8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): May 5, 2009

REHABCARE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-19294	51-0265872
(State or other jurisdiction	(Commission File Number)	(I.R.S. Employer
of incorporation)		Identification No.)

7733 Forsyth Boulevard
Suite 2300
St. Louis, Missouri	63105
(Address of principal executive offices)	(Zip Code)

(314) 863-7422

(Company’s telephone number, including area code)

Not applicable

(Former name or former address if changed since last report)

	Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions.
o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o	Pre-commencement communications pursuant to Rule 14d-2(b) under the  Exchange Act (17 CFR 240.14d-2(b))
o	Pre-commencement communications pursuant to Rule 13e-4(c) under the  Exchange Act (17 CFR 240.13e-4(c))

Item 2.02		Results of Operations and Financial Condition
		The information in Exhibit 99.1 is incorporated herein by reference.
Item 7.01		Regulation FD Disclosure
		The information in Exhibit 99.2 is incorporated herein by reference.
Item 9.01		Financial Statements and Exhibits
(d)		Exhibits
		The following exhibits are furnished pursuant to Item 2.02 and 7.01 hereof and should not be deemed to be “filed” under the Securities Exchange Act of 1934:
	99.1	Press release dated May 5, 2009, announcing our first quarter revenues and results of operations.
	99.2	The script for a conference call held by the registrant on May 6, 2009

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: May 6, 2009

REHABCARE GROUP, INC.

By: /s/	Jay W. Shreiner
	Jay W. Shreiner
	Executive Vice President and
	Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Description
99.1	Press release dated May 5, 2009, announcing our first quarter revenues and results of operations.
99.2	The script for a conference call held by the registrant on May 6, 2009

EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

Tuesday, May 5, 2009

REHABCARE REPORTS FIRST QUARTER

2009 RESULTS

·   Diluted earnings per share attributable to RehabCare increases to $0.48 in the first quarter of 2009 compared to $0.25 in the first quarter of 2008

·   First quarter consolidated operating revenues increase $21.1 million, or 11.6%, to $203.4 million compared to the prior year quarter, driven by growth in each core operating division

·   Skilled Nursing Rehabilitation Services division achieves 8.5% operating earnings margin; Company raises margin expectations for the remainder of  2009

·   Continued progress with Hospital division turnaround plan drives improved outlook for full year performance

ST. LOUIS, MO, May 5, 2009--RehabCare Group, Inc. (NYSE:RHB) today reported financial results for the quarter ended March 31, 2009. Comparative results for the quarter follow.

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 2

	First			Fourth			First
	Quarter			Quarter			Quarter
Amounts in millions, except per share data	2009			2008			2008
Consolidated Operating Revenues	$	203.4		$	194.2		$	182.4
Consolidated Operating Earnings  (a), (b)		14.4			9.4			8.6
Consolidated Earnings from Continuing Operations, Net of Tax		8.5			5.3			4.6
Loss from Discontinued Operations, Net of Tax		(0.1	)		(0.2	)		(0.2	)
Consolidated Net Earnings		8.4			5.1			4.4
Net Losses Attributable to Noncontrolling Interests		0.3			0.6			0.1
Net Earnings Attributable to RehabCare		8.7			5.7			4.5
Diluted Earnings per Share Attributable to RehabCare		0.48			0.32			0.25
Skilled Nursing Rehabilitation Services Operating Revenues (c)		123.1			118.1			112.5
Skilled Nursing Rehabilitation Services Operating Earnings (c)		10.5			8.6			4.1
HRS Inpatient Operating Revenues		31.8			32.4			29.8
HRS Outpatient Operating Revenues		11.3			11.3			10.4
HRS Operating Revenues		43.1			43.7			40.2
HRS Operating Earnings (a)		6.3			5.8			4.6
Hospital Operating Revenues		35.3			30.3			27.5
Hospital Operating Loss  (b)		(2.3	)		(4.8	)		(0.1	)
Healthcare Management Consulting Operating Revenues (c)		1.9			2.4			2.8
Healthcare Management Consulting Operating Earnings (Loss) (c)		—			(0.3	)		—

 (a) Includes a pretax charge arising from a bad debt write-down related to an outpatient transaction of $1.2 million, or $0.04 per diluted share after tax, in the quarter ended December 31, 2008

