$
585,816

$
256,928

$
254,868

$
19

$
1,097,631

Adjusted EBITDA

82,739

38,132

43,039

(22,453
)
141,457

Total assets

2,448,390

984,140

1,333,293

72,526

4,838,349

Capital expenditures

21,313

3,825

4,716

3,636

33,490

Six Months Ended June 30, 2015

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra(1)

Other

Total

(in thousands)

Net operating revenues

$
1,191,117

$
404,238

$
86,829

$
224

$
1,682,408

Adjusted EBITDA

187,919

50,855

11,199

(36,136
)
213,837

Total assets

2,372,723

538,586

1,320,941

109,085

4,341,335

Capital expenditures

53,835

7,025

3,854

4,198

68,912

Six Months Ended June 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation(2)

Concentra

Other

Total

(in thousands)

Net operating revenues

$
1,184,770

$
495,010

$
505,745

$
436

$
2,185,961

Adjusted EBITDA

169,495

67,011

77,192

(43,626
)
270,072

Total assets

2,448,390

984,140

1,333,293

72,526

4,838,349

Capital expenditures

54,988

8,798

7,927

8,545

80,258

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017
	(in thousands)
Net operating revenues:
Specialty hospitals	$	585,816		$	600,960		$	1,184,770		$	1,199,747
Outpatient rehabilitation(1)	256,928			258,106			495,010			513,923
Concentra	254,868			261,586			505,745			517,735
Other	19			23			436			631
Total Company	$	1,097,631		$	1,120,675		$	2,185,961		$	2,232,036

Adjusted EBITDA:
Specialty hospitals	$	82,739		$	98,172		$	169,495		$	186,837
Outpatient rehabilitation(1)	38,132			41,926			67,011			73,277
Concentra	43,039			43,061			77,192			85,653
Other	(22,453		)	(24,479		)	(43,626		)	(48,197		)
Total Company	$	141,457		$	158,680		$	270,072		$	297,570

Total assets:(2)
Specialty hospitals	$	2,457,948		$	2,655,617		$	2,457,948		$	2,655,617
Outpatient rehabilitation	959,748			982,811			959,748			982,811
Concentra	1,328,243			1,310,483			1,328,243			1,310,483
Other	73,950			105,300			73,950			105,300
Total Company	$	4,819,889		$	5,054,211		$	4,819,889		$	5,054,211

Purchases of property and equipment, net:
Specialty hospitals	$	21,313		$	36,691		$	54,988		$	69,048
Outpatient rehabilitation(1)	3,825			6,201			8,798			12,874
Concentra	4,716			7,601			7,927			16,287
Other	3,636			4,156			8,545			7,093
Total Company	$	33,490		$	54,649		$	80,258		$	105,302

A reconciliation of Adjusted EBITDA to income before income taxes is as follows:

	Three Months Ended June 30, 2015															Three Months Ended June 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)			Other			Total			Specialty Hospitals			Outpatient Rehabilitation(1)			Concentra			Other			Total
	(in thousands)															(in thousands)
Adjusted EBITDA	$	91,447		$	28,722		$	11,199		$	(16,471	)				$	82,739		$	38,132		$	43,039		$	(22,453	)
Depreciation and amortization	(13,404		)	(3,177		)	(4,194		)	(1,073		)				(13,812		)	(6,202		)	(14,916		)	(1,275		)
Stock compensation expense	—			—			—			(3,323		)				—			—			(192		)	(4,006		)
Concentra acquisition costs	—			—			(4,715		)	—
Income (loss) from operations	$	78,043		$	25,545		$	2,290		$	(20,867	)	$	85,011		$	68,927		$	31,930		$	27,931		$	(27,734	)	$	101,054
Equity in earnings of unconsolidated subsidiaries													3,848															4,546
Non-operating gain																												13,035
Interest expense													(25,288		)													(44,332		)
Income before income taxes													$	63,571														$	74,303

	Three Months Ended June 30, 2017
	Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	98,172		$	41,926		$	43,061		$	(24,479	)
Depreciation and amortization	(15,454		)	(5,878		)	(15,429		)	(1,572		)
Stock compensation expense	—			—			(264		)	(4,420		)
Income (loss) from operations	$	82,718		$	36,048		$	27,368		$	(30,471	)	$	115,663
Equity in earnings of unconsolidated subsidiaries													5,666
Interest expense													(37,655		)
Income before income taxes													$	83,674

Three Months Ended June 30, 2016

Specialty
Hospitals

Outpatient
Rehabilitation

Concentra

Other

Total

(in thousands)

Adjusted EBITDA

$
82,739

$
38,132

$
43,039

$
(22,453
)

Depreciation and amortization

(13,812
)
(6,202
)
(14,916
)
(1,275
)

Stock compensation expense

—

—

(192
)
(4,006
)

Income (loss) from operations

$
68,927

$
31,930

$
27,931

$
(27,734
)
$
101,054

Equity in earnings of unconsolidated subsidiaries

4,546

Non-operating gain

13,035

Interest expense

(44,332
)
Income before income taxes

$
74,303

	Six Months Ended June 30, 2015															Six Months Ended June 30, 2016
	Specialty Hospitals			Outpatient Rehabilitation			Concentra(1)			Other			Total			Specialty Hospitals			Outpatient Rehabilitation(1)			Concentra			Other			Total
	(in thousands)															(in thousands)
Adjusted EBITDA	$	187,919		$	50,855		$	11,199		$	(36,136	)				$	169,495		$	67,011		$	77,192		$	(43,626	)
Depreciation and amortization	(26,627		)	(6,317		)	(4,194		)	(2,058		)				(27,705		)	(10,238		)	(30,292		)	(2,487		)
Stock compensation expense	—			—			—			(5,650		)				—			—			(384		)	(7,790		)
Concentra acquisition costs	—			—			(4,715		)	—
Physiotherapy acquisition costs																—			—			—			(3,236		)
Income (loss) from operations	$	161,292		$	44,538		$	2,290		$	(43,844	)	$	164,276		$	141,790		$	56,773		$	46,516		$	(57,139	)	$	187,940
Loss on early retirement of debt																												(773		)
Equity in earnings of unconsolidated subsidiaries													6,440															9,198
Non-operating gain																												38,122
Interest expense													(46,676		)													(83,180		)
Income before income taxes													$	124,040														$	151,307

	Six Months Ended June 30, 2016															Six Months Ended June 30, 2017
	Specialty Hospitals			Outpatient Rehabilitation(2)			Concentra			Other			Total			Specialty Hospitals			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)															(in thousands)
Adjusted EBITDA	$	169,495		$	67,011		$	77,192		$	(43,626	)				$	186,837		$	73,277		$	85,653		$	(48,197	)
Depreciation and amortization	(27,705		)	(10,238		)	(30,292		)	(2,487		)				(33,954		)	(12,218		)	(31,552		)	(3,148		)
Stock compensation expense	—			—			(384		)	(7,790		)				—			—			(570		)	(8,700		)
Physiotherapy acquisition costs	—			—			—			(3,236		)
Income (loss) from operations	$	141,790		$	56,773		$	46,516		$	(57,139	)	$	187,940		$	152,883		$	61,059		$	53,531		$	(60,045	)	$	207,428
Loss on early retirement of debt													(773		)													(19,719		)
Equity in earnings of unconsolidated subsidiaries													9,198															11,187
Non-operating gain													38,122
Non-operating loss																												(49		)
Interest expense													(83,180		)													(78,508		)
Income before income taxes													$	151,307														$	120,339

(1) ~~The selected financial data for the Company’s Concentra segment for the periods presented begins as of June 1, 2015, which is the date the Concentra acquisition was consummated.~~

~~(2)~~ The outpatient rehabilitation segment includes the operating results of the Company’s contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.

(2) Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of June 30, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $18.5 million.

~~10.~~7. Income per Common Share

Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.

The following table sets forth ~~for the periods indicated~~ the calculation of income per ~~common~~ share in Holdings’ condensed consolidated statements of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted ~~income~~earnings per ~~common~~ share, ~~respectively:~~respectively.

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2015

2016

2015

2016

(in thousands, except per share amounts)

Numerator:

Net income attributable to Select Medical Holdings Corporation

$
36,940

$
33,935

$
72,003

$
88,768

Less: Earnings allocated to unvested restricted stockholders

1,011

972

1,984

2,552

Net income available to common stockholders

$
35,929

$
32,963

$
70,019

$
86,216

Denominator:

Weighted average shares — basic

127,674

127,626

127,620

127,563

Effect of dilutive securities:

Stock options

335

194

324

146

Weighted average shares — diluted

128,009

127,820

127,944

127,709

Basic income per common share

$
0.28

$
0.26

$
0.55

$
0.68

Diluted income per common share

$
0.28

$
0.26

$
0.55

$
0.68

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2017		2016		2017
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	33,935	$	42,055	$	88,768	$	57,925
Less: Earnings allocated to unvested restricted stockholders	972		1,341		2,552		1,849
Net income available to common stockholders	$	32,963	$	40,714	$	86,216	$	56,076

Denominator:
Weighted average shares—basic	127,626		128,624		127,563		128,544
Effect of dilutive securities:
Stock options	194		153		146		159
Weighted average shares—diluted	127,820		128,777		127,709		128,703

Basic income per common share:	$	0.26	$	0.32	$	0.68	$	0.44
Diluted income per common share:	$	0.26	$	0.32	$	0.68	$	0.44

~~11.~~8. Commitments and Contingencies

Litigation

The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare ~~and~~& Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations or cash flows.

relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.

Evansville Litigation

On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital—Evansville, LLC ~~(‘‘SSH-Evansville’’~~(“SSH-Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States under the federal False Claims Act. The plaintiff-relators are the former CEO and two former case managers at SSH-Evansville, and the defendants currently include the Company, SSH-Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH-Evansville. The plaintiff-relators allege that SSH-Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up-coded diagnoses at admission, and admitted patients for whom long-term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint ~~replaces~~replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the ~~U.S.~~United States Department of Justice notified the ~~court~~District Court of its decision not to intervene in the ~~case, and~~case.

In December 2015, the ~~court thereafter approved a case management plan imposing certain deadlines. The~~ defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in ~~December 2015.~~the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Knoxville Litigation

On July 13, 2015, the ~~federal~~United States District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select, Select Specialty Hospital—Knoxville, Inc. ~~(‘‘SSH-Knoxville’’~~(“SSH-Knoxville”), Select Specialty Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United States and the State of Tennessee notified the court on July 13, 2015 that each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of the defendants during October 2015. ~~The~~

In November 2015, the defendants filed a Motion to Dismiss ~~such~~the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in ~~November 2015,~~the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the ~~court approved such~~plaintiff-relator did not plead his claims with sufficient particularity.

In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed with prejudice the plaintiff-relator’s lawsuit in ~~June 2016.~~its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the ~~plaintiff~~plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The case has been fully briefed in the Court of Appeals. The Company intends to vigorously defend this action, ~~if the relators pursue it,~~ but at this time the Company is unable to predict the timing and outcome of this matter.

~~Construction Commitments~~Wilmington Litigation

~~At June 30,~~On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. The corporate defendants were served on March 6, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, on May 17, 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint, which is now pending, based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim.

On March 24, 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH-Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. The motion is currently pending.

The Company intends to vigorously defend these actions, but at this time the Company ~~had outstanding commitments under construction contracts related~~is unable to ~~new construction, improvements~~predict the timing and ~~renovations at~~outcome of this matter.

Contract Therapy Subpoena

On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s ~~long term acute care properties, inpatient~~contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and ~~Concentra centers totaling approximately $9.4 million~~other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

~~12.~~9. Condensed Consolidating Financial Information ~~for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior Notes~~

Select’s 6.375% senior notes are fully and unconditionally and jointly and severally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the ‘‘“Subsidiary Guarantors”). The Subsidiary ~~Guarantors’’) which is~~Guarantors are defined as ~~a subsidiary~~subsidiaries where Select, or a subsidiary of Select, holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the ~~‘‘Non-Guarantor Subsidiaries,’’ including~~“Non-Guarantor Subsidiaries” and Concentra Group Holdings and its subsidiaries, ~~which were designated as Non-Guarantor subsidiaries by Select’s board of directors at~~ the ~~closing of the Concentra acquisition, the ‘‘Non-Guarantor Concentra’’~~“Non-Guarantor Concentra”).

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra at December 31, ~~2015~~2016 and June 30, ~~2016~~2017 and for the three and six months ended June 30, ~~2015~~2016 and ~~2016.~~2017.

The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.

Certain reclassifications have been made to prior reported amounts in order to conform to the current year guarantor structure.

Select Medical Corporation

Condensed Consolidating Balance Sheet

June 30, ~~2016~~2017

(unaudited)

	Select (Parent Company Only)		Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation		Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)														(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	4,071	$	8,111	$	5,374		$	60,864	$	—		$	78,420	$	72		$	5,533	$	4,946		$	63,248	$	—		$	73,799
Accounts receivable, net	—		420,863		74,638			118,289		—			613,790		—			467,412		120,272			126,552		—			714,236
Current deferred tax asset	9,106		21,379		4,432			9,038		—			43,955
Intercompany receivables	—		2,065,057		162,585			—		(2,227,642		)(a)	—		—			1,489,631		58,333			—		(1,547,964		) (a)	—
Other current assets	13,459		41,891		6,691			26,821		—			88,862		17,584			28,326		12,786			24,515		—			83,211
Total Current Assets	26,636		2,557,301		253,720			215,012		(2,227,642		)	825,027		17,656			1,990,902		196,337			214,315		(1,547,964		)	871,246

Property and equipment, net	44,793		582,067		61,493			200,818		—			889,171		56,568			620,364		54,964			179,636		—			911,532
Investment in affiliates	4,547,761		66,319		—			—		(4,614,080		)(b) (c)	—		4,523,727			118,248		—			—		(4,641,975		) (b) (c)	—
Goodwill	—		1,979,267		—			659,019		—			2,638,286		—			2,091,754		—			674,542		—			2,766,296
Other identifiable intangibles, net	—		105,280		—			238,648		—			343,928
Non-current deferred tax asset	15,175		—		—			—		(15,175		)(d)	—
Identifiable intangible assets, net															—			109,913		—			225,791		—			335,704
Other assets	8,110		112,864		1,167			19,796		—			141,937		42,452			98,649		36,528			16,199		(24,395		) (d)	169,433

Total Assets	$	4,642,475	$	5,403,098	$	316,380		$	1,333,293	$	(6,856,897	)	$	4,838,349	$	4,640,403		$	5,029,830	$	287,829		$	1,310,483	$	(6,214,334	)	$	5,054,211

Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	26,477	$	—	$	—		$	—	$	—		$	26,477	$	34,134		$	—	$	—		$	—	$	—		$	34,134
Current portion of long-term debt and notes payable	6,112		508		158			3,733		—			10,511		23,052			644		244			2,637		—			26,577
Accounts payable	8,204		79,941		13,815			16,460		—			118,420		10,362			75,105		22,387			15,777		—			123,631
Intercompany payables	2,065,057		162,585		—			—		(2,227,642		)(a)	—		1,489,631			58,333		—			—		(1,547,964		) (a)	—
Accrued payroll	8,569		79,177		8,358			39,448		—			135,552		7,526			80,245		3,545			27,871		—			119,187
Accrued vacation	3,352		49,989		15,191			12,542		—			81,074		3,927			58,895		12,214			17,214		—			92,250
Accrued interest	13,933		2		7			2,985		—			16,927		17,096			5		4			2,172		—			19,277
Accrued other	39,267		55,732		9,109			29,977		—			134,085		44,032			60,078		10,533			32,210		—			146,853
Income taxes payable	1,040		—		—			11,274		—			12,314		2,709			—		—			4,267		—			6,976
Total Current Liabilities	2,172,011		427,934		46,638			116,419		(2,227,642		)	535,360		1,632,469			333,305		48,927			102,148		(1,547,964		)	568,885

Long-term debt, net of current portion	1,467,920		491,355		120,914			627,122		—			2,707,311		2,115,318			266		9,663			608,885		—			2,734,132
Non-current deferred tax liability	—		106,571		8,969			101,173		(15,175		)(d)	201,538		—			136,920		736			84,150		(24,395		) (d)	197,411
Other non-current liabilities	46,467		49,000		4,391			31,841		—			131,699		44,297			54,100		7,688			35,194		—			141,279

Total Liabilities	3,686,398		1,074,860		180,912			876,555		(2,242,817		)	3,575,908		3,792,084			524,591		67,014			830,377		(1,572,359		)	3,641,707

Redeemable non-controlling interests	—		—		11,328			234,456		—			245,784		—			—		10,079			458,771		—			468,850

Stockholder’s Equity:
Common stock	0		—		—			—		—			0		0			—		—			—		—			0
Capital in excess of par	913,058		—		—			—		—			913,058		936,428			—		—			—		—			936,428
Retained earnings (accumulated deficit)	43,019		1,250,956		(16,937		)	835		(1,234,854		)(c)	43,019		(88,109		)	1,314,773		(37,110		)	12,447		(1,290,110		) (c)	(88,109		)
Subsidiary investment	—		3,077,282		84,009			217,935		(3,379,226		)(b)	—		—			3,190,466		156,262			5,137		(3,351,865		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	956,077		4,328,238		67,072			218,770		(4,614,080		)	956,077		848,319			4,505,239		119,152			17,584		(4,641,975		)	848,319

Non-controlling interest	—		—		57,068			3,512		—			60,580
Non-controlling interests															—			—		91,584			3,751		—			95,335
Total Equity	956,077		4,328,238		124,140			222,282		(4,614,080		)	1,016,657		848,319			4,505,239		210,736			21,335		(4,641,975		)	943,654

Total Liabilities and Equity	$	4,642,475	$	5,403,098	$	316,380		$	1,333,293	$	(6,856,897	)	$	4,838,349	$	4,640,403		$	5,029,830	$	287,829		$	1,310,483	$	(6,214,334	)	$	5,054,211

(a) Elimination of ~~intercompany.~~intercompany balances.

(b) Elimination of investments in consolidated subsidiaries.

