Nursing Homes Beg for Medicare Mercy as Credit Downgrade Looms

Nursing homes such as Sun Healthcare Group Inc. (SUNH) can’t absorb more cuts from U.S. health programs after an 11 percent Medicare payment rollback and enactment of a deficit-reduction law that threatens a 2 percent cut, the industry’s Washington lobby said.

The financial pressures have triggered a review by credit ratings service Standard & Poor’s, which yesterday placed the debt of for-profit homes including Sun and Skilled Healthcare Group Inc. (SKH) on watch for a downgrade from B, already five steps below investment grade. Standard & Poor’s said the 11 percent reduction that goes into effect in October will erode earnings.

“There comes a point in any sector when additional cuts can no longer be shifted, absorbed or passed through to others,” said Mark Parkinson, chief executive officer of the American Health Care Association, the industry’s Washington lobbying group. “For our profession, that tipping point is right now.”

A new reimbursement system implemented last year led to nursing home overpayments from Medicare, the federal health plan for the elderly and disabled. A rollback announced July 29 will force operators to give up $3.87 billion next year.

Company shares have been under pressure since April 28, when Medicare issued a draft regulation saying it might cut payments to the companies because of overbilling. Since then, shares of Irvine, California-based Sun Healthcare have fallen 76 percent; Louisville, Kentucky-based Kindred Healthcare Inc. (KND) has declined 51 percent; and Skilled Healthcare of Foothill Ranch, California; has fallen 66 percent. All are currently trading at their lowest prices this year.

Share Decline

Nursing home stocks are trading at their lowest prices all year. Kindred shares fell 80 cents, or 5.8 percent, to $12.93 at 4 p.m. in New York Stock Exchange composite trading. Skilled shares fell 37 cents, or 7.5 percent, to $4.58. Shares of Sun fell 1 cent to $3.29.

Medicare payments for services including post-surgical rehabilitation make up 23 percent of the industry’s revenue though only constituting 12 percent of the patient volume, according to the Medicare Payment Advisory Commission. Homes made an 18 percent profit margin on Medicare patients in 2009, the commission said. In total, the program paid nursing homes $26.4 billion on nursing home payments in 2010.

The industry’s lobbying group pledged to fight cuts that could be included in a package drawn up by a bipartisan commission charged with finding at least $1.2 trillion in U.S. budget cuts by Nov. 23. If the group doesn’t get its cuts through Congress, Medicare will automatically slash provider payments by 2 percent starting in 2013.

On Watch

The financial pressures have led Standard & Poor’s to put six for-profit nursing homes on watch for a downgrade, the ratings company said in a statement. Sun, Kindred Healthcare and Skilled Healthcare were the three publicly traded companies called out by the agency for a potential downgrade. Skilled and Sun both have B ratings, and Kindred a B plus.

The ratings company said that falling revenue will make it difficult for the companies to sustain margins. “Resulting payment reductions will impair cash flow prospects and create a challenge for our low-speculative-grade rated for-profit nursing homes to cope with tighter liquidity,” the company said of Sun Healthcare.

The three other operators affected are closely held and include HCR Manorcare Inc., which is owned by Washington-based private equity firm Carlyle Group.

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.

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