(b)   Includes a pretax charge related to the cancellation of a planned acquisition in Providence, RI and a long-term acute care hospital development project in Kokomo, IN of $1.5 million, or $0.05 per diluted share after tax, in the quarter ended December 31, 2008

 (c) In the first quarter of 2009, the Company’s VTA Management Services and Polaris Group subsidiaries, previously reported under Other Healthcare Services, were combined with Contract Therapy services and the new division was named Skilled Nursing Rehabilitation Services. The Other Healthcare Services division also was renamed Healthcare Management Consulting, which consists of Phase 2 Consulting.  Prior year amounts have been reclassified to reflect this change.  2008 consolidated quarterly financial results are unchanged.

“We were very pleased by a strong quarter of consolidated revenue and earnings growth,” said John H. Short, Ph.D, RehabCare President and Chief Executive Officer.

“A number of positive factors led to better than expected performance by our Skilled Nursing Rehabilitation Services (SRS) division (formerly the Contract Therapy division), including significant same store revenue growth, exceptional average daily census (ADC) and strong productivity.  While we were delighted with first quarter results, we are not convinced that record levels of productivity and ADC are sustainable throughout 2009 and believe that net unit growth may be impacted by the current credit environment.  We also likely will experience some downward pricing pressure in the fourth quarter as a result of the proposed rule for FY2010 Medicare reimbursement in skilled nursing facilities (SNFs).  A combination of these factors has led us to raise our targeted range for operating earnings margin in SRS to between 6.5% and 7.5% for the remainder of the year.”

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 3 

  Dr. Short continued, “We also are revising our outlook for the Hospital division, expecting total year operating losses of $8.4 to $9.4 million, a reduction of $4.5 to $5.5 million compared to fiscal year 2008, with uneven sequential improvement in operating earnings performance.  The division has made significant progress with operational enhancements and leadership development over the last two quarters, but start-up losses related to our opening of Greater Peoria Specialty Hospital are expected to impede results in the second half of the year.”

Financial Overview of First Quarter

Consolidated operating revenues for the first quarter of 2009 were $203.4 million, an 11.6% increase compared to $182.4 million in the 2008 first quarter.

Consolidated net earnings attributable to RehabCare were $8.7 million in the first quarter of 2009 compared to $4.5 million in the prior year quarter.  Diluted earnings per share attributable to RehabCare for the first quarter of 2009 were $0.48 compared to $0.25 in the first quarter of 2008.

Operating revenues in the Skilled Nursing Rehabilitation Services (SRS) division increased 9.5% from $112.5 million in the first quarter of 2008 to $123.1 million in the first quarter of 2009 and contract therapy same store revenues increased by 11.5%.  On March 31, 2009, SRS operated in 1,063 contract therapy locations compared to 1,038 locations at the end of the first quarter of 2008 and 1,068 locations at the 2008 fiscal year end.  The Company signed 36 new contracts in the first quarter of 2009 compared to 30 in the first quarter of 2008.

The SRS division’s operating earnings were $10.5 million, or 8.5% of revenue, compared to $4.1 million, or 3.7% of revenue, in the first quarter of 2008.  In addition to improved operating performance, the SRS division benefited from reduced selling, general and administrative costs resulting from actions taken in the second half of 2008.

The Hospital Rehabilitation Services (HRS) division’s first quarter 2009 operating revenues increased 7.2% to $43.1 million, compared to $40.2 million in the first quarter of 2008.  Inpatient operating revenues improved 6.7% and inpatient rehabilitation facility (IRF) same store discharges increased 1.1% compared to first quarter 2008.  The average number of programs operated in the current quarter increased by 0.9% and the average revenue per program increased 5.7% due to an improvement in IRF-subacute contract mix.  Outpatient operating revenues increased 8.6% as the average number of programs operated in the current quarter increased by 8.5% and same store revenues increased 5.0%.

At March 31, 2009, HRS operated 158 programs compared to 153 at the end of the first quarter of 2008 and 157 programs at the 2008 fiscal year end.  The number of IRF programs at the end of the quarter was unchanged sequentially at 113 but up from 107 a year ago.  The division had no IRF openings or closings during the first quarter and three signed but unopened IRF contracts at quarter end.