(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Net operating revenues	$	23		$	687,886		$	171,180		$	261,586		$	—		$	1,120,675

Costs and expenses:
Cost of services	644			561,304			144,211			214,071			—			920,230
General and administrative	28,227			48			—			—			—			28,275
Bad debt expense	—			9,829			3,627			4,718			—			18,174
Depreciation and amortization	1,573			18,149			3,182			15,429			—			38,333
Total costs and expenses	30,444			589,330			151,020			234,218			—			1,005,012

Income (loss) from operations	(30,421		)	98,556			20,160			27,368			—			115,663

Other income and expense:
Intercompany interest and royalty fees	(2,263		)	3,596			(1,333		)	—			—			—
Intercompany management fees	63,504			(53,435		)	(10,069		)	—			—			—
Equity in earnings of unconsolidated subsidiaries	—			5,646			20			—			—			5,666
Interest expense	(19,623		)	(8,234		)	(2,360		)	(7,438		)	—			(37,655		)

Income before income taxes	11,197			46,129			6,418			19,930			—			83,674

Income tax expense (benefit)	(2,324		)	27,307			309			7,082			—			32,374
Equity in earnings of consolidated subsidiaries	28,534			4,200			—			—			(32,734		) (a)	—

Net income	42,055			23,022			6,109			12,848			(32,734		)	51,300

Less: Net income attributable to non-controlling interests	—			—			2,175			7,070			—			9,245

Net income attributable to Select Medical Corporation	$	42,055		$	23,022		$	3,934		$	5,778		$	(32,734	)	$	42,055

(a) Elimination of equity in earnings of subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)

Net operating revenues	$	631		$	1,377,279		$	336,391		$	517,735		$	—		$	2,232,036

Costs and expenses:
Cost of services	1,176			1,142,527			282,521			422,363			—			1,848,587
General and administrative	56,263			87			—			—			—			56,350
Bad debt expense	—			21,577			6,933			10,289			—			38,799
Depreciation and amortization	3,148			39,489			6,683			31,552			—			80,872
Total costs and expenses	60,587			1,203,680			296,137			464,204			—			2,024,608

Income (loss) from operations	(59,956		)	173,599			40,254			53,531			—			207,428

Other income and expense:
Intercompany interest and royalty fees	(4,159		)	6,914			(2,755		)	—			—			—
Intercompany management fees	125,202			(106,069		)	(19,133		)	—			—			—
Loss on early retirement of debt	(19,719		)	—			—			—			—			(19,719		)
Equity in earnings of unconsolidated subsidiaries	—			11,139			48			—			—			11,187
Non-operating loss	—			(49		)	—			—			—			(49		)
Interest expense	(42,431		)	(16,307		)	(4,833		)	(14,937		)	—			(78,508		)

Income (loss) before income taxes	(1,063		)	69,227			13,581			38,594			—			120,339

Income tax expense (benefit)	(2,198		)	33,243			613			13,918			—			45,576
Equity in earnings of consolidated subsidiaries	56,790			9,775			—			—			(66,565		) (a)	—

Net income	57,925			45,759			12,968			24,676			(66,565		)	74,763

Less: Net income attributable to non-controlling interests	—			—			3,244			13,594			—			16,838

Net income attributable to Select Medical Corporation	$	57,925		$	45,759		$	9,724		$	11,082		$	(66,565	)	$	57,925

(a) Elimination of equity in earnings of subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2017

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)

Operating activities
Net income	$	57,925		$	45,759		$	12,968		$	24,676		$	(66,565	) (a)	$	74,763
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			10,902			31			—			—			10,933
Depreciation and amortization	3,148			39,489			6,683			31,552			—			80,872
Provision for bad debts	—			21,577			6,933			10,289			—			38,799
Equity in earnings of unconsolidated subsidiaries	—			(11,139		)	(48		)	—			—			(11,187		)
Equity in earnings of consolidated subsidiaries	(56,790		)	(9,775		)	—			—			66,565		(a)	—
Loss on extinguishment of debt	6,527			—			—			—			—			6,527
Gain on sale of assets and businesses	(8		)	(4,828		)	(4,687		)	—			—			(9,523		)
Stock compensation expense	8,700			—			—			570			—			9,270
Amortization of debt discount, premium and issuance costs	4,342			—			—			1,632			—			5,974
Deferred income taxes	5,987			—			—			(7,461		)	—			(1,474		)
Changes in operating assets and liabilities, net of effects of business combinations:													��
Accounts receivable	—			(125,418		)	(29,435		)	(24,150		)	—			(179,003		)
Other current assets	(5,631		)	5,452			(2,517		)	(2,861		)	—			(5,557		)
Other assets	3,184			(16,925		)	17,426			936			—			4,621
Accounts payable	(413		)	(1,550		)	(10		)	2,732			—			759
Accrued expenses	(5,618		)	(4,817		)	8,704			(3,102		)	—			(4,833		)
Income taxes	9,366			—			—			10,033			—			19,399
Net cash provided by (used in) operating activities	30,719			(51,273		)	16,048			44,846			—			40,340

Investing activities
Acquisition of businesses, net of cash acquired	—			(2,305		)	—			(16,203		)	—			(18,508		)
Purchases of property and equipment	(7,093		)	(71,813		)	(10,109		)	(16,287		)	—			(105,302		)
Investment in businesses	—			(9,874		)	—			—			—			(9,874		)
Proceeds from sale of assets and businesses	8			15,007			19,537			—			—			34,552
Net cash provided by (used in) investing activities	(7,085		)	(68,985		)	9,428			(32,490		)	—			(99,132		)

Financing activities
Borrowings on revolving facilities	630,000			—			—			—			—			630,000
Payments on revolving facilities	(550,000		)	—			—			—			—			(550,000		)
Proceeds from term loans	1,139,487			—			—			—			—			1,139,487
Payments on term loans	(1,150,627		)	—			—			(23,065		)	—			(1,173,692		)
Revolving facility debt issuance costs	(4,392		)	—			—			—			—			(4,392		)
Borrowings of other debt	6,572			—			105			2,767			—			9,444
Principal payments on other debt	(7,353		)	(204		)	(1,183		)	(1,697		)	—			(10,437		)
Repayments of bank overdrafts	(5,228		)	—			—			—			—			(5,228		)
Dividends paid to Holdings	(600		)	—			—			—			—			(600		)
Equity investment by Holdings	963			—			—			—			—			963
Intercompany	(93,455		)	119,528			(26,073		)	—			—			—
Proceeds from issuance of non-controlling interests	—			—			3,553			—			—			3,553
Purchase of non-controlling interests	—			—			(120		)	—			—			(120		)
Distributions to non-controlling interests	—			—			(1,868		)	(3,548		)	—			(5,416		)
Net cash provided by (used in) financing activities	(34,633		)	119,324			(25,586		)	(25,543		)	—			33,562

Net decrease in cash and cash equivalents	(10,999		)	(934		)	(110		)	(13,187		)	—			(25,230		)

Cash and cash equivalents at beginning of period	11,071			6,467			5,056			76,435			—			99,029
Cash and cash equivalents at end of period	$	72		$	5,533		$	4,946		$	63,248		$	—		$	73,799

(a) Elimination of equity in earnings of consolidated subsidiaries.

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Eliminations			Consolidated Select Medical Corporation
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	11,071		$	6,467	$	5,056		$	76,435	$	—		$	99,029
Accounts receivable, net	—			363,470		97,770			112,512		—			573,752
Intercompany receivables	—			1,573,960		28,271			—		(1,602,231		) (a)	—
Prepaid income taxes	6,658			—		—			5,765		—			12,423
Other current assets	11,953			33,958		10,269			21,519		—			77,699
Total Current Assets	29,682			1,977,855		141,366			216,231		(1,602,231		)	762,903

Property and equipment, net	48,697			603,408		50,869			189,243		—			892,217
Investment in affiliates	4,493,684			89,288		—			—		(4,582,972		) (b) (c)	—
Goodwill	—			2,090,963		—			660,037		—			2,751,000
Identifiable intangible assets, net	—			109,132		—			231,430		—			340,562
Other assets	45,636			84,803		53,954			16,235		(26,684		) (d)	173,944

Total Assets	$	4,617,699		$	4,955,449	$	246,189		$	1,313,176	$	(6,211,887	)	$	4,920,626

Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	39,362		$	—	$	—		$	—	$	—		$	39,362
Current portion of long-term debt and notes payable	7,227			445		1,324			4,660		—			13,656
Accounts payable	10,775			78,608		22,397			14,778		—			126,558
Intercompany payables	1,573,960			28,271		—			—		(1,602,231		) (a)	—
Accrued payroll	16,963			92,216		4,246			32,972		—			146,397
Accrued vacation	3,440			55,486		10,668			13,667		—			83,261
Accrued interest	20,114			—		—			2,211		—			22,325
Accrued other	39,155			62,384		4,639			33,898		—			140,076
Total Current Liabilities	1,710,996			317,410		43,274			102,186		(1,602,231		)	571,635

Long-term debt, net of current portion	2,048,154			601		9,685			626,893		—			2,685,333
Non-current deferred tax liability	—			133,852		596			91,314		(26,684		) (d)	199,078
Other non-current liabilities	42,824			53,537		5,727			34,432		��			136,520

Total Liabilities	3,801,974			505,400		59,282			854,825		(1,628,915		)	3,592,566

Redeemable non-controlling interests	—			113		10,056			411,990		—			422,159

Stockholder’s Equity:
Common stock	0			—		—			—		—			0
Capital in excess of par	925,111			—		—			—		—			925,111
Retained earnings (accumulated deficit)	(109,386		)	1,269,014		(38,313		)	1,364		(1,232,065		) (c)	(109,386		)
Subsidiary investment	—			3,180,922		128,556			41,429		(3,350,907		) (b)	—
Total Select Medical Corporation Stockholder’s Equity	815,725			4,449,936		90,243			42,793		(4,582,972		)	815,725

Non-controlling interests	—			—		86,608			3,568		—			90,176
Total Equity	815,725			4,449,936		176,851			46,361		(4,582,972		)	905,901

Total Liabilities and Equity	$	4,617,699		$	4,955,449	$	246,189		$	1,313,176	$	(6,211,887	)	$	4,920,626

(a) Elimination of intercompany balances.

(b) Elimination of investments in consolidated subsidiaries.

(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)																		(in thousands)

Net operating revenues	$	20		$	720,404		$	122,339		$	254,868		$	—		$	1,097,631		$	20		$	723,859		$	118,884		$	254,868		$	—		$	1,097,631

Costs and expenses:
Cost of services	606			571,001			138,496			206,882			—			916,985			606			605,730			103,767			206,882			—			916,985
General and administrative	25,844			26			—			—			—			25,870			25,844			26			—			—			—			25,870
Bad debt expense	—			10,265			2,113			5,139			—			17,517			—			10,285			2,093			5,139			—			17,517
Depreciation and amortization	1,276			17,184			2,829			14,916			—			36,205			1,276			17,316			2,697			14,916			—			36,205
Total costs and expenses	27,726			598,476			143,438			226,937			—			996,577			27,726			633,357			108,557			226,937			—			996,577

Income (loss) from operations	(27,706		)	121,928			(21,099		)	27,931			—			101,054			(27,706		)	90,502			10,327			27,931			—			101,054

Other income and expense:
Intercompany interest and royalty fees	(1,532		)	(50,979		)	52,511			—			—			—			(1,532		)	3,274			(1,742		)	—			—			—
Intercompany management fees	38,783			(32,280		)	(6,503		)	—			—			—			38,783			(32,430		)	(6,353		)	—			—			—
Equity in earnings of unconsolidated subsidiaries	—			4,519			27			—			—			4,546			—			4,519			27			—			—			4,546
Non-operating gain	10,463			2,572			—			—			—			13,035			10,463			2,572			—			—			—			13,035
Interest expense	(25,544		)	(6,685		)	(1,851		)	(10,252		)	—			(44,332		)	(25,544		)	(6,684		)	(1,852		)	(10,252		)	—			(44,332		)

Income (loss) from operations before income taxes	(5,536		)	39,075			23,085			17,679			—			74,303
Income (loss) before income taxes																			(5,536		)	61,753			407			17,679			—			74,303

Income tax expense (benefit)	(473		)	26,370			672			6,881			—			33,450			(473		)	26,370			672			6,881			—			33,450
Equity in earnings of subsidiaries	38,998			21,526			—			—			(60,524		)(a)	—
Equity in earnings of consolidated subsidiaries																			38,998			(1,133		)	—			—			(37,865		) (a)	—

Net income	33,935			34,231			22,413			10,798			(60,524		)	40,853
Net income (loss)																			33,935			34,250			(265		)	10,798			(37,865		)	40,853

Less: Net income attributable to non-controlling interests	—			—			842			6,076			—			6,918			—			18			824			6,076			—			6,918

Net income attributable to Select Medical Corporation	$	33,935		$	34,231		$	21,571		$	4,722		$	(60,524	)	$	33,935
Net income (loss) attributable to Select Medical Corporation																			$	33,935		$	34,232		$	(1,089	)	$	4,722		$	(37,865	)	$	33,935

(a) Elimination of equity in earnings of subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2016

(unaudited)

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation			Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)																		(in thousands)

Net operating revenues	$	437		$	1,431,918		$	247,861		$	505,745		$	—		$	2,185,961		$	437		$	1,439,439		$	240,340		$	505,745		$	—		$	2,185,961

Costs and expenses:
Cost of services	950			1,149,011			269,202			420,084			—			1,839,247			950			1,211,439			206,774			420,084			—			1,839,247
General and administrative	54,231			(93		)	—			—			—			54,138			54,231			(93		)	—			—			—			54,138
Bad debt expense	—			20,963			4,098			8,853			—			33,914			—			21,003			4,058			8,853			—			33,914
Depreciation and amortization	2,487			32,381			5,562			30,292			—			70,722			2,487			32,648			5,295			30,292			—			70,722
Total costs and expenses	57,668			1,202,262			278,862			459,229			—			1,998,021			57,668			1,264,997			216,127			459,229			—			1,998,021

Income (loss) from operations	(57,231		)	229,656			(31,001		)	46,516			—			187,940			(57,231		)	174,442			24,213			46,516			—			187,940

Other income and expense:
Intercompany interest and royalty fees	(2,590		)	(49,946		)	52,536			—			—			—			(2,590		)	6,044			(3,454		)	—			—			—
Intercompany management fees	94,139			(81,804		)	(12,335		)	—			—			—			94,139			(82,127		)	(12,012		)	—			—			—
Loss on early retirement of debt																			(773		)	—			—			—			—			(773		)
Equity in earnings of unconsolidated subsidiaries	—			9,146			52			—			—			9,198			—			9,146			52			—			—			9,198
Loss on early retirement of debt	(773		)	—			—			—			—			(773		)
Non-operating gain (loss)	40,895			(2,773		)	—			—			—			38,122			40,895			(2,773		)	—			—			—			38,122
Interest expense	(45,890		)	(13,319		)	(3,490		)	(20,481		)	—			(83,180		)	(45,890		)	(13,318		)	(3,491		)	(20,481		)	—			(83,180		)

Income from operations before income taxes	28,550			90,960			5,762			26,035			—			151,307
Income before income taxes																			28,550			91,414			5,308			26,035			—			151,307

Income tax expense	8,139			31,985			607			9,779			—			50,510			8,139			31,985			607			9,779			—			50,510
Equity in earnings of subsidiaries	68,357			2,294			—			—			(70,651		)(a)	—
Equity in earnings of consolidated subsidiaries																			68,357			1,873			—			—			(70,230		) (a)	—

Net income	88,768			61,269			5,155			16,256			(70,651		)	100,797			88,768			61,302			4,701			16,256			(70,230		)	100,797

Less: Net income attributable to non-controlling interests	—			—			2,728			9,301			—			12,029			—			33			2,695			9,301			—			12,029

Net income attributable to Select Medical Corporation	$	88,768		$	61,269		$	2,427		$	6,955		$	(70,651	)	$	88,768		$	88,768		$	61,269		$	2,006		$	6,955		$	(70,230	)	$	88,768

(a) Elimination of equity in earnings of subsidiaries.

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2016

(unaudited)

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Operating activities

Net income

$
88,768

$
61,269

$
5,155

$
16,256

$
(70,651
)(a)
$
100,797

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Distributions from unconsolidated subsidiaries

—

12,000

39

—

—

12,039

Depreciation and amortization

2,487

32,381

5,562

30,292

—

70,722

Amortization of leasehold interests

—

34

—

261

—

295

Provision for bad debts

—

20,963

4,098

8,853

—

33,914

Equity in earnings of unconsolidated subsidiaries

—

(9,146
)
(52
)
—

—

(9,198
)
Loss on early retirement of debt

773

—

—

—

—

773

Loss from disposal of assets

—

37

12

6

—

55

Gain on sale of businesses

(40,895
)
(2,566
)
—

—

—

(43,461
)
Impairment of equity investment

—

5,339

—

—

—

5,339

Stock compensation expense

7,790

—

—

384

—

8,174

Amortization of debt discount, premium and issuance costs

5,371

—

2

1,704

—

7,077

Deferred income taxes

997

—

—

(14,283
)
—

(13,286
)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:

Equity in earnings of subsidiaries

(68,357
)
(2,294
)
—

—

70,651
(a)
—

Accounts receivable

—

(22,202
)
(10,405
)
(11,489
)
—

(44,096
)
Other current assets

(2,938
)
7,029

(960
)
7,880

—

11,011

Other assets

(4,268
)
(291
)
(508
)
9,280

—

4,213

Accounts payable

(2,241
)
(17,885
)
(3,181
)
7,455

—

(15,852
)
Accrued expenses

(10,175
)
24,534

9,113

(2,840
)
—

20,632

Income taxes

8,832

—

—

19,989

—

28,821

Net cash provided by (used in) operating activities

(13,856
)
109,202

8,875

73,748

—

177,969

Investing activities

Purchases of property and equipment

(8,545
)
(41,851
)
(21,935
)
(7,927
)
—

(80,258
)
Proceeds from sale of assets and business

63,418

7,942

6

—

—

71,366

Investment in businesses

—

(1,590
)
—

—

—

(1,590
)
Acquisition of businesses, net of cash acquired

(408,654
)
(605
)
(8,395
)
(3,865
)
—

(421,519
)
Net cash used in investing activities

(353,781
)
(36,104
)
(30,324
)
(11,792
)
—

(432,001
)

Financing activities

Borrowings on revolving facilities

320,000

—

—

—

—

320,000

Payments on revolving facilities

(375,000
)
—

—

(5,000
)
—

(380,000
)
Net proceeds from Select term loans

600,127

—

—

—

—

600,127

Payments on term loans

(227,399
)
—

—

(2,250
)
—

(229,649
)
Borrowings of other debt

9,765

—

9,500

2,817

—

22,082

Principal payments on other debt

(7,278
)
(385
)
(876
)
(1,387
)
—

(9,926
)
Dividends paid to Holdings

(506
)
—

—

—

—

(506
)
Equity investment by Holdings

657

—

—

—

—

657

Proceeds from issuance of non-controlling interest

—

—

3,103

—

—

3,103

Repayments of bank overdrafts

(2,138
)
—

—

—

—

(2,138
)
Intercompany

49,141

(67,014
)
17,873

—

—

—

Tax benefit from stock based awards

269

—

—

—

—

269

Purchase of non-controlling interests

—

(1,294
)
—

—

—

(1,294
)
Distributions to non-controlling interests

—

—

(3,402
)
(1,306
)
—

(4,708
)
Net cash provided by (used in) financing activities

367,638

(68,693
)
26,198

(7,126
)
—

318,017

Net increase in cash and cash equivalents

1

4,405

4,749

54,830

—

63,985

Cash and cash equivalents at beginning of period

4,070

3,706

625

6,034

14,435

Cash and cash equivalents at end of period

$
4,071

$
8,111

$
5,374

$
60,864

$
—

$
78,420

~~(a) Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~December 31, 2015~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

