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Community Health Faces Penalties in Medicare Rules Shift

Community Health Systems Inc. and LifePoint Hospitals Inc. may face the biggest reductions in payments next month when the U.S. Medicare program starts penalizing providers with high readmission rates, according to an analysis of government data by CRT Capital Group LLC.

The penalties may mean 2013 results fall below analyst estimates at the two hospital chains, according to a note today from Sheryl Skolnick, an analyst at Stamford, Connecticut-based CRT. Community Health, the second-biggest U.S. hospital owner, may lose $14.3 million in Medicare payments, she estimated. A spokeswoman for the Franklin, Tennessee-based company said it expected to pay only about half that much.

Medicare, the government-backed program for the elderly, will reduce reimbursements by as much as 1 percent starting Oct. 1 at hospitals with high readmission rates for patients with heart attacks, pneumonia and other ills. While the initial cuts may be small, they’re due to increase in future years and private insurers may follow suit, Skolnick said.

“For those hospitals receiving either the full or close to the full 1 percent cap on cuts, fiscal 2013 is shaping up to be a painful year,” Skolnick wrote. “The lack of investment in preventing readmissions by controlling the things a hospital can control may well have led to ‘overstated’ earnings.”

The projections are based on government-collected readmission and mortality rates from 2008 to 2011 and may not be as precise as forecasts made by the companies themselves, Skolnick said.

HCA Rates

Quality scores may also endanger profit forecasts at Vanguard Health Systems Inc., she said. Nashville, Tennessee-based Vanguard may lose about $3 million in Medicare revenue, while LifePoint, based in Brentwood, Tennessee, stands to lose about $4.5 million, she estimated.

Readmission rates were lower, and the potential penalties less severe, at the biggest U.S. chain, Nashville-based HCA Holdings Inc., as well as for Dallas-based Tenet Healthcare Corp., the No. 3 chain, according to CRT’s analysis.

Community Health expects reimbursement cuts to be about $5 million to $7 million, said Tomi Galin, the company spokeswoman. It also projects some increased payments from Medicare as it meets other quality incentives, she said in an e-mail.

‘Top Performers’

The chain’s hospitals “are focused on initiatives to continuously improve the quality of care delivered for their patients,” Galin said. Fifty of the its hospitals were cited as “top performers” today in a report issued by The Joint Commission, the Oakbrook Terrace, Illinois-based group that accredits health-care organizations, Galin said.

Diane Huggins, a spokeswoman at LifePoint, and Gary Willis, a senior vice president at Vanguard, didn’t immediately return messages seeking comments.

Cuts to Medicare revenue at individual hospitals may average 0.4 percent at the three companies, Skolnick said.

Community Health rose less than 1 percent to $29.37 at the close of New York trading, while LifePoint shares fell less than 1 percent to $43.25. Vanguard rose 7.5 percent to $11.50 after Joseph France, a Cantor Fitzgerald LP analyst in New York, said in a note that patient volumes at its hospitals were increasing.

High readmissions may be explained by higher poverty rates in some areas, though it’s not the whole story, Skolnick wrote. HCA and Tenet operate in many low-income areas yet had higher quality scores than rivals in many cases, she said.

“We think it is now appropriate for investors to hold management teams accountable for not investing in quality improvement programs for the last decade,” she wrote.

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