HRS operating earnings increased by $1.7 million to $6.3 million, or 14.6% of revenue, in the first quarter of 2009 compared to $4.6 million, or 11.5% of revenue, in the 2008 first quarter.  The higher average number of IRF programs and increased revenue per program contributed to year-over-year revenue and earnings improvement in the first quarter of 2009.

Operating revenues in the Hospital division for the first quarter of 2009 increased 28.6% to $35.3 million, compared to $27.5 million in the prior year quarter, reflecting a 2.5% increase in same store revenue and the addition of three hospitals during 2008.  The division operated a total of eleven hospitals at March 31, 2009, six IRFs and five long-term acute care hospitals (LTACHs).

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 4 

  The Hospital division incurred an operating loss of $2.3 million in the first quarter of 2009 compared to an operating loss of $4.8 million in the fourth quarter of 2008, or an operating loss of $3.3 million when factoring out costs related to two canceled projects in the fourth quarter.  The earnings improvement over the fourth quarter reflects an increase in same store contribution and a decrease in start-up losses.  This was offset by higher selling, general and administrative expenses largely related to mergers, acquisitions and joint venture development activities.  Total start-up and ramp-up losses in the first quarter of 2009 were $1.1 million, a $0.5 million reduction from the 2008 fourth quarter.  Most of these losses relate to the ramp-up of two recently opened hospitals.

Balance Sheet and Liquidity

At March 31, 2009, the Company had approximately $38.2 million in cash and cash equivalents and $57.0 million in outstanding debt.  The Company continued to build cash balances during the quarter in light of the challenging financial markets.  Net debt (outstanding debt less cash and cash equivalents) stood at $18.8 million at March 31, 2009 compared to $60.5 million at March 31, 2008 and $29.6 million at the end of fiscal year 2008.  Days sales outstanding decreased 5.5 days to 63.9 days at March 31, 2009 from 69.4 days at the prior year quarter end.  Days sales outstanding were 66.0 days at the 2008 fiscal year end.

For the three months ended March 31, 2009, the Company generated cash from operations of $9.4 million and expended approximately $1.6 million for capital expenditures, principally related to information systems.

Legislative Update

The President’s budget proposal for a Medicare bundled payment system has prompted considerable debate within the industry.  Prior to the release of the Senate’s Policy Option paper on April 29, 2009, RehabCare had issued an initial position paper in support of a bundled payment model, believing it would provide a more cost-efficient delivery system with greater emphasis on quality.  The paper also highlights the need to eliminate many existing payment rules.  The position paper and rule elimination summary can be found on the Company’s website at www.rehabcare.com.  The Company is optimistic about the Senate’s Policy Option paper as a first step toward Medicare payment reform and continues to work with Congressional leadership and trade groups on what it believes is necessary for an effective bundled payment design.

RehabCare also is evaluating the potential impact of recently released proposed rules for FY2010 Medicare reimbursement.  Based on its initial analysis, the Company believes that the proposed IRF rule is generally favorable for its freestanding IRFs and HRS inpatient clients, while the impact of the LTACH rule will be neutral.  The proposed SNF rule appears to be negative to the Company’s SNF clients, which may result in some downward pricing pressure in the fourth quarter.

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 5

Outlook

The Company will not be providing revenue and earnings per share guidance for 2009, but provides the following:

·   The Company anticipates strong consolidated revenue and net earnings growth for the full year 2009.  Quarterly operating earnings will be impacted less by hospital start-up/ramp-up losses than in 2008.  The Company has one scheduled LTACH opening, Greater Peoria Specialty Hospital,  in the third quarter of 2009.

·   The Skilled Nursing Rehabilitation Services division expects 6.5% - 7.5% operating earnings margins for the remainder of 2009, driven by 6% - 8% year-over-year same store revenue growth.  The division also expects flat to modest unit growth in 2009.

·   The Hospital Rehabilitation Services division expects 14% - 16% operating earnings margin, 3% - 5% year-over-year growth in IRF same store discharges and a stable to modest net increase in units during 2009, with most unit growth occurring in the second half of the year.