( in thousands)

Assets

Current Assets:

Cash and cash equivalents

$
4,070

$
3,706

$
625

$
6,034

$
—

$
14,435

Accounts receivable, net

—

419,554

68,332

115,672

—

603,558

Current deferred tax asset

11,556

6,733

4,761

5,638

—

28,688

Intercompany receivables

—

1,974,229

127,373

—

(2,101,602
)(a)
—

Prepaid income taxes

7,979

—

—

8,715

—

16,694

Other current assets

10,521

34,887

5,731

34,640

—

85,779

Total Current Assets

34,126

2,439,109

206,822

170,699

(2,101,602
)
749,154

Property and equipment, net

38,872

548,820

61,126

215,306

—

864,124

Investment in affiliates

4,111,682

66,015

—

—

(4,177,697
)(b) (c)
—

Goodwill

—

1,663,974

—

650,650

—

2,314,624

Other identifiable intangibles, net

—

72,776

—

245,899

—

318,675

Non-current deferred tax asset

12,297

—

—

—

(12,297
)(d)
—

Other assets

3,842

108,524

659

29,076

—

142,101

Total Assets

4,200,819

4,899,218

268,607

1,311,630

(6,291,596
)
$
4,388,678

Liabilities and Equity

Current Liabilities:

Bank overdrafts

$
28,615

$
—

$
—

$
—

$
—

$
28,615

Current portion of long-term debt and notes payable

221,769

197

939

2,261

—

225,166

Accounts payable

10,445

101,156

16,997

8,811

—

137,409

Intercompany payables

1,974,229

127,373

—

—

(2,101,602
)(a)
—

Accrued payroll

22,970

66,908

3,916

27,195

—

120,989

Accrued vacation

6,406

50,254

9,363

7,954

—

73,977

Accrued interest

6,315

3

—

3,083

—

9,401

Accrued other

38,883

42,939

9,866

42,040

—

133,728

Total Current Liabilities

2,309,632

388,830

41,081

91,344

(2,101,602
)
729,285

Long-term debt, net of current portion

984,744

452,417

90,860

632,709

—

2,160,730

Non-current deferred tax liability

—

114,394

9,239

107,369

(12,297
)(d)
218,705

Other non-current liabilities

47,190

41,904

4,798

39,328

—

133,220

Total Liabilities

3,341,566

997,545

145,978

870,750

(2,113,899
)
3,241,940

Redeemable non-controlling interests

—

870

11,224

226,127

—

238,221

Stockholder’s Equity:

Common stock

0

—

—

—

—

0

Capital in excess of par

904,375

—

—

—

—

904,375

Retained earnings (accumulated deficit)

(45,122
)
1,189,688

(8,932
)
(6,120
)
(1,174,636
)(c)
(45,122
)
Subsidiary investment

—

2,711,115

74,011

217,935

(3,003,061
)(b)
—

Total Select Medical Corporation Stockholder’s Equity

859,253

3,900,803

65,079

211,815

(4,177,697
)
859,253

Non-controlling interest

—

—

46,326

2,938

—

49,264

Total Equity

859,253

3,900,803

111,405

214,753

(4,177,697
)
908,517

Total Liabilities and Equity

$
4,200,819

$
4,899,218

$
268,607

$
1,311,630

$
(6,291,596
)
$
4,388,678

~~(a) Elimination of intercompany.~~

~~(b) Elimination of investments in consolidated subsidiaries.~~

~~(c) Elimination of investments in consolidated subsidiaries’ earnings.~~

~~(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended June 30, 2015~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
105

$
676,146

$
123,985

$
86,829

$
—

$
887,065

Costs and expenses:

Cost of services

574

564,390

104,163

74,752

—

743,879

General and administrative

19,467

(141
)
—

4,715

—

24,041

Bad debt expense

—

9,252

2,156

878

—

12,286

Depreciation and amortization

1,073

13,908

2,673

4,194

—

21,848

Total costs and expenses

21,114

587,409

108,992

84,539

—

802,054

Income (loss) from operations

(21,009
)
88,737

14,993

2,290

—

85,011

Other income and expense:

Intercompany interest and royalty fees

(311
)
306

5

—

—

—

Intercompany management fees

(2,167
)
8,418

(6,251
)
—

—

—

Equity in earnings of unconsolidated subsidiaries

—

3,828

20

—

—

3,848

Interest expense

(14,280
)
(6,083
)
(1,556
)
(3,369
)
—

(25,288
)

Income (loss) from operations before income taxes

(37,767
)
95,206

7,211

(1,079
)
—

63,571

Income tax expense (benefit)

(13,338
)
38,574

(1,024
)
(695
)
—

23,517

Equity in earnings of subsidiaries

61,369

5,159

—

—

(66,528
) (a)
—

Net income (loss)

36,940

61,791

8,235

(384
)
(66,528
)
40,054

Less: Net income attributable to non-controlling interests

—

13

3,077

24

—

3,114

Net income (loss) attributable to Select Medical Corporation

$
36,940

$
61,778

$
5,158

$
(408
)
$
(66,528
)
$
36,940

~~(a) Elimination of equity in earnings of subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Six Months Ended June 30, 2015~~

~~(unaudited)~~

Select (Parent
Company Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Eliminations

Consolidated
Select Medical
Corporation

(in thousands)

Net operating revenues

$
224

$
1,350,245

$
245,110

$
86,829

$
—

$
1,682,408

Costs and expenses:

Cost of services

1,010

1,125,696

206,806

74,752

—

1,408,264

General and administrative

41,218

(217
)
—

4,715

—

45,716

Bad debt expense

—

18,735

5,343

878

—

24,956

Depreciation and amortization

2,058

27,682

5,262

4,194

—

39,196

Total costs and expenses

44,286

1,171,896

217,411

84,539

—

1,518,132

Income (loss) from operations

(44,062
)
178,349

27,699

2,290

—

164,276

Other income and expense:

Intercompany interest and royalty fees

(597
)
586

11

—

—

—

Intercompany management fees

39,287

(26,866
)
(12,421
)
—

—

—

Equity in earnings of unconsolidated subsidiaries

—

6,399

41

—

—

6,440

Interest expense

(28,181
)
(12,086
)
(3,040
)
(3,369
)
—

(46,676
)

Income (loss) from operations before income taxes

(33,553
)
146,382

12,290

(1,079
)
—

124,040

Income tax expense (benefit)

(11,936
)
60,620

(1,288
)
(695
)
—

46,701

Equity in earnings of subsidiaries

93,620

8,310

—

—

(101,930
) (a)
—

Net income (loss)

72,003

94,072

13,578

(384
)
(101,930
)
77,339

Less: Net income attributable to non-controlling interests

—

31

5,281

24

—

5,336

Net income (loss) attributable to Select Medical Corporation

$
72,003

$
94,041

$
8,297

$
(408
)
$
(101,930
)
$
72,003

~~(a) Elimination of equity in earnings of subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Six Months Ended June 30, 2015~~

~~(unaudited)~~

	Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
	(in thousands)																		Select (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Non-Guarantor Concentra			Eliminations			Consolidated Select Medical Corporation
																			(in thousands)
Operating activities
Net income (loss)	$	72,003		$	94,072		$	13,578		$	(384	)	$	(101,930	)(a)	$	77,339
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net income																			$	88,768		$	61,302		$	4,701		$	16,256		$	(70,230	) (a)	$	100,797
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions from unconsolidated subsidiaries	—			—			52			—			—			52			—			12,000			39			—			—			12,039
Depreciation and amortization	2,058			27,682			5,262			4,194			—			39,196			2,487			32,648			5,295			30,292			—			70,722
Provision for bad debts	—			18,735			5,343			878			—			24,956			—			21,003			4,058			8,853			—			33,914
Equity in earnings of unconsolidated subsidiaires	—			(6,399		)	(41		)	—			—			(6,440		)
Equity in earnings of unconsolidated subsidiaries																			—			(9,146		)	(52		)	—			—			(9,198		)
Equity in earnings of consolidated subsidiaries																			(68,357		)	(1,873		)	—			—			70,230		(a)	—
Loss on extinguishment of debt																			773			—			—			—			—			773
Gain on sale of assets and businesses																			(40,895		)	(2,566		)	—			—			—			(43,461		)
Loss on disposal of assets	—			251			—			—			—			251			—			37			12			6			—			55
Impairment of equity investment																			—			5,339			—			—			—			5,339
Stock compensation expense	5,794			—			—			—			—			5,794			7,790			—			—			384			—			8,174
Amortization of debt discount, premium and issuance costs	3,717			—			—			310			—			4,027			5,371			—			2			1,704			—			7,077
Deferred income taxes	(4,428		)	—			—			—			—			(4,428		)	997			—			—			(14,283		)	—			(13,286		)
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries	(93,620		)	(8,310		)	—			—			101,930		(a)	—
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	—			(73,409		)	(19,744		)	3,888			—			(89,265		)	—			(22,896		)	(9,711		)	(11,489		)	—			(44,096		)
Other current assets	(4,916		)	1,416			1,481			(6,019		)	—			(8,038		)	(2,938		)	7,342			(1,273		)	7,880			—			11,011
Other assets	3,453			(96		)	211			—			—			3,568			(4,268		)	(341		)	(424		)	9,541			—			4,508
Accounts payable	(846		)	7,731			(2,198		)	4,238			—			8,925			(2,241		)	(17,695		)	(3,371		)	7,455			—			(15,852		)
Accrued expenses	(4,099		)	2,899			1,907			—			—			707			(10,175		)	36,088			(2,441		)	(2,840		)	—			20,632
Income taxes	19,111			—			—			(695		)	—			18,416			9,101			—			—			19,989			—			29,090
Net cash provided by (used in) operating activities	(1,773		)	64,572			5,851			6,410			—			75,060			(13,587		)	121,242			(3,165		)	73,748			—			178,238

Investing activities
Acquisition of businesses, net of cash acquired																			(408,654		)	(605		)	(8,395		)	(3,865		)	—			(421,519		)
Purchases of property and equipment	(4,525		)	(56,763		)	(3,770		)	(3,854		)	—			(68,912		)	(8,545		)	(52,591		)	(11,195		)	(7,927		)	—			(80,258		)
Investment in businesses	—			(855		)	—			—			—			(855		)	—			(1,590		)	—			—			—			(1,590		)
Acquisition of businesses, net of cash acquired	—			—			(2,686		)	(1,045,311		)	—			(1,047,997		)
Proceeds from sale of assets and businesses																			63,418			7,942			6			—			—			71,366
Net cash used in investing activities	(4,525		)	(57,618		)	(6,456		)	(1,049,165		)	—			(1,117,764		)	(353,781		)	(46,844		)	(19,584		)	(11,792		)	—			(432,001		)

Financing activities
Borrowings on revolving facilities	650,000			—			—			10,000			—			660,000			320,000			—			—			—			—			320,000
Payments on revolving facilities	(390,000		)	—			—			(10,000		)	—			(400,000		)	(375,000		)	—			—			(5,000		)	—			(380,000		)
Net proceeds from Concentra term loans	—			—			—			623,575			—			623,575
Proceeds from term loans																			600,127			—			—			—			—			600,127
Payments on term loans	(26,884		)	—			—			—			—			(26,884		)	(227,399		)	—			—			(2,250		)	—			(229,649		)
Borrowings of other debt	6,486			—			96			3,008			—			9,590			9,765			—			9,500			2,817			—			22,082
Principal payments on other debt	(6,591		)	(1,296		)	(393		)	(40		)	—			(8,320		)	(7,278		)	(385		)	(876		)	(1,387		)	—			(9,926		)
Repayments of bank overdrafts																			(2,138		)	—			—			—			—			(2,138		)
Dividends paid to Holdings	(13,129		)	—			—			—			—			(13,129		)	(506		)	—			—			—			—			(506		)
Equity investment by Holdings	1,325			—			—			—			—			1,325			657			—			—			—			—			657
Intercompany																			49,141			(68,206		)	19,065			—			—			—
Proceeds from issuance of non-controlling interests	—			—			—			217,065			—			217,065			—			—			3,103			—			—			3,103
Proceeds from bank overdrafts	5,590			—			—			—			—			5,590
Tax benefit from stock based awards	11			—			—			—			—			11
Intercompany	(217,509		)	(5,170		)	4,744			217,935			—			—
Purchase of non-controlling interests																			—			(1,294		)	—			—			—			(1,294		)
Distributions to non-controlling interests	—			—			(4,282		)	—			—			(4,282		)	—			(108		)	(3,294		)	(1,306		)	—			(4,708		)
Net cash provided by (used in) financing activities	9,299			(6,466		)	165			1,061,543			—			1,064,541			367,369			(69,993		)	27,498			(7,126		)	—			317,748

Net increase (decrease) in cash and cash equivalents	3,001			488			(440		)	18,788			—			21,837
Net increase in cash and cash equivalents																			1			4,405			4,749			54,830			—			63,985

Cash and cash equivalents at beginning of period	70			2,454			830			—			—			3,354			4,070			3,706			625			6,034			—			14,435
Cash and cash equivalents at end of period	$	3,071		$	2,942		$	390		$	18,788		$	—		$	25,191		$	4,071		$	8,111		$	5,374		$	60,864		$	—		$	78,420

(a) Elimination of equity in earnings of consolidated subsidiaries.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.

Forward-Looking Statements

This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” ~~“intend”~~“intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

· changes in government reimbursement for our services due to the implementation of healthcare reform legislation, deficit reduction measures, and/or new payment policies (including, for example, the expiration of the moratorium limiting the full application of the 25 Percent Rule that would reduce our Medicare payments for those patients admitted to a long term acute care hospital from a referring hospital in excess of an applicable percentage admissions threshold) may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

· the impact of the Bipartisan Budget Act of 2013 ~~(“BBA~~(the “BBA of 2013”), which ~~establishes new~~established payment limits for Medicare patients who do not meet specified criteria, may result in a reduction in net operating revenues and profitability of our long term acute care hospitals (“LTCHs”);

· the failure of our specialty hospitals to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;

· the failure of our facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;

· a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;

· acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;

· ~~our plans and expectations related to the Concentra and Physiotherapy acquisitions and our inability to realize anticipated synergies;~~

· private third-party payors for our services may ~~undertake future cost containment initiatives~~adopt payment policies that could limit our future net operating revenues and profitability;

· the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;

· shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;

· competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;

· the loss of key members of our management team could significantly disrupt our operations;

· the effect of claims asserted against us could subject us to substantial uninsured liabilities; and

· other factors discussed from time to time in our filings with the SEC, including factors discussed under the ~~section entitled,~~heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016, as such risk factors may be updated from time to time in our periodic filings with the SEC.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Overview

We began operations in 1997 and, ~~we believe that we~~based on number of facilities, are one of the largest operators of specialty hospitals, ~~and~~ outpatient rehabilitation clinics, and occupational medicine centers in the United ~~States based on number of facilities. On March 4, 2016, we acquired Physiotherapy, a national provider of outpatient physical rehabilitation care, which operated 574 clinics nationwide.~~States. As of June 30, ~~2016,~~2017, we had operations in 46 states and the District of Columbia. As of June 30, 2017, we operated ~~124~~123 specialty hospitals in 2628 states and ~~1,600~~1,608 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, ~~provides occupational medicine, consumer health, physical therapy, and veteran’s healthcare services throughout the United States. As of June 30, 2016, Concentra~~ operated ~~301~~315 medical centers in 38 ~~states.~~states as of June 30, 2017. Concentra also provides contract services at employer worksites and ~~operates~~ Department of Veterans Affairs community-based outpatient clinics, ~~(‘‘CBOCs”). On March 31, 2016, we sold our contract therapy businesses. As of June 30, 2016, we had operations in 46 states and the District of Columbia.~~or “CBOCs.”

We manage our Company through three business segments: specialty hospitals, outpatient rehabilitation, and ~~the Concentra segment.~~Concentra. We had net operating revenues of ~~$2,186.0~~$2,232.0 million for the six months ended June 30, ~~2016.~~2017. Of this total, we earned approximately 54% of our net operating revenues from our specialty hospitals segment, approximately 23% from our outpatient rehabilitation segment, and approximately 23% from our Concentra segment. Our specialty hospitals segment consists of hospitals designed to serve the needs of long term acute care patients and hospitals designed to serve patients that require intensive medical rehabilitation care. Patients are typically admitted to our specialty hospitals from general acute care hospitals. These patients have specialized needs, ~~and~~with serious and often complex medical ~~conditions such as respiratory failure, neuromuscular disorders, traumatic brain and spinal cord injuries, strokes, non-healing wounds, cardiac disorders, renal disorders, and cancer.~~conditions. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. ~~Our outpatient rehabilitation patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living.~~ Our Concentra segment consists of medical centers and contract services provided at employer worksites and Department of Veterans Affairs CBOCs that deliver occupational medicine, ~~consumer health,~~ physical therapy, ~~and~~ veteran’s healthcare, and consumer health services.

Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA ~~income (loss) (“Adjusted EBITDA”)~~ is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating ~~units.~~segments. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles (“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation, or as an alternative to or substitute for net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, ~~Concentra acquisition costs,~~ Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations. ~~You should refer to the following table which reconciles the~~

~~relationship of~~The table below reconciles net income and income from operations to Adjusted EBITDA ~~whenever~~and should be referenced when we ~~refer to~~discuss Adjusted ~~EBITDA:~~EBITDA.

