The SeniorCare Investor: Skilled Nursing Stocks Drop–

CMS Announcement Sends SNF Investors Fleeing
There was a fair amount of “big” news in the skilled nursing market in April, not the least of which was the rather unusual announcement from the Centers for Medicare & Medicaid Services (CMS) proposing new SNF Medicare rates for fiscal 2012 with a net increase of 1.5%, or maybe not.  Behind Door #2 was a net decline of 11.3% for fiscal 2012, which investors latched onto and viewed as devastating to the sector, sending most of the public companies’ shares spiraling downward after the announcement. The industry was caught off guard because “the consensus thinking” was that CMS needed more time to determine the full impact of the new RUGs-IV rates beyond the few publicly traded companies that reported better-than-expected profits, mostly from Medicare, for the fourth quarter of 2010 when the rates went into effect.  The consensus was they would want a full year of data before making any recommendations.  Beware the consensus.
As a result of the announcement, and the fear that the reality will be a rate cut sooner than later, Kindred Healthcare (NYSE: KND), Sun Healthcare Group (NASDAQ: SUNH) and Skilled Healthcare (NYSE: SKH) all dropped by 19% (unusual consistency on the part of investors), while The Ensign Group (NASDAQ: ENSG) lost 18% and National HealthCare (AMEX: NHC) dropped only 3%.  Kindred has recovered the most since then, but this sort of announcement has always been the investor’s nightmare with the skilled nursing industry, known as “the stroke of the pen” risk. 
While we can’t possibly guess at CMS’s motives for putting out such a wide range of rate change possibilities, other than letting the industry know what the outside boundaries for negotiations are, it does seem to be a little irresponsible, especially given what is going on with proposed Medicaid rate cuts in many states, which we also view as a negotiating starting point (although some of the larger rate cut proposals by some states are non-starters for the industry).  CMS can play some games, but from what we hear, there are enough leading members of Congress, on both sides of the aisle, who know what is going on in the industry and will never let an 11.3% cut go through, especially with the proposed Medicaid cuts currently on the table that are more real.  This is not to say that there will not be a correction to the RUGs-IV rates, as there is a high probability that there will be some adjustments.  It’s just that the investor overreaction, while predictable with their herd mentality, also represented a buying opportunity for some of the stocks.  The selling reaction was also an excuse for investors to take some of their profits, as several of the publicly traded chains had seen their share prices jump by 28% to 60% in the first quarter this year. 
The goods news for the industry, at least in terms of making their case for minimal Medicare rate changes, is that at least one company (KND) has reported that its average length of stay for Medicare patients has declined since RUGs-IV was implemented, by just over two days.  One interpretation of that is that they are treating, and returning to home, a number of rehab patients faster, but with more therapy hours than in the past.  While the absolute “rate” may be higher than before, the overall cost may be lower or cost-neutral to the health system with two fewer days, which can add up to more than $1,000 over that two-day period.  One of the problems with CMS and how it looks at Medicare skilled nursing rates is that it does not look at outcomes.  You can talk all you want about accountable care organizations, but CMS really does not consider whether Mrs. Jones went home in 14 or 21 days, and how well she did once she arrived at home, when they are reviewing Medicare rates for SNFs.  That is supposed to change at some point in the future, but we are not holding our breath…Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today