·   The Hospital division expects total year operating losses of $8.4 - $9.4 million, a reduction of $4.5 - $5.5 million compared to fiscal year 2008.  For full year 2009, revenue is expected to be $145 - $155 million, driven by strong growth in mature and de novo hospitals and assuming implementation of the proposed FY2010 market basket increase for IRFs and a minimal increase for LTACHs.  Including announced expansion projects, the Company expects breakeven operating earnings in the first half of 2010.

·   The effective tax rate is anticipated to approximate 39% for 2009 after consideration of noncontrolling interests and equity income.

·   The Company expects continued strong operating cash flow with DSO of approximately 66 days.

·   Capital expenditures are anticipated to be approximately $11 million for the remainder of 2009, principally related to information systems investments.  The Company is expecting to receive approximately $1.6 million from its minority partners to fund their respective shares of each joint venture hospital’s capital expenditure and working capital requirements during the remainder of 2009.

Conclusion

“Our growth and performance improvement initiatives over the last several years have clearly taken hold,” said Dr. Short.

“While economic conditions may constrain some revenue generation during the year, as contracts close due to ownership changes and as clients look for more rate concessions, other market variables should create new business prospects, particularly within our HRS division.  Our expertise across the post-acute continuum, along with our model of care coordination and innovative technology to track quality indicators, give us a competitive edge with hospitals and health systems beginning to strategize for a bundled payment scenario.

“Our strong positive cash flow continues to give us a sure-footed position during unstable economic times and the flexibility to evaluate opportunities for our future growth.”

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 6

Reclassification of Previously Reported 2008 Segment Information

In the first quarter of 2009, the Company’s VTA Management Services and Polaris Group subsidiaries, which service the skilled nursing facility industry and were previously reported under Other Healthcare Services, were combined with Contract Therapy services.  The newly formed division has been named Skilled Nursing Rehabilitation Services.  The Other Healthcare Services division also has been renamed Healthcare Management Consulting, which consists of Phase 2 Consulting. A Reclassification of Previously Reported 2008 Segment Information reflecting this change has been prepared and is available for viewing on the Company’s website at http://www.rehabcare.com/investors/default.htm.  All prior year comparisons are based on the reclassified data.  2008 consolidated quarterly financial results are unchanged.

About RehabCare Group

Established in 1982 and headquartered in St. Louis, MO, RehabCare (www.rehabcare.com) is a leading provider of rehabilitation program management services in partnership with over 1,200 hospitals and skilled nursing facilities in 42 states.  The Company also operates freestanding rehabilitation hospitals and long-term acute care hospitals across the country.  RehabCare is included in the Russell 2000 and Standard and Poor’s Small Cap 600 Indices.

RehabCare will host a conference call on May 6, 2009, beginning at 10:00 AM Eastern time.  Listeners may access the call by dialing (800) 640-9765, confirmation number 24356162, or in a listen-only mode through the Company’s website at http://www.rehabcare.com/investors/webcasts.htm.  A replay of the call will be available beginning at approximately noon Eastern Time tomorrow by dialing (877) 213-9653, confirmation number 24356162.  An online archive of the conference call will remain on the Company’s website for at least 21 days after the call.

This press release contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the Company’s current expectations and could be affected by numerous factors, risks and uncertainties discussed in the Company’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Do not rely on forward looking statements as the Company cannot predict or control many factors that may affect its ability to achieve the results estimated.  The Company makes no promise to update any forward looking statements whether as a result of changes in underlying factors, new information, future events or otherwise.

CONTACT: RehabCare Group, Inc.

