Sector Wrap: Health Care Providers

Analyst William Bonello said Congress could potentially draft a bill in late May or June.

"We believe that few provider groups will be cut, as the cost estimate for an 18-month physician fix has dropped dramatically to about $8 billion from approximately $11 to 12 billion," Bonello wrote in a note to clients late Monday.

But he said oxygen providers are at risk, as the Senate could consider cutting reimbursement for traditional oxygen concentrators by as much as 39 percent, while more than doubling reimbursement for traditional portable oxygen. He estimates such a cut would dramatically reduce 2009 earnings per share for Apria Healthcare Group Inc. and Lincare Holdings Inc.

"That said, we view a 40 percent cut as a worst-case scenario and we also believe it is possible that companies could mitigate some of the impact by shifting product mix away from traditional portable equipment to home fill," Bonello added.

The analyst thinks dialysis providers such as DaVita Inc. and Fresenius could benefit in the short-run from the bill's development, though any dialysis-related provisions are likely to be budget neutral over a five-year time period.

Bonello considers risk to home health providers to appear limited, and even thinks Congress could consider a 5 percent rural add-on payment which would help companies like Amedisys Inc., Gentiva Health Services Inc. and LHC Group Inc.

Bonello said general acute care hospitals shouldn't be impacted, but physician-owned hospitals such as MedCath Corp. could be at risk if the Senate cuts Medicare Advantage funding for indirect medical education (teaching hospitals). He does suggest though, that MedCath could likely buy out physician ownership.

Finally, Bonello thinks the odds of a nursing home cut while less than 50 percent is still higher than the odds of cuts in home health care.

"Of the market basket adjustments proposed by MedPAC, we believe that skilled nursing facility payments would be one of the first to be tapped if a bill cannot be funded through Medicare Advantage and oxygen cuts alone," he wrote.