Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
The Fallout From Medicare Reimbursement Cuts
Once again, the threat of Medicare reimbursement cuts has been temporarily reprieved. Since 2003, Congress has been working to appeal Medicare’s sustainable growth rate (SGR) formula, which would lower these payments to physicians and medical care companies by what now equates to about 27%.
The sustainable growth rate formula was created as a budgetary restraint, in hopes of controling Medicare spending. It determines the amount that should be paid for services based on GDP, not on the actual costs of the services. Therefore, any expenses, which surpass the reimbursement amount determined by the SGR, will result in cuts to physician’s payments, as well as to payments to medical service providers.
The latest delay in the cuts took place in mid February, when Congress approved a 10-month compromise bill, ensuring that current reimbursement rates are extended at least to the end of this year. Although good news, the recent legislation is merely just another temporary solution to what appears to be a lingering issue.
At the present time, there is no way to determine what the future holds for this legislation. What is known, however, is how the Medicare reimbursement cuts, if indeed put into effect, would affect certain companies within the medical services industry. Indeed, a number of them would see negative changes in their finances, which will not only affect their top and bottom lines, but may reach their customers, as well.
Brookdale Senior Living (BKD), which operates senior living facilities in the United States, has already felt a blow from cuts initiated in October, 2011. The reductions, although not as extensive as the proposed 27% cuts, reduced the reimbursement amount for skilled nursing patients. This group makes up about 7% of the company’s total revenue.
The recent adjustments to the reimbursement rates have put pressure on Brookdale’s performance. The company will likely initiate modest price increases, which should somewhat bridge the gap caused by the losses. Nevertheless, the top line will still suffer. It is important to remember that this is the result of a lesser reimbursement cut than the proposed cut that continues to be put off. Consequently, it can be expected that passage of the 27% rate reduction will have a greater effect on the company and its patients.
Amedisys, Inc. (AMED) provides home healthcare nursing solutions in the United States. At the beginning of 2011, the company faced a 5.2% reimbursement cut on its Medicare revenue. This contributed to a full-year 2011 share net decline of $1.68 per share, a 45% decrease over 2010’s showing.
The company is now faced with additional cuts this year, which will probably weigh further on its financials. In response to the reimbursement reductions, Amedisys is working to increase the portion of its revenue that does not rely on Medicare dollars. It has already signed a couple of contracts with large insurers, which should help this cause by bringing in new commercial participants. Further cuts, however, are likely to outweigh these additions and lead to further erosion of the bottom line.
Lincare Holdings (LNCR) has had a similar experience. In 2011, the provider of oxygen and respiratory services to home-based patients saw a 3.1% reduction in its payments, but was able to spare its bottom line through share repurchases.
Unlike the companies already mentioned, however, further cuts may actually help Lincare Holdings expand its reach. The market for patients who require respiratory care is increasing, and is often served by local and national providers. Additional reimbursement reductions will likely put these smaller providers in a difficult position, thereby promoting industry consolidation, which Lincare should be able to take advantage of.
The future of companies within the medical services industry, particularly those who cater to Medicare patients, is plagued with uncertainty. It is true that some of the larger players, such as Lincare Holding, and lab companies Laboratory Corporation of America (LH) and Quest Diagnostics (DGX), may be able to withstand the headwinds that will come from Medicare reimbursement cuts. Many others, however, will likely find themselves burdened by decreasing revenues and marginal pressure, challenges that will probably be difficult to overcome.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.