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DaVita rises on update to Medicare rates

NEW YORK (AP) -- Shares of kidney dialysis provider DaVita HealthCare Partners Inc. rose Tuesday after Medicare said it does not expect to cut payments for the popular Medicare Advantage program in 2014.

THE SPARK: After markets closed Monday, the Centers for Medicare and Medicaid Services said it expects the amount it pays per person on Medicare Advantage will rise more than 3 percent in 2014. In February the agency said those payments could fall more than 2 percent next year.

DaVita, which is based in Denver, operates around 1,950 dialysis clinics around the U.S. In 2012 the company paid about $4.42 billion to acquire HealthCare Partners, a doctor network operator that gets a significant amount of revenue from serving Medicare patients. That includes many Medicare Advantage beneficiaries.

THE BIG PICTURE: Medicare Advantage plans are offered by health insurers and subsidized by the government. They offer basic Medicare coverage plus extra benefits like vision and dental coverage.

In February the government released preliminary data that pointed to steeper-than-expected rate cuts for Medicare Advantage plans in 2014. The government uses that figure as a benchmark to determine payments for those privately run versions of the government's Medicare program that covers the elderly and disabled people.

THE ANALYSIS: Piper Jaffray analyst Kevin Ellich kept an "Overweight" rating on DaVita shares based on the news.

"We view the final Medicare Advantage rates as an incremental positive for DaVita since more than half of HealthCare Partners revenues are derived from Medicare Advantage contracts with health plans," he wrote. Ellich added that the company will face "less pricing pressure."

Deutsche Bank analyst Darren Lehrich upgraded the stock to "Buy" from "Hold" in a note to investors. He raised his price target to $136 per share from $130. Lehrich had downgraded the stock in February because he was concerned the Medicare Advantage cuts would hurt the company's earnings growth in 2014.

SHARE ACTION: DaVita rose $7.07, or 5.9 percent, to $126.98 in afternoon trading. Earlier in the session, the stock reached an all-time high of $128.74.