~~Non-GAAP Measure Reconciliation~~

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2015			2016			2015			2016			2016			2017			2016			2017
	(in thousands)												(in thousands)
Net income	$	40,054		$	40,853		$	77,339		$	100,797		$	40,853		$	51,300		$	100,797		$	74,763
Income tax expense	23,517			33,450			46,701			50,510			33,450			32,374			50,510			45,576
Interest expense	25,288			44,332			46,676			83,180			44,332			37,655			83,180			78,508
Non-operating gain	—			(13,035		)	—			(38,122		)
Non-operating loss (gain)													(13,035		)	—			(38,122		)	49
Equity in earnings of unconsolidated subsidiaries	(3,848		)	(4,546		)	(6,440		)	(9,198		)	(4,546		)	(5,666		)	(9,198		)	(11,187		)
Loss on early retirement of debt	—			—			—			773			—			—			773			19,719
Income from operations	$	85,011		$	101,054		$	164,276		$	187,940		$	101,054		$	115,663		$	187,940		$	207,428
Stock compensation expense:
Included in general and administrative	2,749			3,399			4,640			6,839			3,399			3,775			6,839			7,524
Included in cost of services	574			799			1,010			1,335			799			909			1,335			1,746
Depreciation and amortization	21,848			36,205			39,196			70,722			36,205			38,333			70,722			80,872
Physiotherapy acquisition costs	—			—			—			3,236			—			—			3,236			—
Concentra acquisition costs	4,715			—			4,715			—
Adjusted EBITDA	$	114,897		$	141,457		$	213,837		$	270,072		$	141,457		$	158,680		$	270,072		$	297,570

Summary Financial Results

~~Consolidated Operating Results for the~~ Three Months Ended June 30, ~~2016~~2017

For the three months ended June 30, ~~2016,~~2017, our net operating revenues increased ~~23.7%~~2.1% to ~~$1,097.6~~$1,120.7 million, compared to ~~$887.1~~$1,097.6 million for the three months ended June 30, ~~2015. We had income~~2016. Income from operations ofincreased 14.5% to $115.7 million for the three months ended June 30, 2017, compared to $101.1 million for the three months ended June 30, ~~2016, compared~~2016. Net income increased 25.6% to ~~$85.0~~$51.3 million for the three months ended June 30, ~~2015. Net income was~~2017, compared to $40.9 million for the three months ended June 30, 2016. Net income for the three months ended June 30, 2016 ~~compared~~included a pre-tax non-operating gain of $13.0 million. Our Adjusted EBITDA increased 12.2% to ~~$40.1~~$158.7 million for the three months ended June 30, ~~2015. Our Adjusted EBITDA for the three months ended June 30, 2016 increased 23.1%~~2017, compared to $141.5 ~~million, compared to $114.9~~ million for the three months ended June 30, ~~2015, and our~~2016. Our Adjusted EBITDA margin was 14.2% for the three months ended June 30, 2017, compared to 12.9% for the three months ended June 30, ~~2016, compared to 13.0% for the three months ended June 30, 2015.~~2016.

~~Consolidated Operating Results for the~~ Six Months Ended June 30, ~~2016~~2017

For the six months ended June 30, ~~2016,~~2017, our net operating revenues increased ~~29.9%~~2.1% to ~~$2,186.0~~$2,232.0 million, compared to ~~$1,682.4~~$2,186.0 million for the six months ended June 30, ~~2015. We had income~~2016. Income from operations ofincreased 10.4% to $207.4 million for the six months ended June 30, 2017, compared to $187.9 million for the six months ended June 30, ~~2016, compared to $164.3~~2016. Net income was $74.8 million for the six months ended June 30, ~~2015.~~2017, which includes pre-tax losses on early retirement of debt of $19.7 million. Net income was $100.8 million for the six months ended June 30, 2016, ~~compared~~which included a pre-tax non-operating gain of $38.1 million and a pre-tax loss on early retirement of debt of $0.8 million. Our Adjusted EBITDA increased 10.2% to ~~$77.3~~$297.6 million for the six months ended June 30, ~~2015. Our Adjusted EBITDA for the six months ended June 30, 2016 increased 26.3%~~2017, compared to $270.1 ~~million, compared to $213.8~~ million for the six months ended June 30, ~~2015 and our~~2016. Our Adjusted EBITDA margin was 13.3% for the six months ended June 30, 2017, compared to 12.4% for the six months ended June 30, ~~2016, compared to 12.7% for the six months ended June 30, 2015.~~2016.

~~Medicare Reimbursement~~Implementation of ~~LTCH Services —~~ Patient Criteria

As discussed below under “Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria,” our LTCHs transitioned to the new Medicare regulations, which establish new payment limits for Medicare patients discharged from an LTCH who do not meet specified patient criteria, ~~began~~beginning October 1, 2015. Since completing our transition to ~~be phased~~the new LTCH Medicare patient criteria regulations during the third quarter of 2016, we have experienced an increase in toadmissions of patients eligible for the full LTCH-PPS standard reimbursement rate.

The table below illustrates the trend of our case mix index and occupancy percentages during the periods in which our LTCHs became subject to the new patient criteria requirements.

	2015			2016			2017
	Occupancy Percentage		Case Mix Index(1)	Occupancy Percentage		Case Mix Index(1)	Occupancy Percentage		Case Mix Index(1)
Three months ended:
March 31	71	%	1.22	71	%	1.24	68	%	1.28
June 30	70	%	1.21	67	%	1.27	66	%	1.28
September 30	70	%	1.18	61	%	1.26
December 31	70	%	1.21	63	%	1.26

(1) Case mix index, which is calculated as the sum of all diagnostic-related group weights for the period divided by the sum of discharges for the same period, is reflective of the level of patient-acuity in our LTCHs.

Our case mix index has increased, which is reflective of the ~~fourth~~higher-acuity patients we are now admitting under patient criteria. This has resulted in increases in our net revenue per patient day due to higher reimbursement rates for these cases. Our LTCH occupancy percentage reached its lowest level during the third quarter of ~~2015. As of June 30,~~ 2016, 72which is the first quarter in which all of our ~~105 owned~~ LTCHs ~~are now operating~~operated under the new Medicare payment rules.

~~New Specialty Hospitals~~

~~Select’s development of~~ Our LTCHs which operated under the new ~~specialty hospitals can result in start-up costs exceeding net operating revenues, if any, causing Adjusted EBITDA losses~~Medicare payment rules during both the three months ended June 30, 2017 and 2016 experienced improved occupancy during the ~~start-up period. Adjusted EBITDA losses for start-up hospitals were $6.6 million~~three months ended June 30, 2017. These LTCHs had an occupancy percentage of 70% for the three months ended June 30, ~~2016,~~2017, compared to ~~$3.3 million~~69% for the three months ended June 30, ~~2015.~~ ~~Adjusted EBITDA losses for start-up hospitals were $10.5 million for the six months ended June 30, 2016, compared to $8.8 million for the six months ended June 30, 2015.~~2016.

Significant Events

~~Physiotherapy Acquisition~~Refinancing

On March ~~4, 2016,~~6, 2017, Select ~~consummated the acquisition of 100% of the issued and outstanding equity securities of Physiotherapy. Select financed the acquisition using~~entered into a ~~combination of cash on hand~~new senior secured credit agreement that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a ~~portion~~$450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for the issuance of ~~the proceeds from the Series F Tranche B Term Loans~~standby letters of credit. Select used borrowings under the new Select credit facilities ~~as discussed below. Acquisition costs of $3.2 million were recognized as part of general~~to: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and ~~administrative expense on~~ the ~~consolidated statements of operations.~~

~~Sale of Businesses~~

The Company recognized a non-operating gain of $43.4 million for the six months ended June 30, 2016. The Company sold its contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million. The Company also transferred five specialty hospitals in an exchange transactionrevolving facility maturing March 1, 2018 under Select’s 2011 senior secured credit facility; and ~~sold nine outpatient rehabilitation clinics, to a non-consolidating subsidiary, which resulted in non-operating gains of $7.8 million and $1.7 million, respectively.~~

~~Indebtedness~~

On March 4, 2016, Select entered into an additional credit extension amendment to the Select credit facilities, which among other changes, provided for the lenders named therein to make available an aggregate of $625.0 million of Series F Tranche B Term Loans. Select used the proceeds of the Series F Tranche B Term Loans and cash on hand to (i) refinance in full the Series D Tranche B Term Loans due December 20, 2016, (ii) ~~consummate the acquisition of Physiotherapy, and (iii)~~ pay fees and expenses ~~incurred~~ in connection with the ~~transactions. During the six months ended June 30, 2016, we recognized a loss on early retirement of debt of $0.8 million.~~refinancing.

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, filed with the SEC on February ~~26, 2016,~~23, 2017, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of ~~recent~~some of the more significant healthcare regulatory changes that have affected our ~~results of operations~~financial performance in ~~2015~~the periods covered by this report or are likely to affect our financial performance and ~~2016 or may have an effect on our future results of operations.~~financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.

Medicare Reimbursement ~~Generally~~

The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately ~~31%~~30% of our ~~consolidated~~ net operating revenues for both the six months ended June 30, ~~2016~~2017 and ~~37% of our consolidated net operating revenues for~~ the year ended December 31, 2015. The principal causes of the decrease in Medicare net operating revenues as a percentage of our total net operating revenues are the acquisitions of Concentra on June 1, 2015, and Physiotherapy on March 4, 2016, which both have a significantly lower relative percentage of Medicare net operating revenues as compared to our historical business prior to the acquisitions. Since the percentage of net operating revenues generated directly from the Medicare program have been historically higher in our specialty hospitals segment as compared to our outpatient rehabilitation and Concentra segments, we anticipate that the percentage of net operating revenues generated directly from the Medicare program will continue to decrease to the extent growth in our outpatient rehabilitation and Concentra segments outpaces growth in our specialty hospitals segment.2016.

~~The Medicare program reimburses our LTCHs, inpatient rehabilitation facilities (“IRFs”) and outpatient rehabilitation providers, using different payment methodologies.~~

The Medicare Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015, reforms Medicare payment policy for services paid under the Medicare physician fee schedule, including our outpatient rehabilitation services. The law repeals the sustainable growth rate (the “SGR”) formula effective January 1, 2015, and establishes a new payment framework consisting of specified updates to the Medicare physician fee schedule, a new Merit-Based Incentive Payment System (“MIPS”), and incentives for participation in alternative payment models (“APMs”). To finance these provisions, the Medicare Access and CHIP Reauthorization Act of 2015 reduces market basket updates for post-acute care providers, including LTCHs and IRFs, among other Medicare payment cuts. As noted below, the law sets the annual prospective payment system update for fiscal year 2018 at 1% for LTCHs and IRFs, as well as skilled nursing facilities, home health agencies, and hospices. The law also extends the exceptions process for outpatient therapy caps through December 31, 2017.

Medicare Reimbursement of LTCH Services

There have been significant regulatory changes affecting LTCHs that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare payments to our LTCHs are made in accordance with ~~long-term~~the long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to LTCHs are generally published in April or May, finalized in August, and effective on October 1st of each year.

The following is a summary of significant changes to the Medicare prospective payment system for LTCHs which have affected our ~~results of operations, as well as proposed policy and payment rate changes that~~financial performance in the periods covered by this report or may affect our ~~future results of operations.~~financial performance and financial condition in the future.

Fiscal Year ~~2015.~~2016 On August 22, 2014, CMS published the final rule updating policies and payment rates for LTCH-PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or after October 1, 2014 through September 30, 2015). The standard federal rate was set at $41,044, an increase from the standard federal rate applicable during fiscal year 2014 of $40,607. The update to the standard federal rate for fiscal year 2015 included a market basket increase of 2.9%, less a productivity adjustment of 0.5%, less a reduction of 0.2% mandated by the Affordable Care Act (“ACA”), and less a budget neutrality adjustment of 1.266%. The fixed-loss amount for high cost outlier cases was set at $14,972, an increase from the fixed-loss amount in the 2014 fiscal year of $13,314.

~~Fiscal Year 2016.~~ On August 17, 2015, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard federal rate was set at $41,763, an increase from the standard federal rate applicable during fiscal year 2015 of $41,044. The update to the standard federal rate for fiscal year 2016 ~~includes~~included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ~~ACA.~~Affordable Care Act (“ACA”). The ~~fixed-loss~~fixed loss amount for high cost outlier cases paid under LTCH-PPS was set at $16,423, an increase from the ~~fixed-loss~~fixed loss amount in the 2015 fiscal year of $14,972. The ~~fixed-loss~~fixed loss amount for high cost outlier cases paid under the ~~site-neutral~~site neutral payment rate described below was set at $22,538.

Fiscal Year ~~2017.~~2017. On August 2,22, 2016, CMS ~~released an advanced copy of~~published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the standard federal rate for fiscal year 2017 ~~includes~~included a market basket increase of 2.8%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed-loss amount in the 2016 fiscal year of $16,423. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at ~~$23,570,~~$23,573, an increase from the fixed-loss amount in the 2016 fiscal year of $22,538.

~~Medicare Market Basket Adjustments~~

~~The ACA instituted a market basket~~Fiscal Year 2018. On August 2, 2017, CMS released an advanced copy of the final policies and payment ~~adjustment to LTCHs. In fiscal years 2017 through 2019,~~rates for the ~~market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update~~LTCH-PPS for fiscal year 2018 ~~at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a 0% payment update~~(affecting discharges and payment rates that are less than the prior year. For fiscal year 2017, CMS is rebasing the LTCH-specific market basket by replacing the 2009-based LTCH-specific market basket with a 2013-based LTCH-specific market basket that is based on Medicare cost report data from cost reporting periods beginning on or after October 1, ~~2012~~2017 through September 30, 2018). The standard federal rate was set at $41,431, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018 includes a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and ~~before October 1, 2013.~~less a reduction of 0.75% mandated by the ACA. As noted below, the update to the standard federal rate for fiscal year 2018 is impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,382, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,601, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.

Patient Criteria

The BBA of 2013, enacted December 26, 2013, establishes ~~new payment limits~~a dual-rate LTCH-PPS for Medicare patients discharged from an ~~LTCH who do not meet specified criteria.~~LTCH. Specifically, for Medicare patients discharged in cost reporting periods beginning on or after October 1, 2015, LTCHs will be reimbursed ~~under~~at the LTCH-PPS standard federal payment rate only if, immediately preceding the patient’s LTCH admission, the patient was discharged from a ~~general~~“subsection (d) hospital” (generally, a short-term acute care hospital paid under ~~IPPS~~the inpatient prospective payment system, or “IPPS”) and either the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU) at the subsection (d) hospital, or the patient iswas assigned to an Medicare severity diagnosis-related group (“MS-LTC-DRG”) for LTCHs ~~(“MS-LTC-DRG”)~~ for cases receiving at least 96 hours of ventilator services in the LTCH. In addition, to be paid ~~under~~at the LTCH-PPS standard federal payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet ~~the new~~these criteria, the LTCH will be paid a lower ~~“site-neutral”~~“site neutral” payment rate, which will be the lower ~~of (1) the inpatient prospective payment system (“IPPS”)~~of: (i) IPPS comparable ~~per-diem~~per diem payment rate capped at the Medicare severity diagnosis-related group (“MS-DRG”) ~~including~~payment rate plus any outlier ~~payments,~~payments; or ~~(2)~~(ii) 100 percent of the estimated costs for services.

The BBA of 2013 provides for a transition to the site-neutral payment rate for those patients not paid ~~under LTCH-PPS.~~at the LTCH-PPS standard federal payment rate. During the transition period ~~(cost~~(applicable to hospital cost reporting periods beginning on or after October 1, 2015 ~~through~~and on or before September 30, 2017), a blended rate will be paid for Medicare patients not meeting the new ~~criteria. The blended rate will comprise half~~criteria that is equal to 50% of the site-neutral payment rate amount and ~~half~~50% of the ~~LTCH-PPS~~standard federal payment ~~rate.~~rate amount. For discharges in cost reporting periods beginning on or after October 1, 2017, only the site-neutral payment rate will apply for Medicare patients not meeting the new criteria.

In addition, for cost reporting periods beginning on or after October 1, 2019, qualifying discharges from an LTCH will continue to be paid at the LTCH-PPS standard federal payment rate, unless the number of discharges for which payment is made under the site-neutral payment rate is greater than 50% of the total number of discharges from the ~~LTCH.~~LTCH for that period. If the number of discharges for which payment is made under the site-neutral payment rate is greater than 50%, then beginning in the next cost reporting period all discharges from the LTCH will be reimbursed at the site-neutral payment rate. The BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral payment rate to ~~re-qualify~~be reinstated for payment under the dual-rate LTCH-PPS.

Payment adjustments, including the interrupted stay policy and the 25 Percent Rule (discussed below), apply to LTCH discharges regardless of whether the case is paid at the ~~LTCH-PPS~~standard federal payment rate or the site-neutral payment rate. However, short stay outlier payment adjustments do not apply to cases paid at the site-neutral payment ~~rate after the transition period. Beginning in fiscal year 2016,~~rate. CMS calculates the annual recalibration of the MS-LTC-DRG relative payment weighting factors using only data from LTCH discharges that meet the criteria for exclusion from the site-neutral payment rate. In addition, ~~beginning in fiscal year 2016,~~ CMS applies the IPPS fixed-loss amount for high cost outliers to site-neutral cases, rather than the ~~LTCH PPS~~LTCH-PPS fixed-loss amount. CMS calculates the LTCH-PPS fixed-loss amount using only data from cases paid at the LTCH-PPS payment rate, excluding cases paid at the site-neutral rate.

~~Each~~Medicare Market Basket Adjustments

The ACA instituted a market basket payment adjustment to LTCHs. In fiscal years 2018 and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of ~~our LTCHs has their own unique~~2015 sets the annual ~~cost reporting period. As~~update for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a ~~result,~~0% payment update and payment rates that are less than the new payment limits will become effective for each of our LTCHs at different points in time over a twelve month period that began on October 1, 2015. As of June 30, 2016, 72 of our owned LTCHs were operating under the new payment rules. The remaining 33 LTCHs have cost reporting periods commencing during the third quarter of 2016.prior year.

25 Percent Rule

The “25 Percent Rule” is a downward payment adjustment that applies if the percentage of Medicare patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring hospital) exceeds the applicable percentage admissions threshold during a particular cost reporting period. ~~As more full described~~For Medicare patients above the applicable percentage admissions threshold, the LTCH is reimbursed at a rate equivalent to that under ~~“business—Government Regulations,” various legislation has limited~~general acute care hospital IPPS, which is generally lower than LTCH-PPS rates. Cases that reach outlier status in the referring hospital do not count toward the admissions threshold and are paid under LTCH-PPS.

Current law, as amended by the 21st Century Cures Act, precludes CMS from applying the 25 Percent Rule for freestanding LTCHs to cost reporting years beginning before July 1, 2016 and for discharges occurring on or ~~deferred~~after October 1, 2016 and before October 1, 2017. In addition, current law applies higher percentage admissions thresholds under the ~~full application~~25 Percent Rule for most hospitals within hospitals (“HIHs”) for cost reporting years beginning before July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before October 1, 2017. For freestanding LTCHs the percentage admissions threshold is suspended during the relief periods. For HIHs the percentage admissions threshold is raised from 25% to 50% during the relief periods. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with a Metropolitan Statistical Area (“MSA”) dominant hospital the referral percentage was raised from 50% to 75%. Grandfathered HIHs are exempt from the 25 Percent Rule regulations.