Financial: Jay W. Shreiner, Chief Financial Officer

Press: Donna Lee, Office of the CEO

(314) 863-7422

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 7

I. Condensed Consolidated Statements of Earnings
(Unaudited; amounts in thousands, except per share data)
	Three Months Ended
	March 31,			Dec. 31,			March 31,
		2009			2008			2008
Operating revenues	$	203,448		$	194,178		$	182,374
Costs and expenses:
Operating		162,014			157,451			147,106
Selling, general and administrative		23,168			23,625			22,980
Depreciation and amortization		3,882			3,727			3,671
Total costs and expenses		189,064			184,803			173,757
Operating earnings, net		14,384			9,375			8,617
Interest income		15			39			37
Interest expense		(572	)		(745	)		(1,299	)
Other income (expense), net		1			(3	)		3
Equity in net income of affiliates		166			30			158
Earnings from continuing operations before income taxes		13,994			8,696			7,516
Income tax expense		5,540			3,371			2,963
Earnings from continuing operations, net of tax		8,454			5,325			4,553
Loss from discontinued operations, net of tax		(6	)		(269	)		(125	)
Net earnings		8,448			5,056			4,428
Net loss attributable to noncontrolling interests		212			647			80
Net earnings attributable to RehabCare	$	8,660		$	5,703		$	4,508
Amounts attributable to RehabCare:
Earnings from continuing operations, net of tax	$	8,666		$	5,972		$	4,633
Loss from discontinued operations, net of tax		(6	)		(269	)		(125	)
Net earnings	$	8,660		$	5,703		$	4,508
Diluted earnings per share attributable to RehabCare	$	0.48		$	0.32		$	0.25
Weighted average diluted shares		17,899			17,855			17,749

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 8

II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
	Unaudited
	March 31,		December 31,
	2009		2008
Assets
Cash and cash equivalents	$	38,201	$	27,373
Accounts receivable, net		143,781		139,197
Deferred tax assets		15,538		14,876
Other current assets		7,879		7,165
Total current assets		205,399		188,611
Property and equipment, net		36,837		37,851
Goodwill		171,515		171,365
Intangible assets		27,950		28,944
Investment in unconsolidated affiliate		4,778		4,772
Other assets		5,997		6,863
	$	452,476	$	438,406
Liabilities & Equity
Current portion of long-term debt	$	—	$	—
Payables & accruals		92,444		91,327
Total current liabilities		92,444		91,327
Long-term debt, less current portion		57,000		57,000
Other non-current liabilities		12,798		12,279
Stockholders’ equity		277,367		267,772
Noncontrolling interests		12,867		10,028
	$	452,476	$	438,406

III. Condensed Consolidated Statements of Cash Flows
(Unaudited; amounts in thousands)
	Three Months Ended
	March 31,
	2009			2008
Net cash provided by operating activities	$	9,388		$	4,055
Net cash used in investing activities		(1,468	)		(3,138	)
Net cash provided by financing activities		2,908			4,036
Net increase in cash and cash equivalents		10,828			4,953
Cash and cash equivalents at beginning of period		27,373			10,265
Cash and cash equivalents at end of period	$	38,201		$	15,218
Supplemental information:
Additions to property and equipment	$	(1,557	)	$	(3,222	)

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REHABCARE REPORTS FIRST QUARTER 2009 RESULTS                                               Page 9

IV. Operating Statistics (Unaudited; dollars in thousands)
		First			Fourth			First
		Quarter			Quarter			Quarter
		2009			2008			2008
Skilled Nursing Rehabilitation Services
Operating revenues	$	123,148		$	118,055		$	112,450
Operating expenses		98,998			95,443			93,071
Selling, general and administrative		12,017			12,322			13,483
Depreciation and amortization		1,678			1,677			1,787
Operating earnings	$	10,455		$	8,613		$	4,109
Operating earnings margin		8.5	%		7.3	%		3.7	%
Average number of contract therapy locations		1,074			1,076			1,055
End of period number of contract therapy locations		1,063			1,068			1,038
Patient visits (in thousands)		2,005			1,931			1,894
Hospital Rehabilitation Services
Operating revenues
Inpatient Rehabilitation Facility (IRF)	$	30,018		$	30,044		$	27,320
Subacute		1,725			2,327			2,439
Total Inpatient	$	31,743		$	32,371		$	29,759
Outpatient		11,323			11,291			10,422
Total HRS	$	43,066		$	43,662		$	40,181
Operating expenses		30,634			31,494			29,189
Selling, general and administrative		5,490			5,716			5,634
Depreciation and amortization		646			633			720
Operating earnings	$	6,296		$	5,819		$	4,638
Operating earnings margin		14.6	%		13.3	%		11.5	%
Average number of programs
IRF		113			112			107
Subacute		9			12			14
Total Inpatient		122			124			121
Outpatient		36			34			33
Total HRS		158			158			154
End of period number of programs
IRF		113			113			107
Subacute		9			9			13
Total Inpatient		122			122			120
Outpatient		36			35			33
Total HRS		158			157			153
IRF discharges		10,999			11,152			10,276
Subacute discharges		857			908			795
Total Inpatient discharges		11,856			12,060			11,071
Outpatient visits (in thousands)		311			263			240
Hospitals
Operating revenues	$	35,317		$	30,342		$	27,473
Operating expenses		30,890			28,617			23,236
Selling, general and administrative		5,224			5,098			3,173
Depreciation and amortization		1,545			1,400			1,150
Operating earnings (loss)	$	(2,342	)	$	(4,773	)	$	(86	)
Operating earnings margin		-6.6	%		-15.7	%		-0.3	%
End of period number of facilities		11			11			8
Patient days		28,791			26,346			23,631
Discharges		1,647			1,568			1,492

