The Centers for Medicare & Medicaid Services has issued a final rule that cuts Medicare skilled nursing facility Prospective Payment System payments by 11.1% in FY 2012 by $3.87 billion. The cuts are listed as being to “correct for an unintended spike in payment levels and better align Medicare payments with costs.”

The 2012 recalibration will result in a reduction of 12.6% to skilled nursing facility payments of $4.47 billion, but this would be partially offset by the FY 2012 update with an increase of 1.7% to Medicare payments to skilled nursing facilities.  This reflects a market basket of goods and services reduced by a 1% multi-factor productivity adjustment mandated by the Affordable Care Act.

A 2.5% increase for hospice reimbursement is not going to be anywhere close to offsetting the losses here.

Kindred Healthcare Inc. (NYSE: KND) is in three segments of hospitals, health services, and rehabilitation.  It gets somewhere close to 30% of its revenues from this segment being cut.  Its stock opened down at $14.06 and shares are down almost 27% at $13.77 versus a 52-week range of $11.52 to $28.99.

Sun Healthcare Group Inc. (NASDAQ: SUNH) may have its entire profits gone or at risk now as it has awful exposure here.  Its shares opened down at $3.21 versus a $7.00 close.  Shares are now down a total of 55% at $3.13 and its shares hit a low so far of $3.10 (52-week low) versus a 52-week high of $15.01.

Skilled Healthcare Group Inc. (NYSE: SKH) operates skilled nursing facilities, as well as assisted living facilities, hospice service providers, home health providers, and a rehabilitation therapy business. Its stock is down a sharp 37% at $5.44 after opening at $6.61 this morning.  Its 52-week trading range is $2.33 to $15.93.

Five Star Quality Care Inc. (NYSE: FVE) operates senior living communities via independent living or congregate care communities, assisted living communities, and nursing facilities, is down “only” about 8% at $4.55 versus a 52-week trading range of $3.50 to $8.95.

Sunrise Senior Living Inc. (NYSE: SRZ), which offers senior living services and independent living services, is down only 3% at $8.53 against a 52-week range of $2.18 to $12.44.

National Healthcare Corporation (NYSE: NHC) operates and manages long-term health care centers, and associated assisted living and independent living centers.  Its stock is down 12% at $41.78 against a 52-week range of $33.51 to $53.08.

Amedisys Inc. (NASDAQ: AMED) is in home health and hospice services and its shares are down 3% at $25.08. Almost Family Inc. (NASDAQ: AFAM), a home health provider, is down 3.7% at $24.33.

Senior Housing Properties Trust (NYSE: SNH) is a REIT in hospitals, nursing homes, senior apartments, independent living properties, and assisted living centers.  Its shares are also down today by 2.4% at $23.37 versus a 52-week range of $20.42 to $25.28.

Here is what is interesting about this move… This was “pre-budget deal.”  If you think that Medicare and Medicaid payments are the only ones at risk in the weeks, months, and years ahead, you might want to think again.  Cuts will be coming for a myriad of reasons and from many angles.  Companies which rely heavily or solely on government contracts for goods and services are all under more scrutiny.

JON C. OGG

Beginning in 2000, the Medicare Payment Advisory Committee, MedPAC, authorized payment of about $2,200 for up to nine visits from a home health care worker. In an effort to encourage that treatments ran their full course, MedPAC authorized an additional payment of $2,200 for 10 or more treatments.

In 2008, MedPAC changed the reimbursement rules, eliminating the $2,200 bonus payment for the tenth visit. Since the change, the number of patients getting 10 or more treatments has fallen significantly, according to reporting last April in The Wall Street Journal. The new reimbursement schedule paid an additional fee of a few hundred dollars at the sixth, fourteenth, and twentieth visits.

The pattern of home visits changed dramatically. For example, the number of Amedisys patients getting 10 visits dropped by 50% in 2008. At the same time, the percentage of patients getting six visits rose by 8%, those getting 14 visits rose by 33%, and those getting 20 visits rose by 41%.

The WSJ quotes a MedPAC commissioner as saying, “Looking at the great speed with which the volume of services adapts to payment changes, which are breathtaking, it does suggest that there may be a problem with certifying the appropriateness of these services.”

Share prices have fallen off a cliff for all four companies since the investigation was revealed. Amedisys is down more than 40% since the beginning of the year, Almost Family and LHC Group are down about 30%, and Gentiva is off almost 20%.

Amedisys warned today that second quarter earnings would be down and the company has suspended its full-year guidance. That has pulled the stock down more than 2% so far. Almost Family shares are down nearly 6%, LHC Group shares are down more than 5%, and Gentiva shares are down more than 3.5%. Trading volumes are higher than normal as well.

Paul Ausick

Amedisys (AMED) Cut to Neutral at UBS.
Burlington Northern Santa Fe (BNI) Started as Outperform at Baird.
Comcast (CMCSA) Started as Overweight at JPMOrgan.
CSX (CSX) Started as Outperform at Baird.
Dyncorp (DCP) Started as Buy at SunTrust.
Fiserv (FISV) Started as Buy at Citigroup.
General Maritime Corp. (GMR) Raised to Outperform at FBR.
HealthSouth Corp. (HLS) Started as Outperform at Baird.
St. Jude Medical (STJ) Raised to Outperform at Wells Fargo.
Time Warner Cable (TWC) Started as Overweight at JPMorgan.

JON C. OGG

• Cepheid (CPHD) Started as Buy at Needham.
• Charles Schwab (SCHW) Raised to Market Perform at FBR.
• Diana Shipping (DSX) Raised to Overweight at JPMorgan.
• Gymboree (GYMB) Raised to Overweight at JPMorgan.
• Windstream (WIN) Raised to Overweight at JPMorgan.
• AMEDISYS (AMED) Cut to Hold at Deutsche Bank.
• Eagle Bulk Shipping (EGLE) Cut to Underweight at JPMorgan.
• Navios Maritime Partners (NMM) Cut to Neutral at JPMorgan.
• ReneSola Ltd. (SOL) Cut to Neutral at Credit Suisse.
• Verifone (PAY) Cut to Underweight from overweight at JPMorgan.

Jon C. Ogg
November 20, 2008

• Amedisys (AMED) Started as Outperform at Baird.
• Concur Tech (CNQR) Raised to Outperform at Oppenheimer.
• Gentiva Health Services Inc. (GTIV) Started as Outperform at Baird.
• O’Reilly Auto (ORLY) Started as Buy at UBS.
• Telus (TU) Raised to Buy at UBS.

Jon C. Ogg
August 22, 2008