Orange County’s three publicly traded nursing home operators could see profit growth under an expanded payment system for Medicare, according to industry analysts.
The optimistic outlook applies to Irvine’s Sun Healthcare Group Inc., Foothill Ranch-based Skilled Healthcare Group Inc. and Ensign Group Inc. of Mission Viejo, as well as their competitors.
It stems from “a favorable Medicare reimbursement environment and stable operating costs,” said Robert Mains, an analyst with Memphis investment bank Morgan Keegan & Co.
Medicare, the federal healthcare program for seniors, expanded reimbursement in October, paying nursing homes per patient day, with rates based on the complexity of the services delivered.
The new system creates a larger customer base for nursing homes since it adds categories of care that are eligible for reimbursement.
That makes it worthwhile for nursing home companies to provide care for more complicated conditions, such as patients who need ventilators or care for wounds and infectious diseases.
Sun receives about 30% of its $1.9 billion in yearly revenue from Medicare. The program accounts for 35% of Skilled’s $810 million in annual revenue and 32% of Ensign’s $640 million in yearly sales.
Sun sees the changes on reimbursements as “a positive opportunity” that reinforces its strategy of building “clinical capability” to care for sicker patients, Chief Executive William Mathies said.
Mathies said Sun, which has 202 facilities, has been building toward such capability since 2006, when it decided to concentrate on caring for more rehabilitation patients. That move coincided with the last time the federal Centers for Medicare and Medicaid Services expanded payment categories.
“This provides an enhanced opportunity for us to now expand our services,” Mathies said.
Shares of Sun, which spun off its real estate holdings as Irvine-based Sabra Healthcare REIT Inc. in November, have risen 9% in the past six months to a market value of $340 million last week.
The company raised its 2011 financial outlook last week, partly on higher expectations for Medicare.
The expanded reimbursements won’t change how patients come to facilities, said Jose Lynch, Skilled’s president and chief operating officer.
“Ninety-five percent plus of the patients admitted to our affiliate (nursing homes) are from the acute hospital,” Lynch said.
Express Recovery Units
Analysts consider Skilled well-prepared to handle the changes. The company has what are called express recovery units within its nursing homes to handle sicker patients and those with more complex conditions.
A majority of Skilled’s 100 or so nursing homes “already serve certain respiratory and infectious disease types,” Lynch said.
“We are looking at ways to enhance these services over time,” he said.
In a late December report, Barclays Bank PLC analyst Brendan Strong said Skilled stands to make significant gains on Medicare changes.
Skilled’s shares took a beating last summer after a potentially crippling jury verdict against the company. The company eventually settled at a much lower cost and its shares are up 70% since July to a recent market value of $400 million.
The recent comeback combined with the new Medicare reimbursements has Skilled expecting a profit of $45.4 million to $49.1 million this year, above analysts’ prior expectations of $33.5 million.
Revenue is seen coming in at $880 million to $900 million, compared to a Wall Street earlier projection of $857 million.
Ensign’s stock is up 62% since July to a market value of $530 million last week.
The company is cautious about the reimbursement changes. That could be because the chain’s 84 nursing homes do not have separate wings for patients who require more complicated treatments, according to Brian Williams, who follows all three local companies for Avondale Partners LLC in Nashville.
Ensign discussed the “negative impact” of Medicare payment changes on its third-quarter conference call, when it affirmed its 2010 profit projection of $38.3 million to $39.2 million on revenue of $628 million to $638 million.
The changes appear to “be fairly budget-neutral,” Ensign executives said.
The company also said it would be helped by a separate 1.7% “market basket” increase in Medicare payments based on the costs of goods and services that go into a nursing home stay.
Ensign’s shift in tone echoes others in the industry, analysts said.
“The for-profit providers have publically been very conservative at the beginning of (2010) and they’ve incrementally gotten more positive as the year progressed,” Williams said.
“Wall Street’s always fearful of change and certainly, whenever you have a change in reimbursement, it always creates a period of uncertainty and fear and that gets reflected in the stock values,” said Frank Morgan, a Nashville-based analyst with Canada’s RBC Capital Markets who follows Skilled and Sun.
“For some time now, it’s been apparent to us that the fear over (payment change) implementation might have been overblown,” he said.