-END-

EX-99.2

Exhibit 99.2

REHABCARE CONFERENCE CALL SCRIPT

May 6, 2009

INTRODUCTION BY CONFERENCE OPERATOR

INTRODUCTION OF MANAGEMENT BY FD

This conference call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the Company’s current expectations and could be affected by numerous factors, risks and uncertainties discussed in the Company’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Do not rely on forward looking statements. The Company cannot predict or control many factors that may affect its ability to achieve the results estimated.  The Company makes no promise to update any forward looking statements whether as a result of changes in underlying factors, new information, future events or otherwise.

JOHN SHORT

INTRODUCTION AND WELCOME

Good morning and thank you for joining us today.  I’m John Short, President and CEO of the Company.  With me are Jay Shreiner, Chief Financial Officer, and the members of my executive management team, all of whom will be available to answer your questions at the conclusion of our remarks.

We entered 2009 with full expectations for continued financial strength and forward momentum in each of our business lines.  All indicators signaled a strong year of consolidated revenue and net earnings growth, generating healthy cash flow. First quarter results were a very good start.

Fueled by a Skilled Nursing Rehabilitation Services (or SRS) division (formerly our Contract Therapy division) that was firing on all cylinders, we achieved an 11.6 percent year-over-year increase in consolidated operating revenues and a 23 cent gain in diluted earnings per share.

While thrilled with first quarter results, we do not believe they set the precedent for subsequent quarters as they were driven by a combination of positive factors that may not reoccur.  Although continual efforts to evaluate and refine our operations through technology are producing greater efficiencies and more consistent performance within each of our divisions, external influences may continue to impact sequential results.  Nevertheless, we have raised our 2009 outlook for both our SRS and Hospital divisions.

We also have confidence in the stability of our financial status in an uncertain economy.  Positive cash flow from operations not only gives us a strong cash position but is funding the necessary investments to continue to grow and enhance our business in 2009.

Now let me share some of the highlights from the quarter as they pertain to our core operating divisions.

In the first quarter of 2009, we combined our VTA Management Services and Polaris Group subsidiaries, both previously reported under Other Healthcare Services, with our Contract Therapy services and renamed the division Skilled Nursing Rehabilitation Services (or SRS).  Since all three businesses fall under common leadership and service similar clients, we anticipate this organizational change will create greater synergies among them.  We also renamed our Other Healthcare Services division Healthcare Management Consulting, which is comprised of Phase 2 Consulting.

As I mentioned, our Skilled Nursing Rehabilitation Services division delivered an exceptional performance in the first quarter that exceeded all expectations.  Year-over-year operating revenues improved 9.5 percent to 123.1 million dollars, driven by an 11.5 percent increase in contract therapy same store revenues.  The division had a net gain of 25 units over the first quarter of 2008 and a net loss of five from the fourth quarter.  We opened 35 new locations and closed 40 during the quarter compared to 36 openings and 43 closures in the fourth quarter of 2008.  Over half of the first quarter closures were due to changes of ownership or facility closings, more than double the number in the previous quarter. In the first quarter, 36 new client contracts were signed and the number of signed but unopened contracts stood at 22 at the end of the quarter.

Operating earnings were 10.5 million dollars, or 8.5 percent of revenue, compared to 4.1 million dollars, or 3.7 percent of revenue, in the first quarter of 2008.  Strong average daily census and productivity contributed to first quarter earnings results.

