by Kim Dixon

Last Updated: 2008-04-25 16:00:35 -0400 (Reuters Health)

WASHINGTON (Reuters) – Nursing home stocks could get a bounce next week if feared cuts worth billions of dollars to their reimbursement rates under the U.S. Medicare insurance program for the elderly are softened.

Shares of publicly traded nursing homes have been beaten down this year on worries the government will follow through on proposed cuts of $4.7 billion over five years.

The Centers for Medicare and Medicaid Services (CMS) is expected to decide by the end of the month on potential payment changes resulting in cuts of between 2 and 3 percent, which President George W. Bush proposed in his budget earlier this year.

The looming decision by CMS has depressed the shares of Kindred Healthcare, Skilled Healthcare and Sun Healthcare.

Sun shares are down about 27 percent so far this year, Skilled Healthcare shares are down 21 percent and Kindred shares are down 11 percent.

But industry watchers say the market is being overly pessimistic. They cite bipartisan opposition from members of the U.S. House of Representatives, and Medicare’s history of proposing steeper cuts than it eventually decides on.

"We expect essentially flat rates, marking a better outcome than the market seems to expect," said James Kumpel, an analyst at Friedman Billings Ramsey. "In the past CMS has moderated its initial proposal."

Nursing home companies rely on Medicare to pay for about 80 percent of their services, according to the American Health Care Association (AHCA), a trade group for the industry.

Between 1 to 1.5 million Americans live in nursing homes, a number expected to swell as the baby boomer population ages.

About two-thirds of the industry is owned by for-profit companies, according to the trade group.


The government says it has overestimated how much it should be paying for very sick and expensive patients.

The Medicare Payment Advisory Commission, which advises Congress on how to spend nearly $400 billion on health care services, has separately proposed payment changes that would hurt for-profits.

But lawmakers have gotten involved in recent weeks, which could help the nursing homes’ cause.

"We are deeply concerned about the impact cuts of this magnitude would have on America’s most vulnerable seniors," a bipartisan group of 42 representatives said in an April 18 letter sent to U.S. House of Representative Speaker Nancy Pelosi and Republican leader John Boehner.

"Congressional efforts to prevent the cuts should be a positive for SNF (skilled nursing facility) providers," Oppenheimer analyst Michael Wiederhorn said.

The AHCA says nursing homes need the higher rates to account for losses they face when treating patients on Medicaid, the government program for the poor.

Medicaid pays $13 less than the cost of caring for each Medicaid patient, the group says.

"The cuts, of this size and scope proposed, fail to take into account the inherent reliance on Medicare to account for severe shortfall in Medicaid funding," the group said in a statement.

Expectations were set very low since negative comments about payments were made by a CMS official in February, according to Ipsita Smolinski, an analyst at JP Morgan.

"When you have this big looming federal regulation, I don’t think anyone is going to be comfortable until they see it," she said.

(Editing by Brian Moss and Tim Dobbyn)