For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule. As a result, the 25 Percent Rule applies to discharges occurring on or after October 1, 2018. After the expiration of the regulatory moratorium, our LTCHs (whether freestanding, HIH or satellite) will be subject to a downward payment adjustment for any Medicare patients who were admitted from a co-located or a non-co-located hospital and that exceed the applicable percentage admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period. These regulatory changes will have an adverse financial impact on the net operating revenues and profitability of many of ~~our LTCHs~~these hospitals for ~~cost reporting periods beginning on or after July 1, 2016.~~

~~For~~ discharges occurring prior to October 1, 2016, the 25 Percent Rule payment adjustments are found in two Medicare regulations, one that applies to Medicare patients admitted from a co-located referring hospital and one that applies to Medicare patients admitted from a referring hospital not co-located with the LTCH. After October 1, 2016, a single consolidated 25 Percent Rule applies to all LTCH discharges that occur in the LTCH’s cost reporting period that begins after the statutory moratoria on the full implementation of the 25 Percent Rule expires. The moratorium on the full application of the 25 Percent Rule applicable to co-located hospitals expires beginning with LTCH cost reporting periods beginning on or after July 1, 2016, while the moratorium on the full application of the 25 Percent Rule applicable to LTCHs not co-located with a referring hospital expires beginning with LTCH cost reporting periods beginning on or after October 1, ~~2016. Consequently, LTCHs~~2018.

Short Stay Outlier Policy

CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five-sixths of the geometric average length of stay for that particular MS-LTC-DRG, referred to as a short stay outlier, or “SSO.” SSO cases are ~~subject to both Medicare regulations will continue to be subject~~paid based on the lesser of (i) 100% of the average cost of the case, (ii) 120% of the MS-LTC-DRG specific per diem amount multiplied by the patient’s length of stay, (iii) the full MS-LTC-DRG payment, or (iv) a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS.

For fiscal year 2018, CMS adopted changes to the ~~moratorium on the full application of the 25 Percent Rule applicable to co-located hospitals until their cost reports beginning~~SSO policy such that all SSO cases discharged on or after October 1, ~~2016.~~

2017 are paid based on a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS. Under this policy, as the ~~single consolidated 25 Percent Rule, CMS calculates~~length of stay of a SSO case increases, the percentage of ~~LTCH discharges referred from any hospital~~the per diem payment amounts based on ~~a provider number basis only. An LTCH’s~~the full MS-LTCH-DRG standard federal payment rate increases and the percentage of ~~Medicare discharges from all locations of given referring hospital would be determined during settlement of a cost report by dividing~~ the ~~LTCH’s total number of Medicare discharges in the~~

~~cost reporting period (based~~payment based on the CMS Certification Number (CCN) on the claims) that were admitted directly from a given referring hospital (again determined by the CCN on the referring hospital’s claims) by the LTCH’s total number of Medicare discharges in the cost reporting period. LTCH discharges that reach high cost outlier status at the referring hospital are not be subject to the 25 Percent Rule payment adjustment (that is, such discharges would only be included in an LTCH’s total Medicare discharges and would not count as having been admitted from that referring hospital), and to the extent the LTCH is exclusively located in an MSA-dominant area or rural area, the LTCH would have an increased applicable threshold under proposed special treatment for exclusively MSA-dominant or exclusively rural LTCHs.IPPS comparable amount decreases.

Moratorium on New LTCHs, LTCH Satellite Facilities and LTCH ~~Beds~~beds

~~The SCHIP Extension Act imposed~~Current law imposes a moratorium on the establishment and classification of new LTCHs, LTCH satellite facilities and LTCH beds in existing LTCHs or satellite facilities subject to certain exceptions through December 28, 2012. The BBA of 2013, as amended by the PAMA, reinstated the moratorium on the establishment and classification of new LTCHs or LTCH satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities ~~beginning April 1, 2014~~ through September 30, ~~2017 with certain~~2017. There are three exceptions to the moratorium for projects that ~~are applicable to the establishment and classification of new LTCHs or LTCH satellite facilities~~were under development ~~prior to~~when the moratorium began on April 1, 2014. Only one exception needs to exist for the moratorium not to apply.

Medicare Reimbursement of Inpatient Rehabilitation Facility Services

The following is a summary of significant changes to the Medicare prospective payment system for ~~IRFs~~inpatient rehabilitation facilities (“IRFs”) which have affected our ~~results of operations during~~financial performance in the periods ~~presented in~~covered by this report ~~as well as the policies and payment rates for fiscal year 2016 which~~or may affect our ~~patient discharges~~financial performance and ~~cost reporting periods beginning on or after October 1, 2015.~~financial condition in the future. Medicare payments to our IRFs are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).

Fiscal Year ~~2015.~~2016 On August 6, 2014, CMS published the final rule updating policies and payment rates for IRF-PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or after October 1, 2014 through September 30, 2015). The standard payment conversion factor for discharges for fiscal year 2015 was set at $15,198, an increase from the standard payment conversion factor applicable during fiscal year 2014 of $14,846. The update to the standard payment conversion factor for fiscal year 2015 included a market basket increase of 2.9%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2015 to $8,848 from $9,272 established in the final rule for fiscal year 2014.

~~Fiscal Year 2016.~~ On August 6, 2015, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard payment conversion factor for discharges for fiscal year 2016 was set at $15,478, an increase from the standard payment conversion factor applicable during fiscal year 2015 of $15,198. The update to the standard payment conversion factor for fiscal year 2016 ~~includes~~included a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2016 to $8,658 from $8,848 established in the final rule for fiscal year 2015.

Fiscal Year ~~2017.~~2017. On ~~July 29,~~August 5, 2016, CMS ~~released an advanced copy of~~published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard payment conversion factor for discharges for fiscal year 2017 was set at $15,708, an increase from the standard payment conversion factor applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor for fiscal year 2017 ~~includes~~included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2017 to $7,984 from $8,658 established in the final rule for fiscal year 2016.

Fiscal Year 2018. On July 31, 2017, CMS released an advanced copy of the final policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 includes a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. As noted below, the standard payment conversion factor for fiscal year 2018 is impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. CMS increased the outlier threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.

Medicare Market Basket Adjustments

The ACA instituted a market basket payment adjustment for IRFs. In fiscal years ~~2017 through~~2018 and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a 0% payment update and payment rates that are less than the prior year.

Patient Classification Criteria

In order to qualify as an IRF a hospital must demonstrate that during its most recent twelve month cost reporting period it served an inpatient population of whom at least 60% required intensive rehabilitation services for one or more of 13 conditions specified by regulation. Compliance with the 60% rule is demonstrated through either medical review or the “presumptive” method, in which a patient’s diagnosis codes are compared to a “presumptive compliance” list. For fiscal year 2018, CMS revised the 60% rule’s presumptive methodology by (i) including certain International Classification of Diseases, Tenth Revision, Clinical Modification (“ICD-10-CM”) diagnosis codes for patients with traumatic brain injury and hip fracture conditions; and (ii) revising the presumptive methodology list for major multiple trauma by counting IRF cases that contain two or more of the ICD-10-CM codes from three major multiple trauma lists in the specified combinations.

Medicare Reimbursement of Outpatient Rehabilitation Services

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. Historically, the Medicare physician fee schedule rates have updated annually based on the SGR formula. The SGR formula has resulted in automatic reductions in rates every year since 2002; however, for each year through March 31, 2015, CMS or Congress has taken action to prevent the SGR formula reductions. The Medicare Access and CHIP Reauthorization Act of 2015 repeals the SGR formula effective for services provided on or after January 1, 2015, and establishes a new payment framework consisting of specified updates to the Medicare physician fee schedule, a new MIPS, and APMs. For services provided between January 1, 2015 and June 30, 2015, a 0% payment update was applied to the Medicare physician fee schedule payment rates. For services provided between July 1, 2015 and December 31, 2015, a 0.5% update was applied to the fee schedule payment rates. For services provided in ~~2016~~2017 through 2019, a 0.5% update will be applied each year to the fee schedule payment rates, subject to ~~MIPS~~an adjustment beginning in ~~2019.~~2019 under the Merit-Based Incentive Payment System (“MIPS”). For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and ~~APM adjustments. Finally, in~~the alternative payment models (“APMs”). In 2026 and subsequent years eligible professionals participating in APMs that meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.

~~The Medicare Access and CHIP Reauthorization Act of 2015 requires that~~Beginning in 2019, payments under the fee schedule ~~be adjusted starting in 2019~~are subject to adjustment based on performance in MIPS, which ~~will consolidate the three existing incentive programs focused~~measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. ~~The law requires the Secretary of Health and Human Services to establish~~Under the MIPS requirements ~~under which~~ a provider’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the professional’s payment for a year. Each year from ~~2019-2024~~2019 through 2024 professionals who receive a significant share of their revenues through an APM (such as accountable care

organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and ~~promotes~~to promote the alignment of incentives across payors. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, will be subject to future notice and comment rule-making. ~~For the year ended December 31, 2015, we received approximately 11% of our outpatient rehabilitation net operating revenues from Medicare.~~

Operating Statistics

The following ~~tables set~~table sets forth operating statistics for ~~each of~~ our operating segments for each of the periods presented. The operating statistics reflect data for the period of time we managed these operations:

Three Months Ended June 30,

Six Months Ended June 30,

2015

2016

2015

2016

Specialty Hospitals Data(1):

Number of hospitals owned - start of period

120

118

120

118

Number of hospitals acquired

—

3

1

3

Number of hospital start-ups

1

1

1

1

Number of hospitals closed/sold

(2
)
(6
)
(3
)
(6
)
Number of hospitals owned - end of period

119

116

119

116

Number of hospitals managed - end of period

9

8

9

8

Total number of hospitals (all) - end of period

128

124

128

124

Long term acute care hospitals

111

106

111

106

Rehabilitation hospitals

17

18

17

18

Available licensed beds (2)

5,187

5,154

5,187

5,154

Admissions (2)

14,024

13,094

28,425

26,955

Patient days (2)

343,515

317,119

695,754

655,090

Average length of stay (days) (2)

24

24

25

24

Net revenue per patient day (2)(3)

$
1,590

$
1,680

$
1,583

$
1,655

Occupancy rate (2)

71
%
68
%
72
%
70
%
Percent patient days - Medicare (2)

60
%
55
%
61
%
56
%

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017
Specialty hospitals data:(1)
Number of hospitals owned—start of period	118			114			118			115
Number of hospitals acquired	3			1			3			1
Number of hospital start-ups	1			—			1			—
Number of hospitals closed/sold	(6		)	(1		)	(6		)	(2		)
Number of hospitals owned—end of period	116			114			116			114
Number of hospitals managed—end of period	8			9			8			9
Total number of hospitals (all)—end of period	124			123			124			123
Long term acute care hospitals	106			102			106			102
Rehabilitation hospitals	18			21			18			21
Available licensed beds(2)	5,154			5,155			5,154			5,155
Admissions(2)	13,094			13,691			26,955			27,586
Patient days(2)	317,119			316,884			655,090			634,249
Average length of stay (days)(2)	24			23			24			23
Net revenue per patient day(2)(3)	$	1,680		$	1,731		$	1,655		$	1,723
Occupancy rate(2)	68		%	68		%	70		%	68		%
Percent patient days—Medicare(2)	55		%	54		%	56		%	54		%

Outpatient rehabilitation data:
Number of clinics owned—start of period	1,441			1,445			896			1,445
Number of clinics acquired	—			—			543			1
Number of clinic start-ups	7			6			13			14
Number of clinics closed/sold	(13		)	(10		)	(17		)	(19		)
Number of clinics owned—end of period	1,435			1,441			1,435			1,441
Number of clinics managed—end of period	165			167			165			167
Total number of clinics (all)—end of period	1,600			1,608			1,600			1,608
Number of visits(2)	2,122,330			2,106,760			3,698,884			4,182,550
Net revenue per visit(2)(4)	$	102		$	103		$	102		$	102

Concentra data:
Number of centers owned—start of period	301			308			300			300
Number of centers acquired	—			5			2			11
Number of center start-ups	—			2			—			4
Number of centers closed/sold	—			—			(1		)	—
Number of centers owned—end of period	301			315			301			315
Number of visits(5)	1,890,348			1,982,255			3,736,063			3,869,070
Net revenue per visit(5)(6)	$	118		$	116		$	118		$	117

Three Months Ended June 30,

Six Months Ended June 30,

2015

2016

2015

2016

Outpatient Rehabilitation Data:

Number of clinics owned - start of period

883

1,441

880

896

Number of clinics acquired

—

—

7

543

Number of clinic start-ups

5

7

8

13

Number of clinics closed/sold

(7
)
(13
)
(14
)
(17
)
Number of clinics owned - end of period

881

1,435

881

1,435

Number of clinics managed - end of period

147

165

147

165

Total number of clinics (all) - end of period

1,028

1,600

1,028

1,600

Number of visits (2)

1,336,284

2,122,330

2,572,772

3,698,884

Net revenue per visit (2)(4)

$
103

$
102

$
103

$
102

Three Months Ended June 30,

Six Months Ended June 30,

2015

2016

2015

2016

Concentra Data:

Number of centers owned - start of period

—

301

—

300

Number of centers acquired

300

—

300

2

Number of centers start-ups

—

—

—

—

Number of centers closed/sold

—

—

—

(1
)
Total number of centers - end of period

300

301

300

301

Number of visits (5)

673,834

1,890,348

673,834

3,736,063

Net revenue per visit (5)(6)

$
112

$
118

$
112

$
118

~~(Operating statistics footnotes are continued next page)~~

(1) Specialty hospitals consist of LTCHs and IRFs.

(2) Data excludes specialty hospitals and outpatient clinics managed by the Company.

(3) Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenues by the total number of patient days.

(4) Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue by the total number of ~~visits and excludes~~visits. For purposes of this computation, outpatient rehabilitation direct patient service clinic revenue does not include managed clinics or contract therapy ~~revenue for all periods presented.~~revenue.

(5) Data excludes onsite clinics and CBOCs.

(6) Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of center visits.

Results of Operations

The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2015		2016		2015		2016		2016		2017		2016		2017
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services(1)	83.9		83.5		83.7		84.1
Cost of services(1)									83.5		82.1		84.1		82.8
General and administrative	2.7		2.4		2.7		2.5		2.4		2.5		2.5		2.5
Bad debt expense	1.4		1.6		1.5		1.6		1.6		1.6		1.6		1.7
Depreciation and amortization	2.4		3.3		2.3		3.2		3.3		3.5		3.2		3.7
Income from operations	9.6		9.2		9.8		8.6		9.2		10.3		8.6		9.3
Loss on early retirement of debt	—		—		—		0.0		—		—		0.0		(0.9	)
Equity in earnings of unconsolidated subsidiaries	0.4		0.4		0.4		0.4		0.4		0.5		0.4		0.5
Non-operating gain	—		1.2		—		1.7
Non-operating gain (loss)									1.2		—		1.7		(0.0	)
Interest expense	(2.8	)	(4.0	)	(2.8	)	(3.8	)	(4.0	)	(3.3	)	(3.8	)	(3.5	)
Income before income taxes	7.2		6.8		7.4		6.9		6.8		7.5		6.9		5.4
Income tax expense	2.7		3.1		2.8		2.3		3.1		2.9		2.3		2.0
Net income	4.5		3.7		4.6		4.6		3.7		4.6		4.6		3.4
Net income attributable to non-controlling interests	0.3		0.6		0.3		0.5		0.6		0.8		0.5		0.8
Net income attributable to Holdings and Select	4.2	%	3.1	%	4.3	%	4.1	%	3.1	%	3.8	%	4.1	%	2.6	%

(1) Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs.

The following ~~tables summarize~~table summarizes selected financial data by business segment for the periods indicated:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2015

2016

% Change

2015

2016

% Change

(in thousands)

Net operating revenues:

Specialty hospitals

$
592,336

$
585,816

(1.1
)%
$
1,191,117

$
1,184,770

(0.5
)%
Outpatient rehabilitation(2)

207,795

256,928

23.6

404,238

495,010

22.5

Concentra(3)

86,829

254,868

N/M

86,829

505,745

N/M

Other(1)

105

19

(81.9
)
224

436

94.6

Total company

$
887,065

$
1,097,631

23.7
%
$
1,682,408

$
2,185,961

29.9
%

Income (loss) from operations:

��

Specialty hospitals

$
78,043

$
68,927

(11.7
)%
$
161,292

$
141,790

(12.1
)%
Outpatient rehabilitation(2)

25,545

31,930

25.0

44,538

56,773

27.5

Concentra(3)

2,290

27,931

N/M

2,290

46,516

N/M

Other(1)

(20,867
)
(27,734
)
(32.9
)
(43,844
)
(57,139
)
(30.3
)
Total company

$
85,011

$
101,054

18.9
%
$
164,276

$
187,940

14.4
%

Adjusted EBITDA:

Specialty hospitals

$
91,447

$
82,739

(9.5
)%
$
187,919

$
169,495

(9.8
)%
Outpatient rehabilitation(2)

28,722

38,132

32.8

50,855

67,011

31.8

Concentra(3)

11,199

43,039

N/M

11,199

77,192

N/M

Other(1)

(16,471
)
(22,453
)
(36.3
)
(36,136
)
(43,626
)
(20.7
)
Total company

$
114,897

$
141,457

23.1
%
$
213,837

$
270,072

26.3
%

Adjusted EBITDA margin:

Specialty hospitals

15.4
%
14.1
%

15.8
%
14.3
%

Outpatient rehabilitation(2)

13.8

14.8

12.6

13.5

Concentra(3)

12.9

16.9

12.9

15.3

Other(1)

N/M

N/M

N/M

N/M

Total company

13.0
%
12.9
%

12.7
%
12.4
%

Purchases of property and equipment:

Specialty hospitals

$
31,042

$
21,313

$
53,835

$
54,988

Outpatient rehabilitation(2)

3,103

3,825

7,025

8,798

Concentra(3)

3,854

4,716

3,854

7,927

Other(1)

3,065

3,636

4,198

8,545

Total company

$
41,064

$
33,490

$
68,912

$
80,258

~~(Selected financial data by business segment and related footnotes are continued next page)~~

~~The following tables summarize selected financial data by business segment, for the periods indicated:~~

As of June 30,

2015

2016

(in thousands)

Total assets:

Specialty hospitals

$
2,372,723

$
2,448,390

Outpatient rehabilitation

538,586

984,140

Concentra(3)

1,320,941

1,333,293

Other(1)

109,085

72,526

Total company

$
4,341,335

$
4,838,349

	Three Months Ended June 30,								Six Months Ended June 30,
	2016			2017			% Change		2016			2017			% Change
	(in thousands)
Net operating revenues:
Specialty hospitals	$	585,816		$	600,960		2.6	%	$	1,184,770		$	1,199,747		1.3	%
Outpatient rehabilitation(1)	256,928			258,106			0.5		495,010			513,923			3.8
Concentra	254,868			261,586			2.6		505,745			517,735			2.4
Other(2)	19			23			N/M		436			631			N/M
Total Company	$	1,097,631		$	1,120,675		2.1	%	$	2,185,961		$	2,232,036		2.1	%
Income (loss) from operations:
Specialty hospitals	$	68,927		$	82,718		20.0	%	$	141,790		$	152,883		7.8	%
Outpatient rehabilitation(1)	31,930			36,048			12.9		56,773			61,059			7.5
Concentra	27,931			27,368			(2.0	)	46,516			53,531			15.1
Other(2)	(27,734		)	(30,471		)	(9.9	)	(57,139		)	(60,045		)	(5.1	)
Total Company	$	101,054		$	115,663		14.5	%	$	187,940		$	207,428		10.4	%
Adjusted EBITDA:
Specialty hospitals	$	82,739		$	98,172		18.7	%	$	169,495		$	186,837		10.2	%
Outpatient rehabilitation(1)	38,132			41,926			9.9		67,011			73,277			9.4
Concentra	43,039			43,061			0.1		77,192			85,653			11.0
Other(2)	(22,453		)	(24,479		)	(9.0	)	(43,626		)	(48,197		)	(10.5	)
Total Company	$	141,457		$	158,680		12.2	%	$	270,072		$	297,570		10.2	%
Adjusted EBITDA margins:
Specialty hospitals	14.1		%	16.3		%			14.3		%	15.6		%
Outpatient rehabilitation(1)	14.8			16.2					13.5			14.3
Concentra	16.9			16.5					15.3			16.5
Other(2)	N/M			N/M					N/M			N/M
Total Company	12.9		%	14.2		%			12.4		%	13.3		%
Total assets:(3)
Specialty hospitals	$	2,457,948		$	2,655,617				$	2,457,948		$	2,655,617
Outpatient rehabilitation	959,748			982,811					959,748			982,811
Concentra	1,328,243			1,310,483					1,328,243			1,310,483
Other(2)	73,950			105,300					73,950			105,300
Total Company	$	4,819,889		$	5,054,211				$	4,819,889		$	5,054,211
Purchases of property and equipment, net:
Specialty hospitals	$	21,313		$	36,691				$	54,988		$	69,048
Outpatient rehabilitation(1)	3,825			6,201					8,798			12,874
Concentra	4,716			7,601					7,927			16,287
Other(2)	3,636			4,156					8,545			7,093
Total Company	$	33,490		$	54,649				$	80,258		$	105,302

N/~~M —~~ M—Not ~~Meaningful~~Meaningful.