Taking into consideration both the contributing factors we believe to be sustainable and the dynamics that will continue to alter the playing field, we are raising our earnings margin expectations for the remainder of the year to between 6.5 and 7.5 percent.  We do not believe an 8.5 percent earnings margin, nor double digit same store revenue growth, will continue throughout the year.

As expected, our Hospital Rehabilitation Services (HRS) division posted solid year-over-year results in the first quarter.  Operating revenues improved 7.2 percent to 43.1 million dollars over the prior year quarter, with inpatient revenues increasing by 6.7 percent and outpatient revenues increasing 8.6 percent.  Inpatient rehabilitation facility same store discharges increased 1.1 percent compared to first quarter 2008 and outpatient same store revenues increased 5.0 percent.

Operating earnings increased to 6.3 million dollars, or 14.6 percent of revenue, compared to 4.6 million dollars, or 11.5 percent of revenue, in the first quarter of 2008.  A higher average number of inpatient rehabilitation facilities and increased revenue per program contributed to revenue and earnings growth in the first quarter.

At the end of first quarter 2009, HRS operated 158 programs compared to 153 at the end of first quarter 2008 and 157 at the 2008 fiscal year end.  The number of inpatient rehabilitation facility programs at the end of the quarter was unchanged sequentially at 113 but up from 107 a year ago. The division had no inpatient rehabilitation facility openings or closings during the first quarter of 2009 and three signed but unopened inpatient rehabilitation facility contracts at quarter end.

We continue to expect stable to modest unit growth in 2009, with most of this growth occurring in the second half of the year.  We expect new opportunities to arise as a result of the Obama administration’s proposed bundled payment system for acute and post-acute care, and its penalties for patient readmissions. We are uniquely qualified to help hospitals thrive under a bundled payment scenario, given our broad scope of services across the post-acute continuum, our application of advanced technology to track and deliver superior patient outcomes and our CareNexus model of seamless patient throughput.  Although implementation of a bundled payment system would be several years out once approved, we anticipate hospitals will begin asking themselves, “What is our post-acute strategy?” and we will be there to answer.

Revenues in our Hospital division in the first quarter increased 28.6 percent over the same period last year to 35.3 million dollars, reflecting a 2.5 percent same store revenue increase and the addition of three new hospitals in 2008.  At the end of the quarter, we were operating a total of 11 hospitals, six inpatient rehabilitation facilities and five long-term acute care hospitals (LTACHs).

For the second consecutive quarter, our turnaround plan for the Hospital division yielded sequential improvement in operating earnings.  The division reported an operating loss of 2.3 million dollars, compared to 4.8 million dollars in the fourth quarter of last year, or 3.3 million dollars when factoring out costs related to two canceled projects in the fourth quarter.  Reevaluating expected results in 2009, we believe we can reduce total year operating losses to between 8.4 and 9.4 million dollars, a decrease of 4.5 to 5.5 million dollars compared to fiscal year 2008.  However, we do not anticipate sequential operating earnings improvement throughout the year, as start-up losses related to our scheduled third quarter opening of Greater Peoria Specialty Hospital will impact results in the second half of the year.

The current legislative landscape is centered largely on healthcare reform which could result in a Medicare post-acute bundled payment system.  Prior to the release of the Senate’s Policy Option paper on April 29, we had issued an initial position paper in support of a bundled payment model, believing it would provide a more cost-efficient delivery system with greater emphasis on quality.  In order to accomplish this, however, we believe there needs to be a level playing field, with the elimination of many of the existing payment rules for each post-acute setting.  We are optimistic about the Senate’s Policy Option paper as a first step toward Medicare payment reform and continue to work with Congressional leadership and trade associations on what we believe is necessary for an effective bundled payment design.

We also are evaluating the potential impact of recently released proposed rules for fiscal year 2010 Medicare reimbursement.  Based on our initial analysis, we believe that the proposed IRF rule is generally favorable for our freestanding IRFs and HRS inpatient clients, while the impact of the LTACH rule will be largely neutral.  The proposed SNF rule appears to be negative to our SNF clients, which may result in some downward pricing pressure in the fourth quarter.

