Skilled nursing stocks in sick bay on big Medicare cuts

Skilled nursing stocks in sick bay on big Medicare cuts

By Shravya Jain

On Friday, the Centers for Medicare & Medicaid Services (CMS) cut 2012 payments for skilled nursing facilities by 11.1 percent, or $3.87 billion.

“This cut will wipe out a significant portion of their earnings, and will also likely cause debt covenants to be broken in certain cases,” Leerink Swan analyst Jason Gurda wrote in a note.

When CMS had proposed cuts of 11.3 percent for 2012 in April, most analysts had expected the final rule to be diluted after negotiations.

“Historical precedent would have suggested that the worst-case scenario would have been materially modified and/or phased in for the final rule; we believe the market had largely priced in such a scenario,” RBC Capital analyst Frank Morgan said.

“Unfortunately, this final rule was the exception.”

The U.S. government has been under pressure to cut Medicare costs — expected to nearly double in 10 years to $1.02 trillion — as it grapples with mounting federal debt.

Analysts expect the industry to lobby the Congress to mitigate the loss but expect little to come out of that.

“Given the difficult budgetary environment we believe it is unlikely that Congress will grant relief to the industry,” Wells Fargo analyst Gary Lieberman wrote.

Oppenheimer analyst Michael Wiederhorn believes the current environment reduces chances of any action but lobbying could at least protect the group from further cuts through the debt ceiling negotiations.

There was a broad sell-off in healthcare stocks on fears that the debt-ceiling deal to be voted on by the U.S. Congress would cut healthcare spending for federal programs such as Medicare.

Shares of home health agencies — also dependent on Medicare funding and awaiting a final rate cut ruling in October — like Amedisys (AMED.O), Gentiva (GTIV.O), LHC Group (LHCG.O) and Almost Family (AFAM.O) also fell by up to 13 percent.

“The shares are down mainly due to concerns that home health agencies may be targeted next,” Avondale Securities analyst Kevin Campbell said.


Skilled Healthcare (SKH.N) was down 40 percent at $5.30 on Monday, while Kindred Healthcare (KND.N) fell about 28 percent to $13.56 on the New York Stock Exchange.

Sun Health Care (SUNH.O) slumped 57 percent to an eight-year low of $2.99 and Ensign Group (ENSG.O) fell 23 percent to $21.99 on Nasdaq.

Analysts expect Sun Healthcare to be hurt the most; expecting it to generate a loss and possibly break debt covenants.

Kindred is not expected to be hurt as badly on account of it being more diversified, especially after its recent acquisition of RehabCare.

Wiederhorn sees Skilled Healthcare and the Ensign Group emerging as “industry survivors” that will benefit from low-cost market share gains.

Skilled Healthcare said Monday it was in the process of fully assessing the impact of the ruling on its operations and will revise its full-year outlook.

(Reporting by Shravya Jain in Bangalore; Editing by Saumyadeb Chakrabarty)

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