(1) The outpatient rehabilitation segment includes the operating results of our contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.

(2) Other includes our corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related ~~businesses~~

~~(2)~~ ~~The outpatient rehabilitation segment includes the operating results of contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.~~businesses.

(3) ~~Concentra’s operating results are consolidated with Select’s effective~~Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of June ~~1, 2015.~~30, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $18.5 million.

Three Months Ended June 30, ~~2016,~~2017 Compared to Three Months Ended June 30, ~~2015~~2016

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, non-operating gain, ~~(loss),~~ interest expense, income taxes, and net income attributable to non-controlling ~~interest,~~interests, which, in each case, are the same for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased ~~by 23.7%~~2.1% to ~~$1,097.6~~$1,120.7 million for the three months ended June 30, ~~2016,~~2017, compared to ~~$887.1~~$1,097.6 million for the three months ended June 30, ~~2015, principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4,~~ 2016.

Specialty Hospitals Segment.~~. Our specialty hospitals segment net~~ Net operating revenues ~~declined 1.1%~~increased 2.6% to $601.0 million for the three months ended June 30, 2017, compared to $585.8 million for the three months ended June 30, 2016 ~~compared to $592.3 million~~ for ~~the three months ended June 30, 2015.~~our specialty hospitals segment. The ~~primary reason for this decrease was a decline~~increase in ~~our patient days which decreased 7.7% to 317,119 days for the three months ended June 30, 2016, compared to 343,515 days for the three months ended June 30, 2015. As discussed above under “~~~~Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria~~,” new Medicare regulations, which establish new payment limits for Medicare patients discharged from an LTCH who do not meet specified patient criteria, began to be phased in to our LTCHs in the fourth quarter of 2015. We experienced fewer Medicare patient daysnet operating revenues is principally due to ~~changes we implemented at LTCHs operating under the~~several new ~~Medicare patient criteria regulations and specialty hospital closures. This decrease in patient days was offset in part by increases in our Medicare net revenue per patient day. Our~~inpatient rehabilitation facilities which recently commenced operations. The average net revenue per patient day for all of our specialty hospitals increased ~~5.7%~~3.0% to $1,731 for the three months ended June 30, 2017, compared to $1,680 for the three months ended June 30, ~~2016, compared to $1,590~~2016. We had 316,884 patient days for the three months ended June 30, 2015, principally as a result of increases in our Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from the increase in patient acuity at LTCHs now operating under the Medicare patient criteria

~~regulations. Our occupancy percentage declined~~2017, compared to ~~68%~~317,119 days for the three months ended June 30, ~~2016, compared~~2016. The decrease in patient days is principally due to ~~71%~~closed specialty hospitals.

Outpatient Rehabilitation Segment. Net operating revenues increased to $258.1 million for the three months ended June 30, ~~2015.~~

~~Outpatient Rehabilitation~~~~. Our outpatient rehabilitation segment net operating revenues increased 23.6%~~2017, compared to $256.9 million for the three months ended June 30, 2016 ~~compared to $207.8 million~~ for ~~three months ended June 30, 2015. This increase resulted from growth in~~ our outpatient rehabilitation ~~clinics,~~segment. The increase in net operating revenues was principally due to an increase in our net revenue per visit, offset in part by ~~the sale of our contract therapy businesses. Patient visits~~a decline in ~~our outpatient clinics were 2,122,330~~visits. Net revenue per visit was $103 for the three months ended June 30, ~~2016,~~2017, compared to 1,336,284 for the three months ended June 30, 2015. This increase resulted principally from our newly acquired outpatient rehabilitation clinics, as well as growth in our existing owned outpatient rehabilitation clinics. Net revenue per visit in our owned outpatient rehabilitation clinics was $102 for the three months ended June 30, ~~2016, compared to $103~~2016. We had 2,106,760 visits in our clinics for the three months ended June 30, ~~2015.~~2017, compared to 2,122,330 visits for the three months ended June 30, 2016. The decline in visits occurred within some of our Physiotherapy markets.

Concentra ~~Segment~~Segment.. Net operating revenues ~~were~~increased 2.6% to $261.6 million for the three months ended June 30, 2017, compared to $254.9 million for the three months ended June 30, 2016 ~~compared~~for our Concentra segment. The increase in net operating revenues was due to ~~$86.8 million for the three months ended June 30, 2015, which includes results beginning June 1, 2015. Net revenue per visit was $118~~an increase in visits principally from newly acquired and developed medical centers. We had 1,982,255 visits ~~were 1,890,348~~ in ~~the~~our centers for the three months ended June 30, ~~2016,~~2017, compared to ~~net revenue per visit of $112 and 673,834~~1,890,348 visits ~~in the centers~~ for the three months ended June 30, ~~2015,~~2016. The increase in visits principally related to our employer services. Net revenue per visit was $116 for the three months ended June 30, 2017, compared to $118 for the three months ended June 30, 2016. The decrease in net revenue per visit is principally due to an increased proportion of employer service visits, which ~~includes results beginning June 1, 2015.~~yield lower per visit rates.

Operating Expenses

Our operating expenses include our cost of services, general and administrative expense, and bad debt expense. Our operating expenses ~~increased~~were $966.7 million, or 86.2% of net operating revenues, for the three months ended June 30, 2017, compared to $960.4 million, or 87.5% of net operating revenues, for the three months ended June 30, 2016, compared to $780.2 million, or 88.0% of net operating revenues, for the three months ended June 30, 2015. The increase in operating expenses is principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016. Our cost of services, a major component of which is labor expense, was $920.2 million, or 82.1% of net operating revenues, for the three months ended June 30, 2017, compared to $917.0 million, or 83.5% of net operating revenues, for the three months ended June 30, ~~2016, compared~~2016. The decrease in our operating expenses relative to ~~$743.9 million, or 83.9% of~~our net operating revenues ~~for~~is principally due to the ~~three months ended June 30, 2015. The decrease~~improved operating performance of our start-up specialty hospitals, specialty hospital closures, and a decline in ~~cost of services as a percentage of net~~ operating ~~revenues resulted principally from a decrease~~expenses in ~~expenses relative to revenues at~~ our ~~Concentra segment as a result of cost saving initiatives we have implemented.~~outpatient rehabilitation segment. Facility rent expense, a component of cost of services, was $57.2 million for the three months ended June 30, 2017, compared to $57.0 million for the three months ended June 30, ~~2016, compared to $37.7~~2016. General and administrative expenses were $28.3 million for the three months ended June 30, ~~2015. General and administrative expenses were~~2017, compared to $25.9 million for the three months ended June 30, ~~2016, compared to $24.0 million for the three months ended June 30, 2015, which included $4.7 million of Concentra acquisition costs.~~2016. General and administrative expenses as a percentage of net operating revenues were 2.5% for the three months ended June 30, 2017, compared to 2.4% for the three months ended June 30, ~~2016, compared to 2.7%~~2016. Our bad debt expense was $18.2 million for the three months ended June 30, ~~2015. Our general and administrative function includes our shared services activities which have grown and expanded as a result of our significant business acquisitions. Our bad debt expense was $17.5~~2017, compared to $17.5 million ~~or 1.6% of net operating revenues,~~ for the three months ended June 30, ~~2016, compared to $12.3 million, or 1.4%~~2016. Bad debt expense as a percentage of net operating revenues was 1.6% for both the three months ended June 30, ~~2015.~~2017 and 2016.

Adjusted EBITDA

Specialty ~~Hospitals.~~ Hospitals Segment.Adjusted EBITDA increased 18.7% to $98.2 million for ~~our specialty hospitals was~~the three months ended June 30, 2017, compared to $82.7 million for the three months ended June 30, 2016 for our specialty hospitals segment. Our Adjusted EBITDA margin for the segment was 16.3% for the three months ended June 30, 2017, compared to ~~$91.4~~14.1% for the three months ended June 30, 2016. The increase in Adjusted EBITDA for our specialty hospitals segment was primarily driven by the improved operating performance of our LTCHs, reductions in Adjusted EBITDA losses in our start-up specialty hospitals, and the closure of specialty hospitals which had generated Adjusted EBITDA losses during the three months ended June 30, 2016. Adjusted EBITDA losses in our start-up specialty hospitals were $1.2 million for the three months ended June 30, ~~2015. Our Adjusted EBITDA margin for the segment was 14.1%~~2017, compared to $6.6 million for the three months ended June 30, ~~2016, compared~~2016.

Outpatient Rehabilitation Segment. Adjusted EBITDA increased 9.9% to ~~15.4%~~$41.9 million for the three months ended June 30, 2015. The reduction in Adjusted EBITDA and Adjusted EBITDA margin for our specialty hospitals segment was attributable to a decline in Adjusted EBITDA in our LTCHs, which was principally the result of a decrease in Medicare patient days as discussed above under “~~Net Operating Revenues.~~~~” We also experienced a decline in Adjusted EBITDA and Adjusted EBITDA margin~~

~~resulting from start-up specialty hospitals which incurred $6.6 million of Adjusted EBITDA losses in the three months ended June 30, 2016, as discussed under “~~~~Summary Financial Results~~~~” above.~~

~~Outpatient Rehabilitation.~~ ~~Adjusted EBITDA for our outpatient rehabilitation segment increased 32.8%~~2017, compared to $38.1 million for the three months ended June 30, 2016 ~~compared to $28.7 million~~for our outpatient rehabilitation segment. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 16.2% for the three months ended June 30, ~~2015. Our contract therapy businesses, sold on March 31, 2016, contributed $2.7 million of Adjusted EBITDA~~2017, compared to ~~the outpatient rehabilitation segment~~14.8% for the three months ended June 30, ~~2015.~~2016. The increase in Adjusted EBITDA for our outpatient rehabilitation segment was ~~attributable~~due to ~~growth at our existing clinics and from clinics acquired~~improved operating performance as a result of lower cost of services during ~~the year. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 14.8% for~~ the three months ended June 30, ~~2016, compared to 13.8% for the three months ended June 30, 2015. The increase was principally due to the sale of our contract therapy businesses.~~2017.

Concentra Segment. Adjusted EBITDA was $43.1 million for ~~our Concentra segment was~~the three months ended June 30, 2017, compared to $43.0 million for the three months ended June 30, 2016 ~~compared to $11.2 million~~ for ~~the three months ended June 30, 2015, which includes results beginning June 1, 2015.~~our Concentra segment. Our Adjusted EBITDA margin for the Concentra segment was 16.5% for the three months ended June 30, 2017, compared to 16.9% for the three months ended June 30, ~~2016, compared~~2016. The decline in our Adjusted EBITDA margin for our Concentra segment was the result of higher operating expenses, principally related to ~~12.9%~~increased labor costs, relative to our net operating revenues.

Other. The Adjusted EBITDA loss was $24.5 million for the three months ended June 30, ~~2015, which was principally due~~2017, compared to ~~cost reductions.~~

~~Other.~~ an Adjusted EBITDA loss ~~was~~of $22.5 million for the three months ended June 30, ~~2016, compared to an~~2016. The increase in our Adjusted EBITDA loss ~~of $16.5~~was due to an increase in general and administrative costs, which encompass our corporate shared service activities.

Depreciation and Amortization

Depreciation and amortization expense was $38.3 million for the three months ended June 30, ~~2015.~~2017, compared to $36.2 million for the three months ended June 30, 2016. The increase was principally due to new inpatient rehabilitation facilities operating in our specialty hospitals segment.

~~Depreciation and Amortization~~Income from Operations

For the three months ended June 30, ~~2016, depreciation and amortization expense was $36.2~~2017, we had income from operations of $115.7 million, compared to ~~$21.8~~$101.1 million for the three months ended June 30, ~~2015.~~2016. The increase ~~was principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016.~~

~~Income from Operations~~

~~For the three months ended June 30, 2016, we had~~in income from operations resulted principally from the improved operating performance of ~~$101.1 million, compared to $85.0 million for the three months ended June 30, 2015.~~ ~~The increase was principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016.~~our specialty hospitals segment.

Equity in Earnings of Unconsolidated Subsidiaries

For the three months ended June 30, ~~2016,~~2017, we had equity in earnings of unconsolidated subsidiaries of ~~$4.5~~$5.7 million, compared to ~~equity in earnings of unconsolidated subsidiaries of $3.8~~$4.5 million for the three months ended June 30, ~~2015.~~2016. The increase in our equity in earnings of unconsolidated subsidiaries resulted principally from ~~increased earnings associated with several~~improved performance of ~~our~~the inpatient rehabilitation ~~joint ventures~~businesses in which we ~~own~~have a ~~non-controlling~~minority interest.

Non-Operating Gain

~~For~~We recognized a non-operating gain of $13.0 million during the three months ended June 30, ~~2016, we had a non-operating gain of $13.0 million.~~2016. The non-operating gain was principally due to the sale of nine outpatient rehabilitation clinics and the ~~transfer~~sale of five specialty hospitals in an exchange ~~transaction, as discussed above under “~~~~Significant Events.~~”transaction.

Interest Expense

Interest expense was $37.7 million for the three months ended June 30, 2017, compared to $44.3 million for the three months ended June 30, ~~2016, compared to $25.3 million for the three months ended June 30, 2015.~~2016. The ~~increase~~decrease in interest expense was principally ~~due to increases~~the result of decreases in our ~~indebtedness as a result~~interest rates associated with the refinancing of the ~~acquisition~~Select credit facilities during the first quarter of 2017 and the Concentra ~~on June 1, 2015 and Physiotherapy on March 4,~~credit facilities during the third quarter of 2016.

Income Taxes

We recorded income tax expense of $32.4 million for the three months ended June 30, 2017, which represented an effective tax rate of 38.7%. We recorded income tax expense of $33.5 million for the three months ended June 30, ~~2016. The expense~~2016, which represented an effective tax rate of 45.0%. ~~We recorded income tax expense of $23.5 million for the three months ended June 30, 2015. The expense represented an effective tax rate of 37.0%.~~

Our quarterly effective income tax rate is derived from our full year estimated effective income tax rate and can be impacted by discrete items specific to a particular quarter and quarterly changes in our full year tax provision estimate. During the three months ended June 30, 2016, we exchanged five specialty ~~hospitals in a hospital swap transaction.~~hospitals. For tax purposes, the exchange was treated as a discrete tax event ~~particular to~~during the ~~quarter~~three months ended June 30, 2016. Our tax basis in the five specialty hospitals was less than our book basis, ~~and resulted~~resulting in a tax gain exceeding our book gain. The additional tax expense resulting from this gain was the principal cause of the ~~increase in the~~higher effective tax ~~rate.~~rate during this period.

~~Non-controlling~~Net Income Attributable to Non-Controlling Interests

~~Non-controlling~~Net income attributable to non-controlling interests ~~in consolidated earnings were~~was $9.2 million for the three months ended June 30, 2017, compared to $6.9 million for the three months ended June 30, ~~2016, compared to $3.1 million for the three months ended June 30, 2015.~~2016. The increase is principally due ~~to the acquisition of Concentra. These amounts represent~~ the minority ~~owner’s~~interest owners’ share of income from Concentra and ~~losses for these consolidated entities.~~new inpatient rehabilitation facilities operating within our specialty hospitals segment.

Six Months Ended June 30, ~~2016~~2017 Compared to Six Months Ended June 30, ~~2015~~2016

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain, ~~(loss),~~ interest expense, income taxes, and net income attributable to non-controlling ~~interest,~~interests, which, in each case, are the same for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased ~~by 29.9%~~2.1% to ~~$2,186.0~~$2,232.0 million for the six months ended June 30, ~~2016,~~2017, compared to ~~$1,682.4~~$2,186.0 million for the six months ended June 30, ~~2015, principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4,~~ 2016.

Specialty Hospitals Segment.~~. Our specialty hospitals segment net~~ Net operating revenues ~~declined 0.5%~~increased 1.3% to $1,199.7 million for the six months ended June 30, 2017, compared to $1,184.8 million for the six months ended June 30, 2016 ~~compared~~for our specialty hospitals segment. The increase in net operating revenues is principally due to ~~$1,191.1 million~~several new inpatient rehabilitation facilities which recently commenced operations. The average net revenue per patient day for our specialty hospitals increased 4.1% to $1,723 for the six months ended June 30, ~~2015. The primary reason~~2017, compared to $1,655 for ~~this decrease was a decline in our~~the six months ended June 30, 2016. For the six months ended June 30, 2017, we had 634,249 patient days, ~~which decreased 5.8%~~compared to 655,090 days for the six months ended June 30, ~~2016, compared~~2016. The decrease in patient days is principally due to ~~695,754 days~~closed specialty hospitals.

