Medicare has been a gift for rebounding Sun Healthcare Group Inc. But as the Irvine-based nursing home operator knows all too well, what Washington gives, it can take away.
President Bush’s proposed $36 billion in cuts to try and stem the growth of Medicare spending could whack Sun and other nursing home operators.
Back in the late 1990s, Sun and other big nursing home operators sought cover in bankruptcy court after the Balanced Budget Act of 1997 dealt them heavy funding cuts.
“Any cuts to Medicare would hurt the industry,” said Richard Matros, Sun’s chief executive.
For now, things seem to be going Sun’s way.
Sun’s fourth-quarter and 2005 results are due Tuesday.
After upping its outlook in December, Sun expects yearly revenue of about $880 million, up 5% from 2004.
Pre-tax profits are seen as coming in at about $56 million, up from $7.6 million a year earlier.
‘Normal’ Public Company
“As we go into 2006, for the first time we’re sort of a normal publicly held company,” Matros said. “We went through a major restructuring, and we finished out 2005 very strongly.”
The company’s revenue places Sun in the middle tier of larger public companies based here. But the company’s market value still suffers a hangover from the bankruptcy, the industry’s downturn and a reliance on government funding.
It was $100 million at recent check.
Medicare has been part of Sun’s comeback story.
The company runs nearly 150 nursing homes across the country.
As with other operators, some 80% of patients are covered by Medicare or Medicaid.
The government programs make up as much as 65% of nursing home revenue, according to the American Health Care Association, a Washington, D.C.-based trade group that’s leading the fight against the Bush administration’s proposed cuts.
Medicare, the federal government’s program for the elderly and poor, is the bigger piece of the pie, said L. Bryan Shaul, Sun’s chief financial officer, during last week’s Roth Capital Partners LLC investment conference in Dana Point.
“Medicare gets us about $325 a day (per person), compared to $125 a day with Medicaid,” he said. “You have better margins and an improved mix.”
Medicare rates are higher because patients whose nursing home care is covered by the federal insurance program are sicker, Matros said.
Insurance and out-of-pocket payments still are “materially lower than Medicare,” Matros said.
Sun gets about $140 a day per person from insurers and direct payments, he said.
The company’s gotten more Medicare patients by marketing and tailoring its homes to them, according to Matros.
Big Buy
In December, Sun added to its Medicare business by paying $150 million in stock to buy Peak Medical Corp., a New Mexico-based nursing home, assisted living and hospice company.
Sun still keeps a low profile on Wall Street. Just one analyst follows the company, Charles Lynch of CIBC World Markets.
Lynch, through a spokeswoman, declined a request to send his initiation of coverage report.
Sun is dealing with another federal funding issue.
Earlier this month, Matros said he was confident Sun could handle cuts coming from the federal Deficit Reduction Act, which Congress passed in early February.
Those cuts would affect SunPlus Home Health Services, the company’s home healthcare unit, by about $900,000 a year.
Sun views that amount as “immaterial and expects to mitigate (the cut) through ongoing strategic initiatives in that business segment,” Matros said in a release.
Matros also said the law could affect SunDance Rehabilitation Corp., Sun’s contract rehabilitation business.
But executives couldn’t yet assess what might happen because federal regulators are looking at a process to accept therapy from a reimbursement cap.
“Management believes there are operational and structural initiatives that the company can execute to mitigate any potential negative ramifications,” Matros said.
Sun, which was founded in 1993 in Albuquerque, N.M., and still has a 250-worker back-office operation there, has about 21,000 workers. Around 35 people work in its Irvine corporate office.
