Sector Wrap: Health care spending

Analyst says potential health care spending cuts could hit post-acute care stocks and REITs

Associated Press

NEW YORK (AP) -- A Stifel Nicolaus analyst said Monday that the threat of health care spending cuts could hurt a variety of stocks in the health care sector, including companies that own hospitals, rehabilitation and nursing facilities, and companies that own health care real estate.

Because of an obsolete 1990s budget law, Medicare payments to doctors are scheduled for cuts every year. Congress waives the cuts on an annual basis but has never repealed the rule itself. In 2013, payments to doctors were scheduled to be cut 27 percent, and in 2014, the number is projected at 24.4 percent.

Earlier this year, the Congressional Budget Office lowered its estimate for how much it would cost to repeal the formula that is responsible for the proposed cuts: it believes the change would cost $138 billion over the next 10 years.

A House committee has passed legislation that would eliminate the formula and make the annual "doc fix" unnecessary. House and Senate committees will have to find a way to pay for those costs, and analyst Robert Mains said he thinks Medicare providers will be a target for cuts.

"This, we feel, creates headline risk for post-acute care providers (long-term care hospitals, rehabilitation hospitals, skilled nursing facilities, home health agencies) and the real estate investment trusts that own their real estate," he wrote.

Even if the cuts aren't made, Mains said speculation could hurt the stocks. He said the most vulnerable companies include HealthSouth Corp., which runs inpatient rehabilitation facilities; Kindred Healthcare Corp., which runs nursing and rehabilitation centers and long-term acute care hospitals; Ensign Group Inc., which provides urgent-care, assisted-living, rehabilitative and other services at health care facilities; and nursing home operator Skilled Healthcare Group Inc.

Mains said the health care real estate investment trusts, or REITs, that get the most income from skilled nursing facilities include Omega Healthcare Investors Inc. and Sabra Health Care REIT Inc., while Medical Properties Trust Inc. and Healthcare Realty Trust Inc. could be hurt by changes in hospital reimbursement rates.

Shares of HealthSouth gained 15 cents to $32.32 in trading Monday, while Kindred shares lost 4 cents to $15.30, Ensign shares rose 2 cents to $38.76 and Skilled Healthcare stock gave up a penny to $5.07. Omega Healthcare Investors shares fell 15 cents to $28.97 and Medical Properties Trust stock shed 28 cents, or 2.3 percent, to $12.10.

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