Outpatient Rehabilitation Segment. Net operating revenues increased 3.8% to $513.9 million for the six months ended June 30, ~~2015. As discussed above under “~~~~Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria~~,” new Medicare regulations, which establish new payment limits for Medicare patients discharged from an LTCH who do not meet specified patient criteria, began to be phased in to our LTCHs in the fourth quarter of 2015. We experienced fewer Medicare patient days due to changes we implemented at LTCHs operating under the new Medicare patient criteria regulations and specialty hospital closures.

This decrease in patient days was offset in part by increases in our Medicare net revenue per patient day. Our average net revenue per patient day for all of our specialty hospitals increased 4.5% to $1,655 for the six months ended June 30, 2016,2017, compared to $1,583 for the six months ended June 30, 2015, principally as a result of increases in our Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from the increase in patient acuity at LTCHs now operating under the Medicare patient criteria regulations. Our occupancy percentage declined to 70% for the six months ended June 30, 2016, compared to 72% for the six months ended June 30, 2015.

~~Outpatient Rehabilitation~~~~. Our outpatient rehabilitation segment net operating revenues increased 22.5%~~ to $495.0 million for the six months ended June 30, 2016 ~~compared to $404.2 million~~ for ~~six months ended June 30, 2015. This~~our outpatient rehabilitation segment. The increase in net operating revenues was principally due to ~~an increase in visits resulting principally from our newly acquired outpatient rehabilitation clinics and~~the acquisition of Physiotherapy on March 4, 2016, which contributed to the overall growth in our ~~existing owned outpatient rehabilitation clinics. Net revenue per visit~~visits. The increase in net operating revenues was offset in part by the sale of our ~~owned outpatient rehabilitation clinics was $102~~contract therapy businesses on March 31, 2016. Visits increased 13.1% to 4,182,550 for the six months ended June 30, ~~2016,~~2017, compared to ~~$103~~3,698,884 visits for the six months ended June 30, ~~2015.~~2016. Net revenue per visit was $102 for both the six months ended June 30, 2017 and 2016.

Concentra ~~Segment~~Segment.. Net operating revenues ~~were~~increased 2.4% to $517.7 million for the six months ended June 30, 2017, compared to $505.7 million for the six months ended June 30, 2016 ~~compared~~for our Concentra segment. The increase in net operating revenues was due to ~~$86.8 million~~an increase in visits principally from newly acquired and developed medical centers. Visits in our centers increased 3.6% to 3,869,070 for the six months ended June 30, ~~2015, which includes results beginning June 1, 2015. Net revenue per visit was $118 and~~2017, compared to 3,736,063 visits ~~were 3,736,063 in the centers~~ for the six months ended June 30, ~~2016, compared~~2016. The increase in visits principally related to ~~net~~our employer services. Net revenue per visit ~~of $112 and 673,834 visits in the centers~~was $117 for the six months ended June 30, ~~2015,~~2017, compared to $118 for the six months ended June 30, 2016. The decrease in net revenue per visit is principally due to an increased proportion of employer service visits, which ~~includes results beginning June 1, 2015.~~yield lower per visit rates.

Operating Expenses

Our operating expenses include our cost of services, general and administrative expense, and bad debt expense. Our operating expenses ~~increased~~were $1,943.7 million, or 87.0% of net operating revenues, for the six months ended June 30, 2017, compared to $1,927.3 million, or 88.2% of net operating revenues, for the six months ended June 30, 2016, compared to $1,478.9 million, or 87.9% of net operating revenues, for the six months ended June 30, 2015. The increase in operating expenses is principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016. Our cost of services, a major component of which is labor expense, was $1,848.6 million, or 82.8% of net operating revenues, for the six months ended June 30, 2017, compared to $1,839.2 million, or 84.1% of net operating revenues, for the six months ended June 30, ~~2016, compared~~2016. The decrease in our operating expenses relative to ~~$1,408.3 million, or 83.7% of~~our net operating revenues ~~for the six months ended June 30, 2015. The increase in cost of services as a percentage of net operating revenues resulted~~is principally from Concentra and an increase in expenses relative to revenues at our specialty hospitals. Our specialty hospitals labor costs increased as a result of higher labor costs associated with the increased patient acuity and higher wage rates for clinicians we are experiencing at our LTCHs now operating under the Medicare patient criteria regulations. We also maintained certain staffing levels at our specialty hospitals, even though we experienced declines in patient volumes during the six months ended June 30, 2016, due to the ~~difficulties in rehiring staff should patient volumes increase.~~improved operating performance of our start-up specialty hospitals, specialty hospitals closures, and cost reductions achieved by Concentra. Facility rent expense, a component of cost of services, was $113.8 million for the six months ended June 30, 2017, compared to $109.0 million for the six months ended June 30, ~~2016, compared to $71.1~~2016. General and administrative expenses were $56.4 million for the six months ended June 30, ~~2015. General and administrative expenses were~~2017, compared to $54.1 million for the six months ended June 30, 2016, which ~~included~~includes $3.2 million of Physiotherapy ~~acquisition costs, compared to $45.7 million for the six months ended June 30, 2015, which included $4.7 million of Concentra~~ acquisition costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for both the six months ended June 30, ~~2016~~2017 and ~~2.7%~~2016. Our bad debt expense was $38.8 million, or 1.7% of net operating revenues, for the six months ended June 30, ~~2015. Our general and administrative function includes our shared services activities which have grown and expanded as a result of our significant business acquisitions. Our bad debt expense was~~2017, compared to $33.9 million, or 1.6% of net operating revenues, for the six months ended June 30, ~~2016, compared to $25.0 million, or 1.5%~~2016. The increase was principally the result of ~~net operating revenues, for the six months ended June 30, 2015.~~increases in bad debt expense in our specialty hospitals and Concentra segments.

Adjusted EBITDA

Specialty ~~Hospitals.~~ Hospitals Segment.Adjusted EBITDA increased 10.2% to $186.8 million for ~~our specialty hospitals was~~the six months ended June 30, 2017, compared to $169.5 million for the six months ended June 30, 2016 for our specialty hospitals segment. Our Adjusted EBITDA margin for the segment was 15.6% for the six months ended June 30, 2017, compared to ~~$187.9~~14.3% for the six months ended June 30, 2016. The increase in Adjusted EBITDA for our specialty hospitals segment was primarily driven by the improved operating performance of our LTCHs, reductions in Adjusted EBITDA losses in our start-up specialty hospitals, and the closure of specialty hospitals which had generated Adjusted EBITDA losses during the six months ended June 30, 2016. Adjusted EBITDA losses in our start-up specialty hospitals were $3.2 million for the six months ended June 30, ~~2015. Our Adjusted EBITDA margin for the segment was 14.3% for the six months ended June 30, 2016,~~2017, compared to 15.8% for the six months ended June 30, 2015. The reduction in Adjusted EBITDA and Adjusted EBITDA margin for our specialty hospitals segment was attributable to a decline in Adjusted EBITDA in our LTCHs, which was principally the result of a decrease in patient days as discussed above under “~~Net Operating Revenues”~~ ~~and increases in our cost of services as discussed above under ‘‘~~~~Operating Expenses~~~~.’’ We also experienced a decline in Adjusted EBITDA and Adjusted EBITDA margin resulting from start-up hospitals which incurred~~ $10.5 ~~million of Adjusted EBITDA losses in the six months ended June 30, 2016, compared to $8.8~~ million for the six months ended June 30, ~~2015, as discussed under “~~~~Summary Financial Results~~~~” above.~~2016.

Outpatient ~~Rehabilitation.~~ Rehabilitation Segment.Adjusted EBITDA increased 9.4% to $73.3 million for ~~our outpatient rehabilitation segment increased 31.8%~~the six months ended June 30, 2017, compared to $67.0 million for the six months ended June 30, 2016 ~~compared~~for our outpatient rehabilitation segment. The increase in Adjusted EBITDA was principally due to ~~$50.9 million for the six months ended June 30, 2015.~~growth in visits, as discussed above under “Net Operating Revenues.” Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 14.3% for the six months ended June 30, 2017, compared to 13.5% for the six months ended June 30, ~~2016, compared to 12.6% for the six months ended June 30, 2015.~~2016. The increase was principally due to the sale of our contract therapy ~~businesses.~~businesses on March 31, 2016, which operated at lower Adjusted EBITDA margins than our outpatient rehabilitation clinics.

Concentra Segment. Adjusted EBITDA increased 11.0% to $85.7 million for ~~our Concentra segment was~~the six months ended June 30, 2017, compared to $77.2 million for the six months ended June 30, 2016 for our Concentra segment. Our Adjusted EBITDA margin for the Concentra segment was 16.5% for the six months ended June 30, 2017, compared to ~~$11.2~~15.3% for the six months ended June 30, 2016. The increase in Adjusted EBITDA for our Concentra segment was principally the result of cost reductions we have achieved.

Other. The Adjusted EBITDA loss was $48.2 million for the six months ended June 30, ~~2015, which includes results beginning June 1, 2015. Our adjusted EBITDA margin for the Concentra segment was 15.3% for the six months ended June 30, 2016,~~2017, compared to ~~12.9% for the six months ended June 30, 2015.~~

~~Other.~~ an Adjusted EBITDA loss ~~was~~of $43.6 million for the six months ended June 30, ~~2016, compared to an Adjusted EBITDA loss of $36.1 million for the six months ended June 30, 2015.~~2016.

Depreciation and Amortization

~~For the six months ended June 30, 2016, depreciation~~Depreciation and amortization expense was ~~$70.7 million, compared to $39.2~~$80.9 million for the six months ended June 30, ~~2015.~~2017, compared to $70.7 million for the six months ended June 30, 2016. The increase was principally due to ~~the acquisitions of Concentra on June 1, 2015, and Physiotherapy on March 4, 2016.~~new inpatient rehabilitation facilities operating in our specialty hospitals segment.

Income from Operations

For the six months ended June 30, ~~2016,~~2017, we had income from operations of ~~$187.9~~$207.4 million, compared to ~~$164.3~~$187.9 million for the six months ended June 30, ~~2015.~~2016. The increase ~~was~~in income from operations resulted principally ~~due to~~from the ~~acquisitions~~improved operating performance of our specialty hospitals and Concentra ~~on June 1, 2015, and Physiotherapy on March 4, 2016.~~segments.

Loss on Early Retirement of Debt

On March ~~4, 2016,~~6, 2017, we ~~repaid the Series D Tranche B Term Loans under the Select~~refinanced Select’s senior secured credit ~~facilities. During~~facilities which resulted in losses on early retirement of debt of $19.7 million during the six months ended June 30, 2017.

On March 4, 2016, we ~~recognized~~refinanced a portion of our term loans under Select’s 2011 senior secured credit facility which resulted in a loss on early retirement of debt of $0.8 ~~million.~~million during the six months ended June 30, 2016.

Equity in Earnings of Unconsolidated Subsidiaries

For the six months ended June 30, ~~2016,~~2017, we had equity in earnings of unconsolidated subsidiaries of ~~$9.2~~$11.2 million, compared to ~~equity in earnings of unconsolidated subsidiaries of $6.4~~$9.2 million for the six months

ended June 30, ~~2015.~~2016. The increase in our equity in earnings of unconsolidated subsidiaries resulted principally from ~~increased earnings associated with several~~improved performance of ~~our~~the inpatient rehabilitation ~~joint ventures~~businesses in which we ~~own~~have a ~~non-controlling~~minority interest.

Non-Operating Gain

~~For~~We recognized a non-operating gain of $38.1 million during the six months ended June 30, ~~2016, we had a non-operating gain of $38.1 million.~~2016. The non-operating gain was principally due to the sale of our contract therapy businesses during the ~~first~~ quarter ended March 31, 2016, as well as the sale of nine outpatient rehabilitation clinics and the ~~transfer~~sale of five specialty hospitals in an exchange transaction during the ~~second~~ quarter ~~as discussed above under “~~~~Significant Events.~~~~” Additionally, we recognized an impairment loss of $5.3 million during the first quarter on an investment in which we were a minority owner.~~ended June 30, 2016.

Interest Expense

Interest expense was ~~$83.2~~$78.5 million for the six months ended June 30, ~~2016,~~2017, compared to $46.7 million for the six months ended June 30, 2015. The increase in interest expense was principally due to increases in our indebtedness as a result of the acquisition of Concentra and Physiotherapy.

~~Income Taxes~~

~~We recorded income tax expense of $50.5~~$83.2 million for the six months ended June 30, 2016. The decrease in interest expense ~~represented an effective tax rate~~was principally the result of ~~33.4%.~~ decreases in our interest rates associated with the refinancing of the Select credit facilities during the first quarter of 2017 and the Concentra credit facilities during the third quarter of 2016.

Income Taxes

We recorded income tax expense of ~~$46.7~~$45.6 million for the six months ended June 30, ~~2015. The expense~~2017, which represented an effective tax rate of ~~37.7%~~37.9% We recorded income tax expense of $50.5 million for the six months ended June 30, 2016, which represented an effective tax rate of 33.4%.

Our effective income tax rate is derived from our full year estimated effective income tax rate and can be impacted by discrete items specific to a particular quarter and quarterly changes in our full year tax provision estimate. On March 31, 2016, we sold our contract therapy businesses. ~~For tax purposes, the sale was treated as a discrete tax event particular to the first quarter of 2016.~~ Our tax basis in our contract therapy businesses exceeded our selling price. As a result, we had no tax expense from the sale. Additionally, during the three months ended June 30, 2016, we exchanged five specialty ~~hospitals in a hospital swap transaction. For tax purposes, the exchange was treated as a discrete tax event particular to the second quarter of 2016.~~hospitals. Our tax basis in the five specialty hospitals was less than our book basis, ~~and resulted~~resulting in a tax gain exceeding our book gain. The lower effective tax rate for the six months ended June 30, 2016 resulted from the net effects of the two discrete tax events discussed above.

Net Income Attributable to Non-Controlling Interests

~~Non-controlling~~Net income attributable to non-controlling interests ~~in consolidated earnings were $12.0~~was $16.8 million for the six months ended June 30, ~~2016,~~2017, compared to ~~$5.3~~$12.0 million for the six months ended June 30, ~~2015.~~2016. The increase is principally due ~~to the acquisition of Concentra. These amounts represent~~ the minority ~~owner’s~~interest owners’ share of income ~~and losses for these consolidated entities.~~from Concentra.

Liquidity and Capital Resources

Cash Flows for the Six Months Ended June 30, ~~2016~~2017 and Six Months Ended June 30, ~~2015~~2016

For the Six Months Ended June 30,

2015

2016

(in thousands)

Cash provided by operating activities

$
75,060

$
177,969

Cash used in investing activities

(1,117,764
)
(432,001
)
Cash provided by financing activities

1,064,541

318,017

Increase in cash and equivalents

21,837

63,985

Cash and equivalents at beginning of period

3,354

14,435

Cash and equivalents at end of period

$
25,191

$
78,420

In the following, we discuss cash flows from operating activities, investing activities, and financing activities, which, in each case, are the same for Holdings and Select.

	Six Months Ended June 30,
	2016			2017
	(in thousands)
Cash flows provided by operating activities	$	178,238		$	40,340
Cash flows used in investing activities	(432,001		)	(99,132		)
Cash flows provided by financing activities	317,748			33,562
Net increase (decrease) in cash and cash equivalents	63,985			(25,230		)
Cash and cash equivalents at beginning of period	14,435			99,029
Cash and cash equivalents at end of period	$	78,420		$	73,799

Operating activities provided ~~$178.0~~$40.3 million of cash flows for the six months ended June 30, ~~2016, compared to $75.1 million of cash flows provided for the six months ended June 30, 2015.~~2017. The ~~increase~~decrease in operating cash flows for the six months ended June 30, ~~2016~~2017 compared to the six months ended June 30, ~~2015~~2016 is principally due to ~~cash flows provided from Concentra which was acquired on June 1, 2015, Physiotherapy which was acquired on March 4, 2016, an increase~~increases in ~~the turnover of~~ our accounts ~~receivable, and cash distributions we received from unconsolidated investments in which we are minority owners.~~

receivable. Our days sales outstanding ~~were 51~~was 58 days at June 30, ~~2016,~~2017, compared to 5351 days at both December 31, ~~2015~~2016 and ~~55 days at~~ June 30, ~~2015.~~2016. Our days sales outstanding will fluctuate based upon variability in our collection cycles. ~~Our~~The increase in our days sales outstanding atand related decline in our operating cash flows is primarily related to the current underpayments we are receiving through the periodic interim payment program from Medicare in our LTCHs. These underpayments will be corrected in future months as our periodic interim payments are reconciled and reset by our fiscal intermediaries.

Investing activities used $99.1 million for the six months ended June 30, ~~2016, December 31, 2015~~2017. The principal use of cash was $105.3 million for purchases of property and ~~June 30, 2015 all fall within our expected range.~~

equipment and $18.5 million for the acquisition of businesses, offset in part by $34.6 million of proceeds from the sale of assets. Investing activities used $432.0 million of cash ~~flow~~flows for the six months ended June 30, 2016, principally due to the acquisition of Physiotherapy. ~~Investing~~

Financing activities ~~also included $80.3 million for purchases of property and equipment, offset in part by proceeds from the sale of businesses of $71.4 million. Investing activities used $1,117.8~~provided $33.6 million of cash ~~flow~~flows for the six months ended June 30, ~~2015, principally due to $1,045.0~~2017. The principal source of cash was $80.0 million of net borrowings under the Select revolving facility, offset in part by $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities, $2.9 million of cash used for a term loan payment associated with the Select credit facilities, and cash used for the payment of financing costs related to the ~~Concentra acquisition and $68.9 million for purchases~~refinancing of ~~property and equipment.~~the Select credit facilities.

Financing activities ~~for Select~~ provided ~~$318.0~~$317.7 million of cash ~~flow~~flows for the six months ended June 30, 2016. The principal source of cash was the issuance of $625.0 million ~~aggregate principal amount~~ of ~~Series~~series F ~~Tranche~~tranche B ~~Term Loans under the Select credit facilities,~~term loans, resulting in net proceeds of $600.1 million, offset by $215.7 million of cash used to repay the ~~Series~~series D ~~Tranche~~tranche B ~~Term Loans under the Select credit facilities~~term loans and $60.0 million of net repayments under the Select revolving ~~facility~~facility.

