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Skilled nursing facility shares sink after CMS cut

Mon, 08/01/2011 - 5:45am
TOM MURPHY - AP Business Writer - Associated Press

Shares of skilled nursing facility operators tanked Monday before the first trading day after the federal government announced a Medicare reimbursement cut for the next fiscal year that one analyst described as a "stinging setback."

The Centers for Medicare and Medicaid Services issued a final ruling on Friday, announcing a net cut of 11.1 percent to Medicare skilled nursing facility rates. The agency had said in April it was considering the deep cut because changes in reimbursement rates had led to a significant increase in spending because patients were grouped into one of the most expensive categories.

The cut begins Oct. 1, and Oppenheimer analyst Michael Wiederhorn said in a research note it represents a worst-case scenario.

"It will certainly have a devastating impact on the industry, and we expect the stocks to see significant selling pressure," he wrote.

Weiderhorn downgraded shares of Sun Healthcare Group Inc. to "underperform" from "outperform" and expects the company to generate a loss next year. Shares of Sun Healthcare fell more than 56 percent, or $3.95, to $3.05 in pre-market trading Monday.

But the analyst also reiterated his "outperform" rating on Skilled Healthcare Group Inc. and Ensign Group Inc. He said expects those companies to be "industry survivors."

"We remain shocked that CMS is taking this draconian approach and putting access to nursing home care at risk," he wrote. "However, the survivors should emerge stronger than ever."

Next year's earnings should be down for skilled nursing facilities operators with the biggest hits absorbed by companies with the lowest margins, Morgan Keegan analyst Robert Mains said in another note. Mains lowered his ratings on Sun Healthcare Group Inc. and Skilled Healthcare to "market perform" from "outperform"

He said the cuts were "considerably worse" than analysts or the industry was expecting.

"This is a stinging setback for the (skilled nursing facility) industry, which had mounted what we thought were credible arguments to mitigate the cut," Mains wrote, adding that the industry will now lobby Congress. "It had been our contention that Congress, not CMS, will determine the final cut, and that it could soften CMS's blow, but our confidence in Congress accomplishing anything has understandably been shaken."

Jefferies analyst Omotayo Okusanya said in a note the cut will raise concern about the ability of skilled nursing facility tenants to pay their rents. He expected CMS to temper the proposal it announced in April and said it appears the agency "gave in to political pressure given the ongoing deficit reduction talks."

Skilled Healthcare fell 28 percent, or $2.44, to $6.36; and Kindred Healthcare Inc. dropped 24 percent, or $4.56, to $14.28. Ensign Group shares were not trading in the premarket.

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