• AUGUST 1, 2011, 9:28 A.M. ET

Skilled-Nursing Stocks Tumble Premarket On Medicare Rate Change

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By Melissa Korn 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--Shares of skilled-nursing providers tumbled in premarket trading on Monday over concerns about the companies' earnings prospects once new cuts to Medicare reimbursement rates take effect in October.
The Centers for Medicare & Medicaid Services announced late Friday that Medicare rates would be reduced by 11.1%, slightly below its April draft proposal, in response to what it said were unexpected increases in nursing-home payments this fiscal year.
The cuts are the "worst case scenario," Oppenheimer analysts said in a client note on Sunday and "will certainly have a devastating impact" on the industry.
Sun Healthcare Group Inc. (SUNH) stock plummeted 55% to $3.14 premarket, while Skilled Healthcare Group Inc. (SKH) was off 27.6% to $6.37 and Kindred Healthcare Inc. (KND) fell 23% to $14.50. Shares of Five Star Quality Care Inc. (FVE), Sunrise Senior Living Inc. (SRZ), National Healthcare Corp. (NHC) and Amedisys Inc. (AMED) were also down.
Oppenheimer slashed its rating on Sun Healthcare to underperform from outperform, saying the rate reduction "more than wipes out" that company's entire per-share earnings and puts it in danger of breaching its covenants. Leerink Swann analysts, meanwhile, warned that Skilled Healthcare may trip some of its covenants.
Those companies derive 27% and 32% of their first-quarter revenue from the Medicare skilled-nursing-facility reimbursements, respectively, according to Leerink Swann. The firm said Medicare funds provide a higher-margin revenue stream than Medicaid reimbursements.
Meanwhile, analysts at Citi said it is "difficult to quantify a level at which we would be buyers" in the industry.
At least some of the companies can take a little comfort in the government's decision to raise reimbursement rates for hospice care by 2.5%. Hospice services comprise small portions of Skilled Healthcare and Sun Healthcare's businesses.
-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com


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