Sector Snap: Health care services

In the last week, Senate Republicans and Democrats have introduced competing Medicare reform bills. The bills have several ideas in common; both would eliminate a 10.6 percent pay cut for doctors who treat Medicare beneficiaries. Neither bill is likely to pass on its own, and President Bush has promised to veto the Democrats' version due to concerns over reduced options and benefits for some Medicare Advantage users.

Jefferies analyst Arthur Henderson said the two bills offer similar benefits to ambulance providers, lab companies and dialysis providers.

Reimbursement rates for emergency services companies will rise, he said, which helps Emergency Medical Services Corp. and Rural/Metro Corp. Dialysis companies will get a hand from increased screening for chronic kidney disease, and competitive bidding would be eliminated for lab operators like Quest Diagnostics Inc.

The Democratic bill requires advanced imaging providers to be accredited, which Henderson said would help Alliance Imaging Inc. and Radian Group Inc. It would also cut reimbursement for stationery oxygen equipment by 29 percent.

The Republican bill offers larger payments to rural nursing home providers and requires competitive bidding for durable medical equipment providers, and would keep respiratory reimbursement rates the same. The analyst says the compromise bill will include a rate cut that is "meaningfully less than 29 percent."

Henderson said LHC Group Inc., a post-acute health care services company, gets 60 percent of its revenue from rural markets. He added that nursing home services company Amedisys Inc. and home health care services company Gentiva Health Services Inc. would also benefit from that bill.

Investors are already factoring in a large cut in oxygen equipment reimbursement, he wrote, so a smaller one would boost Lincare Holding Inc. shares, and the bidding on durable equipment would help Lincare and Medco Health Solutions Inc.

In a Thursday client note, Andrew Parmentier of Friedman Billings Ramsey said e-prescribers and imaging services companies are also likely to get a boost from the final bill, as both versions contain "identical language" in those areas.

In afternoon trading, shares of Amedisys gained 47 cents to $51.28. Quest Diagnostics stock rose 51 cents to $50.47.