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Nursing Home Companies Rise on Funding Reprieve

Nursing home operators have been among the best local performers in a shaky stock market, thanks to a stable outlook for government funding and an expected surge in business as baby boomers age.

In the past six months, shares of Orange County’s three nursing home operators are up an average 50%, with gains ranging from 15% to 105%.

The S & P; 500 index is off 5% for the same period. The BYN Mellon Billion-Dollar Club, an index of larger local stocks tracked for the Business Journal by Bank of New York Mellon Corp., is up about 6% since March. The BNY Mellon OC 50 index of smaller stocks is up about 5% in the past six months.


Biggest Gainer

Mission Viejo-based Ensign Group Inc., the smallest of the three local nursing home companies, has seen the steepest stock climb. Its shares are up 105% since March, giving it a market value of $330 million as of last week.

Shares of Lake Forest’s Skilled Healthcare Group Inc. are up 25% from March with a market value of about $575 million at recent check.

Irvine-based Sun Healthcare Group Inc., the largest of the three companies, is up 15% from March with a market value of about $740 million as of last week.

The rising tide’s also lifted competitors, including Louisville, Ky.-based Kindred Healthcare Inc., which is up 40% from March with a recent market value of $1 billion.

Much of the gains have come in the past month.

The nursing home operator stock rally is “due to a specific event,” said Richard Matros, Sun’s chief executive.

In early August, the federal Centers for Medicare and Medicaid Services scrapped a proposed 3.3% cut in payments to nursing home operators.

The government also said “market basket” payments for nursing homes would go up by $780 million in 2009. Market basket payments are based on the cost of goods and services included in a nursing home stay.

Sun, which runs 213 nursing homes, gets about 30% of its $1.8 billion in yearly revenue from Medicare, the federal insurance program for seniors and disabled Americans.

Skilled Healthcare, which has 75 nursing homes, gets about 37% of its $740 million in yearly revenue from Medicare.

Ensign, which has 54 homes, gets about 34% of its $470 million in yearly revenue from the government.

Medicare, which covers shorter nursing home stays, is seen as a better source for nursing homes because the rates it pays are up to 2.5 times higher than Medicaid, which covers low-income Americans.

The threat of cuts always hangs over the industry and hurt nursing home stocks in late spring and early summer.

“Reimbursement concerns weighed on the valuation of these stocks,” said Eric Gommel, an analyst with Stifel, Nicolaus & Co. in St. Louis who follows Sun and Ensign.

Stocks have done better, Gommel said, as investors became more comfortable that Medicare wasn’t going to take a big hit in Congress.

States also have kept their nursing home funding stable, while operators came out with good second-quarter earnings, he said.

Sun’s Matros called 2008 an “unusual year” with nursing home operators being more volatile. The “slightest negative news about anybody” drove all players down, he said.

“I’d have discussions with long-term shareholders who have been at this business a long time,” Matros said. “They know we have the same fight every year, and they’d always roll with it. But this year they freaked out.”

Nursing homes and other healthcare stocks might not be “as defensive as they maybe were in the past,” analyst Gommel said.

Even so, “The reason why we like nursing homes is that there’s a stable supply-demand relationship,” he said.

Overbuilding is unlikely because of regulation and the prospect of aging baby boomers filling nursing homes in years to come, according to Gommel.

Nursing homes also are positioning themselves as low-cost providers of recovery care after injury or illness that requires a hospital stay.

Skilled Healthcare is on track to have 53 of its “express recovery units” open by the end of the year, Chief Executive Boyd Hendrickson said on its most recent earnings conference call.

“Other companies are doing it,” he said. “If we hadn’t been the innovator rebel, we probably would have copied it. It’s a great idea.”

Ensign’s surge comes after the company went public last November.

“Being a new company with a relatively short track record, it took time for investors to get comfortable,” Gommel said. “They’ve put up earnings that have essentially been in line with what people expected,that’s what’s helped them.”

Ensign is “pleased with the progress being made across our operations” and believes that it still has “ample room” for improvement, Chief Executive Christopher Christensen said in the company’s most recent conference call.


Concerns for 2009

Some on Wall Street remain cautious about what could happen to nursing home operators.

“We believe that pressure to reduce or freeze rates will remain a key risk next year,” said Jason Gurda, an analyst with Boston-based investment bank Leerink, Swann & Co., who follows Skilled Healthcare.

Market basket payments for nursing home operators could be cut or frozen, he said.

Rising state budget deficits also “may pressure Medicaid rates” as states cut their matching funds to the federal program, Gurda said.

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