CMS Updates Coming

Some time in the next 2 weeks CMS will come out with their annual update — probably not this week but the following.  We’ve gone back through the last MEDPAC report and below is their recommendation to CMS for fiscal 2011: Hospitals – Market basked less upcoding adjustment <=2% per year Home Health – 0% update + rebase payments to cost + renew HH agencies with unusual billing patterns Skilled Nursing – 0% update LTACH – 0% update + very short stay have decline starting 12/31/10 (16% of all admissions) Rehab Hospitals – 0% update The US Senate Committee on Commerce, Science, and Transportation issued a report titled “Implementing Health Insurance Reform:  New Medical Loss Ratio Information for Policymakers and Consumers”.    The report discusses how the insurance industry has already begun to shift administrative costs to be medical costs.  Under the insurance reform bill, insurance companies must spend at least 85% of the policy premium dollar on medical expenses for group plans and 80% for individual plans.  By shifting expenses from “administrative” to “medical”, plans that have not historically hit these targets presumably can now achieve the targets without lowering premiums.  Wellpoint was singled out as a company that had …

Early April

First, the analysts are making significant negative adjustments to 2011 home healthcare earnings based on the healthcare reform bill — and at the same time boosting 2010 estimates.  All three major companies are now expected to have declining earnings in 2011.  Over the past 4 weeks, LHC Group has outperformed, Gentiva is about unchanged and Amedisys is down in an up market.  Valuations for both Amedisys and LHC Group are about 1.25x revenue and 7-8x EBITDA which I think is reasonable — certainly not cheap.  Gentiva is the least expensive and there is probably more of an opportunity for earnings upside in Gentiva given the turn around progress they have been making.  I’d be cautious on the sector. Second, the hospitals continue to outperform — however, three weeks from now CMS should be out with fiscal 2011 proposals.  I think we should be paring back positions two weeks from now.  I met with several hospital execs in Nashville this past week and one exec lamented that “Wall Street is drinking the Kool Aid”.   He went on to say that all analysts want to talk about his how his bad debt is going to go down and how much upside his …