Gentiva, DaVita, Sun Healthcare Face Risk From Medicare Cuts, Moody's Says

Home health-care companies, nursing facilities and medical-equipment makers are facing more than $70 billion in federal reimbursement cuts, raising risks for bond- holders, Moody’s Investors Service said in a report.

Medicare pays more than $300 billion a year to medical services and equipment providers, making them susceptible to rate cuts, the New York-based credit-rating service said today. The health law signed into law in March trims federal payments to home-nursing agencies by $40 billion over a decade starting in 2014, and earlier laws will cut $28 billion for makers of home-health and oxygen equipment, Moody’s said.

Those cuts, and others potentially coming down the line, may lower revenue and raise borrowing costs on for-profit companies, making debt less attractive, Moody’s said. Among those affected may be Gentiva Health Services Inc. of Atlanta, the top home-care provider; DaVita Inc. of Denver, the biggest dialysis provider; and the nursing-home chain Sun Healthcare Group Inc. of Irvine, California, rating service said.

“There are more cuts to come, and sectors that are continuing to earn high profit margins, or grow very quickly, will be the most targeted in the future.” said Jessica Gladstone, an analyst for Moody’s, in a telephone interview. “Health-care reform didn’t really solve a lot of the problems we have in terms of budget deficits,”

For-profit companies rated by Moody’s had more than $83 billion in debt outstanding as of June 30, Gladstone said. Seventy percent of those businesses get at least a third of their annual revenue from Medicare, the program for the elderly and disabled, and Medicaid, the insurer for the poor, the credit agency said in its report.

Gentiva Sales

Gentiva, which operates 350 home-care agencies, generated 87 percent of its sales last year from the two programs, Moody’s said. DaVita generated 65 percent. For Sun Healthcare, owner of more than 200 nursing homes and post-acute care centers, the figure was 70 percent.

A 10 percent cut in Medicare payments, for example, would reduce Gentiva’s revenue by 8.2 percent a year, DaVita’s by 5.7 percent, and Sun Healthcare’s by 3 percent, Moody’s estimated.

Scott Cianciulli, a Gentiva spokesman, and Kelsey Rood, a DaVita spokeswoman, declined to comment on the outlook. Messages weren’t returned by Sun Healthcare’s media office.

Peter T. Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a DaVita director.

Spurring Consolidation

Funding cuts are likely to spur consolidation in the hardest-hit industries, or push smaller players out of business, Gladstone said. That may help larger companies such as Gentiva, which bought hospice operator Odyssey HealthCare Inc. in August for about $1 billion, she said.

With reimbursement rates likely to change, growth carries risks as well, the analyst said.

“Companies need to be a little bit more mindful about just taking on leverage and assuming they’ll be able to pay it off by assuming current payment rates,” she said.

To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at Rgale5@bloomberg.net