The Centers for Medicare and Medicaid Services’ decision to cut reimbursements for nursing homes socked the sector last week, including three public companies based in Orange County.
Federal officials said Medicare payments to nursing homes are being cut by more than 11% for the 12 months starting Oct. 1.
Medicare, the federal health insurance program for the elderly, is often used in nursing homes for patients who are receiving complex healthcare services, such as care after a hip fracture or joint replacement.
Double-Digit Drops
Sun Healthcare Group Inc. of Irvine, Foothill Ranch’s Skilled Healthcare Group Inc. and Ensign Group Inc. in Mission Viejo all saw their share prices take double-digit tumbles on Aug. 1, shortly after officials announced the cuts.
Shares of all three companies have seen mild gains since the announcement but remain well off prior levels. Sun’s market value was about $93 million last week, with Skilled at $202 million and Ensign about $463 million.
“The industry, the analysts, (the) people did not see this coming at all,” said Robert Mains, a nursing home industry analyst with Memphis, Tenn., investment bank Morgan, Keegan & Co. who follows Sun and Skilled. “What we saw was a reaction to much worse-than-expected rates.”
Sun, the largest local operator with 165 nursing homes, lost more than half its value on Aug. 1—shares closed down 52% that day.
“Totally Unacceptable”
“From our perspective, this is totally unacceptable,” William Mathies, Sun’s chief executive, told Dow Jones News Service.
Sun gets about 30% of its annual revenue of $1.9 billion from Medicare. The cuts in reimbursements are ex-pected to cost Sun $65 million in annual revenue.
The company is looking for ways to offset the hit.
“Obviously, we’ll have to take a hard look at our infrastructure,” Mathies told Dow Jones.
Sun’s stock took a harder hit last week because it has lower margins than some of its peers, “largely because some of the markets they’re in,” Mains said. “The rules change takes a larger proportion of Sun’s earnings.”
Sun also withdrew its earlier outlook for 2011, citing the complexity of the new Medicare rule. It said it plans to update its projections later in the current quarter.
Previously, Sun said it expected a full-year profit of $34 million to $38 million on revenue of $1.95 billion to $1.99 billion.
“I note that our $88.5 million of cash provides us with flexibility to meet the challenges,” Mathies said.
The Medicare cut came as Sun released its second-quarter earnings.
Second-quarter profit fell 1% to $9.9 million from a year earlier but beat analysts’ expectations of $9.7 million.
Revenue was up 3% over last year’s second quarter to $487.7 million, in line with Wall Street forecasts of $487 million.
Skilled, which operates 74 nursing homes, saw its shares fall nearly 43% on the Aug. 1 news of the reimbursement reduction.
The company will issue new guidance in about 45 days, Chief Executive Boyd Hendrickson said.
Skilled’s Plans
In the meantime, Skilled plans to reduce expenses in order to blunt the financial effects of the rate cuts, Hendrickson said.
Skilled also said its board decided to end a search for a potential buyer based on reduced Medicare cuts. The company said its directors believe the action “has diminished the prospects of maximizing shareholder value through a sale of (Skilled) or its real estate assets in the near term.”
Medicare makes up 37% of Skilled’s annual revenue of $820 million.
Analyst Mains was not surprised that Skilled decided to pull back from a potential sale, given the cuts and a regulatory climate he called “really tough to gauge.”
“It’s unrealistic to be able to expect to put a price on a nursing home until there’s some clarity on how this is really going to work,” Mains said.
Ensign, which gets about 34% of its $650 million in annual revenue from Medicare, closed down 22% on Aug. 1 in the nursing home sell-off.
Ensign, which has 99 facilities, also reported mixed second-quarter results last week.
The company reported a profit of $13 million, up 34% from a year ago and beating Wall Street expectations of $12.5 million.
Second-quarter revenue came in at $186.3 million, below analysts’ projection of $189.1 million.
Built For This
Ensign’s not particularly fazed by the Medicare cuts, Chief Executive Christopher Christensen said in its earnings release.
“Despite the broader pain that will be afflicting the industry starting October 1, we are pleased to report that Ensign was built for exactly times like these,” Christensen said.
Ensign’s business model, which gives a lot of authority to local operating officials, “acknowledges, as a foundational principle, the unpredictability of operating in an environment dominated by government (payers),” he said.
Analyst Michael Wiederhorn of New York-based Oppenheimer & Co. said in a research note that he expects Ensign to be an “industry survivor.”
“We remain shocked that (regulators are) taking this draconian approach and putting nursing home care at risk. However, the survivors should emerge stronger than ever,” Wiederhorn said.
