Nursing-Home Shrs Up, Some Hospitals Slip, On Medicare Rates

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Medicare’s proposed 2010 acute-care inpatient payment rates caused some hospital stocks to slip Monday, while the government’s planned reimbursement levels for skilled nursing facilities sparked a rally in nursing-home shares.

Citigroup Global Markets called the proposed Medicare acute-care hospital rates for next fiscal year "worse than feared," while noting that the figures won’t be finalized until August.

Medicare’s proposal, based on inflation and various adjustments, calls for a 0.5% decrease in inpatient reimbursement to acute-care hospitals next year, compared with a 3% to 3.5% historic average increase and what Citi believes was a Street expectation of a 1% increase. Rural hospitals would see a 1.3% cut and urban facilities a 0.4% decrease under the proposal, released late Friday.

What is worse, Citi said, is that the Centers for Medicare and Medicaid Services identified another 6.6% of downward hospital coding adjustments that must be made in 2011 and 2012.

All the acute-care hospital operators traded lower early in the session Monday, then some rebounded. Shares of non-urban hospital operator Health Management Associates Inc. (HMA) recently traded down 5.7%, or 27 cents, to $4.42, while urban operator Tenet Healthcare Corp. (THC) climbed 3 cents, or 1.6%, to $2.43. Other hospital shares traded up slightly or down 1% to 2%.

Meanwhile, shares of nursing-home operators surged, even though Medicare proposed an average 1.2% rate cut, with adjustments, for such facilities for 2010. The move appeared to be a relief rally, with some analysts considering the proposed cut better than expected and others noting the rates seem to be lower than anticipated by companies and the Street.

"We believe that the need for savings due to healthcare reform or other initiatives make it likely that the [skilled nursing facility] industry will experience a reimbursement cut" in fiscal 2010, said Wachovia Capital Markets.

Some analysts said nursing-home stocks had oversold before the Medicare proposal and were likely to trade higher on the news. And while Citi said the proposed cut poses a risk to its earnings estimates for Sun Healthcare Group Inc. (SUNH) and Skilled Healthcare Group Inc. (SKH), the firm called the proposal "better than worst case," with the weighted impact on those companies probably a bit better than the 1.2% decrease, based on differences in reimbursement in categories of residents.

Sun Healthcare shares recently traded up 11.5%, to $1.04, to $10.05, while Skilled Healthcare rose 9.5%, or 82 cents, to $9.47.

Shares of Kindred Healthcare Inc. (KND) climbed 6.2%, or 85 cents, to $14.49.

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