Financing activities provided $1,064.5 million of cash flow for the six months ended June 30, 2015. The principal sources of cash for financing activities were $260.0 million of net borrowings under the Select revolving facility, $623.6 million borrowed under the Concentra credit facilities, and $217.1 million attributable to a non-consolidating interest in Group Holdings.

Capital Resources

Working ~~capital~~capital. - We had net working capital of ~~$289.7~~$302.4 million at June 30, ~~2016~~2017, compared to ~~net working capital of $19.9~~$191.3 million at December 31, ~~2015.~~2016. The increase in net working capital is primarily due to ~~the extinguishment of Series D Tranche B Term Loans, which were classified as a current liability at December 31, 2015, and~~ an increase in ~~cash over the six months ended June 30, 2016.~~our accounts receivable.

Select credit ~~facilities~~facilities. - On March ~~2, 2016,~~6, 2017, Select ~~made~~entered into a ~~principal prepayment~~new senior secured credit agreement that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a $450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for the issuance of ~~$10.2 million associated with the~~standby letters of credit. Select ~~term loans in accordance with the provision in~~used borrowings under the Select credit facilities ~~that requires mandatory prepayments~~to: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term ~~loans as a result of annual excess cash flow as~~loan, Adjusted LIBO (as defined in the Select credit ~~facilities.~~agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.

At June 30, ~~2016,~~2017, Select had outstanding borrowings under the Select credit facilities consisting of ~~$1,150.9~~a $1,147.1 million of Select term ~~loans~~loan (excluding unamortized discounts and debt issuance costs of ~~$29.8~~$27.0 million) and borrowings of ~~$240.0~~$300.0 million (excluding letters of credit) under the Select revolving facility. ~~After giving effect to $39.7 million of outstanding letters of credit at~~At June 30, ~~2016,~~2017, Select had ~~$170.3~~$111.4 million of availability under the Select revolving ~~facility.~~

~~The Select credit facilities require Select~~facility after giving effect to maintain certain leverage ratios (as defined in the Select credit facilities). For the quarter ended June 30, 2016, Select was required to maintain its leverage ratio at less than 5.75 to 1.00. Select’s leverage ratio was 5.00 to 1.00 as$38.6 million of ~~June 30, 2016.~~outstanding letters of credit.

Concentra credit ~~facilities~~facilities. - Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select, it is included in Select’s consolidated financial statements.

On March 1, 2017, Concentra made a principal prepayment of $23.1 million associated with its first lien term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.

At June 30, ~~2016,~~2017, Concentra had outstanding borrowings ~~of $645.5 million~~ under the Concentra credit facilities of $619.2 million of first lien term loans (excluding unamortized discounts and debt issuance costs of ~~$21.4~~$14.4 million)~~. Concentra did not have any~~ and no borrowings under the Concentra revolving facility. ~~After giving effect to $7.8 million of outstanding letters of credit at~~At June 30 ~~2016,~~2017, Concentra had ~~$42.2~~$43.4 million of availability under its revolving ~~facility.~~facility after giving effect to $6.6 million of outstanding letters of credit.

Stock Repurchase ~~Program~~Program. - Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2018, and will remain in effect until ~~December 31, 2016,~~then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings ~~is funding~~funds this program with cash on hand and borrowings under ~~Select’s~~the Select revolving ~~credit~~ facility. Holdings did not repurchase shares during the ~~six~~three months ended June 30, ~~2016.~~2017. Since the inception of the program through June 30, ~~2016,~~2017, Holdings has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 per share, which includes transaction costs.

~~Liquidity~~Liquidity. - We believe our internally generated cash flows and borrowing capacity under the Select and Concentra credit facilities will be sufficient to finance operations over the next twelve months. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Use of Capital ~~Resources~~Resources. - We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers, and from time to time we may also develop new inpatient rehabilitation ~~hospitals.~~hospitals and occupational medicine centers. We also intend to open new outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow ~~our business~~ through opportunistic acquisitions.

Recent Accounting Pronouncements

In ~~March~~January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

In October 2016, the ~~Financial Accounting Standards Board (the “FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”) 2016-09,~~ASU 2016-16, ~~Compensation-Stock Compensation~~Income Taxes (Topic 740), ~~which simplifies various aspects~~Intra-Entity Transfers of ~~accounting~~Assets Other Than Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for ~~share-based payments~~an intra-entity asset transfer until the asset has been sold to ~~employees.~~an outside party. The ~~areas for simplification involve several aspects of the accounting for employee share-based payment transactions, including~~ASU requires an entity to recognize the income tax consequences ~~classification~~ of ~~awards as either equity or liabilities, and classification on~~an intra-entity transfer of an asset other than inventory when the ~~statement of cash flows.~~transfer occurs. The standard will be effective for fiscal years beginning after December 15, ~~2016.~~2017. The Company ~~is currently evaluating~~plans to adopt the ~~standard~~guidance effective January 1, 2018. Adoption of the guidance will be applied on a modified retrospective approach through a cumulative effect adjustment to ~~determine~~retained earnings as of the ~~impact it will have on its consolidated financial statements.~~effective date.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU includes a lessee accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The original standards were effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards, with a new effective date for fiscal years beginning after December 15, 2017. The standards require the selection of a ~~modified~~ retrospective or cumulative effect transition ~~method for retrospective application.~~ method.

The Company will implement the new standard beginning January 1, 2018 using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change is ~~currently evaluating~~how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of June 30, 2016 and June 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards ~~to determine~~on January 1, 2018.

The Company’s remaining implementation efforts are focused principally on refining the ~~impact they will have on its consolidated financial statements.~~accounting processes, disclosure processes, and internal controls.

Recently Adopted Accounting Pronouncements

In ~~April and August~~November 2015, the FASB issued ASU ~~2015-03 and ASU 2015-15, each titled~~No. 2015-17, ~~Interest- Imputation~~Balance Sheet Classification of ~~Interest~~Deferred Taxes, ~~to simplify~~which changed the presentation of ~~debt issuance costs.~~deferred income taxes. The standard ~~requires debt issuance costs~~changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be ~~presented~~classified as noncurrent in ~~the balance sheet as~~ a ~~direct deduction from the carrying value~~classified statement of ~~the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as an asset and amortized over the term of the arrangement.~~financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at ~~the beginning~~December 31, 2016 has been retrospectively adjusted. Adoption of the ~~first quarter of 2016. The balance sheet~~new standard impacted the Company’s previously reported results as of December 31, 2015 was retrospectively conformed to reflect the adoption of the standard and approximately $38.0 million of unamortized debt issuance costs are now classified as a direct reduction of debt, rather than a component of other assets.follows:

	December 31, 2016
	As Reported		As Adjusted
	(in thousands)
Current deferred tax asset	$	45,165	$	—
Total current assets	808,068		762,903
Other assets	152,548		173,944
Total assets	4,944,395		4,920,626

Non-current deferred tax liability	222,847		199,078
Total liabilities	3,616,335		3,592,566
Total liabilities and equity	4,944,395		4,920,626

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Quantitative and Qualitative Disclosures about Market Risk~~

We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under the Select credit facilities and Concentra credit facilities.

As of June 30, ~~2016,~~2017, Select had ~~$1,150.9~~a $1,147.1 million term loan (excluding unamortized discounts and debt issuance ~~costs) in term loans~~costs of $27.0 million) outstanding ~~under the Select credit facilities~~ and ~~$240.0~~$300.0 million in revolving borrowings outstanding under the Select credit facilities, which bear interest at variable rates.

As of June 30, ~~2016,~~2017, Concentra had ~~outstanding borrowings under the Concentra credit facilities~~$619.2 million of ~~$645.5 million~~first lien term loans (excluding unamortized discounts and debt issuance ~~costs)~~costs of ~~term loans,~~$14.4 million) outstanding under the Concentra credit facilities, which bear interest at variable rates. Concentra did not have any outstanding revolving ~~borrowings. Certain of Select’s and Concentra’s outstanding~~ borrowings ~~that bear interest~~ at ~~variable rates were effectively fixed as of~~ June 30, ~~2016 based upon then current interest rates because the Adjusted LIBO Rate did not then exceed the applicable Adjusted LIBO Rate floors for such borrowings:~~2017.

· ~~Select’s aggregate $527.5 million in Series E Tranche B Term Loans are subject to an Adjusted LIBO Rate floor of 1.00%~~At June 30, 2017, the 3-month LIBOR rate was 1.30%. ~~Therefore, until the Adjusted LIBO Rate exceeds 1.00%, Select’s interest rate on this indebtedness is effectively fixed at 6.00%.~~

· Select’s aggregate $623.4 million in Series F Tranche B Term Loans are subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, until the Adjusted LIBO Rate exceeds 1.00%, Select’s interest rate on this indebtedness is effectively fixed at 6.00%.

· the $445.5 million Concentra first lien term loan is subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, until the Adjusted LIBO Rate exceeds 1.00%, Concentra’s interest rate on this indebtedness is effectively fixed at 4.00%.

· the $200.0 million Concentra second lien term loan is subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, until the Adjusted LIBO Rate exceeds 1.00%, Concentra’s interest rate on this indebtedness is effectively fixed at 9.00%.

~~However, the Select and Concentra revolving borrowings are not subject to an Adjusted LIBO Rate floor.~~

~~The following table summarizes the impact of hypothetical increases~~Consequently, each 0.25% increase in market interest rates ~~as of June 30, 2016 on our consolidated interest expense over the subsequent twelve month period:~~

Increase in
Market
Interest Rate

Interest Rate Expense
Increases Per Annum
(in thousands)(1)

0.25
%
$
600.0

0.50
%
$
3,894.6

0.75
%
$
8,985.5

1.00
%
$
14,076.5

~~(1)~~ Based on the 3-month LIBOR rate of 0.65% as of June 30, 2016, a change in interest rates of up to 0.35% would only increase interest expense with respect to the Select and Concentra revolving borrowings, which are not subject to an Adjusted LIBO Rate floor. Increases in interest rates greater than 0.35% as of June 30, 2016 wouldwill impact the interest ~~rate paid~~expense on ~~all of~~ Select’s and Concentra’s variable rate debt ~~as indicated in the table above.~~by $5.2 million per annum.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective as of June 30, ~~2016~~2017 to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.

~~Physiotherapy Acquisition~~

On March 4, 2016, Select consummated the acquisition of Physiotherapy. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the second quarter ended June 30, ~~2016~~2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~Litigation~~

The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.

Evansville Litigation

of Justice notified the ~~court~~District Court of its decision not to intervene in the ~~case, and~~case.

the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

Knoxville Litigation

Wilmington Litigation

On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. The corporate defendants were served on March 6, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, on May 17, 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint, which is now pending, based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim.

The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.

Contract Therapy Subpoena

On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.

ITEM 1A. RISK FACTORS

There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2018 and will remain in effect until ~~December 31, 2016,~~then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings did not repurchase shares during the three months ended June 30, ~~2016~~2017 under the authorized common stock repurchase program.

The following table provides information regarding repurchases of our common stock during the three months ended June 30, ~~2016:~~

Total Number of Shares
Purchased(1)

Average Price
Paid Per Share

Total Number
of Shares Purchased as
Part of Publically
Announced Plans or
Programs

Approximate
Dollar Value of
Shares that May Yet Be
Purchased Under Plans or
Programs

April 1 - April 30, 2016

5,579

$
13.59

—

$
185,249,408

May 1 - May 31, 2016

32,467

13.24

—

185,249,408

June 1 - June 30, 2016

—

—

—

185,249,408

Total

38,046

$
13.29

—

$
185,249,408

~~(1)~~ ~~Represents~~2017. The shares repurchased during the three months ended June 30, 2017 relate entirely to shares of common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.

	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
April 1 - April 30, 2017	3,209	$	13.75	—	$	185,249,408
May 1 - May 31, 2017	29,165	13.70		—	185,249,408
June 1 - June 30, 2017	—	—		—	185,249,408
Total	32,374	$	13.70	—	$	185,249,408

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not ~~applicable.~~applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None.~~In light of the results of the advisory vote on the frequency of Say-On-Pay votes at our annual meeting of stockholders on May 2, 2017, our Board of Directors determined that the Company will continue to hold an advisory Say-on-Pay vote annually. Our Board of Directors will re-evaluate this determination no later than the next stockholder vote on the frequency of Say-on-Pay votes.

ITEM 6. EXHIBITS

The exhibits to this report are listed in the Exhibit Index appearing on page 6156 hereof.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized.

	SELECT MEDICAL CORPORATION


	By:	/s/	Martin F. Jackson
			Martin F. Jackson
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer)

	By:	/s/	Scott A. Romberger
			Scott A. Romberger
		Senior Vice President, Chief Accounting Officer and Controller
		(Principal Accounting Officer)

Dated: August ~~4, 2016~~3, 2017


	SELECT MEDICAL HOLDINGS CORPORATION


	By:	/s/	Martin F. Jackson
			Martin F. Jackson
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer)

	By:	/s/	Scott A. Romberger
			Scott A. Romberger
		Senior Vice President, Chief Accounting Officer and Controller
		(Principal Accounting Officer)

Dated: August ~~4, 2016~~3, 2017

EXHIBIT INDEX

~~Exhibit~~Number		Description

10.1		Second Amendment to ~~the~~ Lease Agreement, dated ~~June 1, 2016,~~as of May 30, 2017, between Old Gettysburg ~~II, LP~~Associates and Select Medical ~~Corporation.~~Corporation (Reg. Nos. 001-34465 and 001-31441).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2016~~2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and ~~2015,~~2017, (ii) Condensed Consolidated Balance Sheets as of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, (iii) Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2016 and ~~2015,~~2017, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the six months ended June 30, ~~2016~~2017 and (v) Notes to Condensed Consolidated Financial Statements.

6356

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		~~Smaller reporting~~ ~~company~~Emerging Growth Company o

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)		~~Smaller reporting~~ ~~company~~Emerging Growth Company o

PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6

	Condensed consolidated statements of cash flows	7

	Notes to condensed consolidated financial statements	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3130

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5650

ITEM 4.	CONTROLS AND PROCEDURES	5750

PART II	OTHER INFORMATION	5951

ITEM 1.	LEGAL PROCEEDINGS	5951

ITEM 1A.	RISK FACTORS	6053

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6053

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	6154

ITEM 4.	MINE SAFETY DISCLOSURES	6154

ITEM 5.	OTHER INFORMATION	6154

ITEM 6.	EXHIBITS	6154

SIGNATURES

						Select Medical Holdings Corporation Stockholders										Non-
	Comprehensive Income		Total			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			controlling Interests
Balance at December 31, 2015			$	908,517		131,283		$	131	$	424,506		$	434,616		$	49,264
Net income	$	90,774	90,774										88,768			2,006
Net income - attributable to redeemable non-controlling interests	10,023
Total comprehensive income	$	100,797
Issuance and vesting of restricted stock			7,786			149		0		7,786
Tax benefit from stock based awards			269							269
Repurchase of common shares			(506		)	(38	)	0		(238		)	(268		)
Stock option expense			4							4
Exercise of stock options			657			78		0		657
Non-controlling interests acquired in business combination			2,514													2,514
Distributions to non-controlling interests			(3,505		)											(3,505		)
Issuance of non-controlling interests			9,831													9,831
Purchase of redeemable non-controlling interests			320										320
Other			(4		)					(33		)	(441		)	470
Balance at June 30, 2016			$	1,016,657		131,472		$	131	$	432,951		$	522,995		$	60,580

						Select Medical Corporation Stockholders										Non-
	Comprehensive Income		Total			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings (Accumulated Deficit)			controlling Interests
Balance at December 31, 2015			$	908,517		0		$	0	$	904,375		$	(45,122	)	$	49,264
Net income	$	90,774	90,774										88,768			2,006
Net income - attributable to redeemable non-controlling interests	10,023
Total comprehensive income	$	100,797
Additional investment by Holdings			657							657
Dividends declared and paid to Holdings			(506		)								(506		)
Contribution related to restricted stock awards and stock option issuances by Holdings			7,790							7,790
Tax benefit from stock based awards			269							269
Non-controlling interests acquired in business combination			2,514													2,514
Distributions to non-controlling interests			(3,505		)											(3,505		)
Issuance of non-controlling interests			9,831													9,831
Purchase of redeemable non-controlling interests			320										320
Other			(4		)					(33		)	(441		)	470
Balance at June 30, 2016			$	1,016,657		0		$	0	$	913,058		$	43,019		$	60,580

Cash and cash equivalents	$	3,772
Identifiable tangible assets, excluding cash and cash equivalents	406,926
Identifiable intangible assets	254,990
Goodwill	651,152
Total assets	1,316,840
Total liabilities	248,797
Acquired non-controlling interests	17,084
Net assets acquired	1,050,959
Less: Cash and cash equivalents acquired	(3,772		)
Net cash paid	$	1,047,187

	Select			Concentra			Total
	(in thousands)
July 1, 2016 — December 31, 2016	$	8,880		$	3,559		$	12,439
2017	15,257			5,871			21,128
2018	771,228			4,597			775,825
2019	18,070			4,615			22,685
2020	6,288			4,636			10,924
2021 and beyond	1,305,313			628,965			1,934,278
Total principal	2,125,036			652,243			2,777,279
Unamortized discounts and premiums	(12,663		)	(2,677		)	(15,340		)
Unamortized debt issuance costs	(25,407		)	(18,710		)	(44,117		)
Total	$	2,086,966		$	630,856		$	2,717,822

	December 31, 2015						June 30, 2016
	Face Value		Carrying Value		Fair Value		Face Value		Carrying Value		Fair Value
	(in thousands)
Select 6.375% senior notes(1)	$	710,000	$	700,867	$	623,948	$	710,000	$	701,703	$	674,926
Select credit facilities(2)	1,048,277		1,038,071		1,023,616		1,390,877		1,361,105		1,376,415
Concentra credit facilities(3)	652,750		629,659		645,392		645,500		624,113		638,159

	As of June 30,
	2015		2016
	(in thousands)
Total assets:
Specialty hospitals	$	2,372,723	$	2,448,390
Outpatient rehabilitation	538,586		984,140
Concentra(3)	1,320,941		1,333,293
Other(1)	109,085		72,526
Total company	$	4,341,335	$	4,838,349

Increase in Market Interest Rate		Interest Rate Expense Increases Per Annum (in thousands)(1)
0.25	%	$	600.0
0.50	%	$	3,894.6
0.75	%	$	8,985.5
1.00	%	$	14,076.5

	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
April 1 - April 30, 2016	5,579	$	13.59	—	$	185,249,408
May 1 - May 31, 2016	32,467	13.24		—	185,249,408
June 1 - June 30, 2016	—	—		—	185,249,408
Total	38,046	$	13.29	—	$	185,249,408