I’ll now turn the call over to Jay Shreiner, who will review our consolidated financial results for the quarter and reiterate our outlook for 2009.

JAY SHREINER

Thank you, John.

Consolidated operating revenues for the first quarter of 2009 were 203.4 million dollars, compared to 182.4 million dollars in the first quarter of 2008, an 11.6 percent increase.

Consolidated net earnings attributable to RehabCare were 8.7 million dollars, or 48 cents per diluted share, in the first quarter of 2009, compared to 4.5 million dollars, or 25 cents per diluted share, in the first quarter of 2008.

For the three-month period ending March 31, 2009, we generated cash from operations of 9.4 million dollars and spent 1.6 million dollars for capital expenditures, principally related to information systems.

Days sales outstanding in accounts receivable decreased to 63.9 days at March 31, 2009 compared to 69.4 days at March 31, 2008 and 66.0 days at December 31, 2008, a result of increased collection efforts.

At quarter end, we had approximately 38.2 million dollars in cash and cash equivalents compared to 15.2 million dollars at the end of the first quarter of 2008.  Total debt outstanding was unchanged from the 2008 fiscal year end at 57 million dollars but was down 18.7 million dollars from the prior year quarter.  We expect to begin paying down outstanding debt in the second quarter of this year.

Net debt (or outstanding debt less cash and cash equivalents) stood at 18.8 million dollars at the end of first quarter 2009 compared to 29.6 million dollars at the 2008 fiscal year end and 60.5 million dollars a year ago.

As previously stated, we will not be providing revenue and earnings per share guidance for 2009, but provide the following outlook:

·   We anticipate strong consolidated revenue and net earnings growth for the full year 2009, with quarterly operating earnings impacted less by hospital start-up/ramp-up losses than in 2008.

·   In our Skilled Nursing Rehabilitation Services division, we expect 6.5 to 7.5 percent operating earnings margins for the remainder of 2009, driven by 6 to 8 percent year-over-year same store revenue growth.  The division also expects flat to modest unit growth in 2009.

·   The Hospital Rehabilitation Services division expects 14 to 16 percent operating earnings margin, 3 to 5 percent year-over-year growth in inpatient rehabilitation facility same store discharges and stable to modest net increase in units during 2009, with most unit growth occurring in the second half of the year.

·   For our Hospital division, we expect total year operating losses of 8.4 to 9.4 million dollars, a 4.5 to 5.5 million dollar reduction compared to fiscal year 2008.  For full year 2009, revenue is expected to be between 145 and 155 million dollars, driven by strong growth in mature and de novo hospitals and assuming implementation of the proposed market basket increases for IRFs and LTACHs.  Including announced expansion projects, we expect breakeven operating earnings in the first half of 2010.

·   The effective tax rate is anticipated to approximate 39 percent for 2009 after consideration of noncontrolling interests and equity income.

·   We expect continued strong operating cash flow and DSO of approximately 66 days.

·   Capital expenditures are anticipated to be approximately 11.0 million dollars for the remainder of 2009, principally related to information systems investments.  We expect to receive approximately 1.6 million dollars from our minority partners to fund their respective shares of each joint venture hospital’s capital expenditure and working capital requirements during the remainder of 2009.

Now I will turn the call back over to John.

JOHN SHORT

Thank you, Jay.

Closing Remarks

The management tracking tools and training initiatives we employed in 2008 to improve operations and patient capture took hold in the first quarter with remarkable results.  Throughout 2009, we will continue to look to new technology to drive greater clinical and operational performance and to set us apart within the industry. For example, the recent application of the iPhone in our hospital settings already is setting a new standard in the patient preadmission screening process, significantly reducing evaluation and approval times.

But technology alone cannot deliver the sustainable results our shareholders expect and the quality services our patients and customers need.  In closing, let me thank our more than 13,000 employees, a group I sincerely believe to be without equal, for their selfless commitment to the success of RehabCare and to our mission of helping people regain their lives.

We will continue to manage RehabCare not just quarter to quarter but with a focus on delivering long-term value for our shareholders.

With that, I would like to have our operator open the call for questions.

To be read following Questions and Answers –

As a reminder, this conference call is being webcast live on our web site, www.rehabcare.com and will be available for replay beginning at noon Eastern time today.