A swing and a hit

Standard & Poor's helped prompt financial markets' wide swings last week with its downgrade of U.S. credit, compounding the uncertainty facing healthcare as Congress moves to squeeze more than $1 trillion from the nation's deficit.

And to underscore the risk healthcare companies face in coming months, the ratings agency released a report highlighting companies' exposure to Medicare, a top option for cuts as lawmakers proceed.

Expectations that Congress will curb Medicare spending on hospitals, doctors and other health services to blunt the budget deficit have intensified since the Budget Control Act, signed into law Aug. 2, set down a Thanksgiving deadline for a dozen lawmakers to draft deficit cuts of $1.5 trillion.

President Barack Obama stated last week that “modest adjustments” to Medicare would be necessary to reduce the deficit.

S&P noted last week in its report, The Deficit Remedy Could Be Toxic for U.S. Health Care Companies, that Medicare accounts for at least half of all revenue for nine for-profit healthcare companies. More than a dozen companies rated by S&P garner 30% to 50% of their revenue from Medicare.

“We are in a difficult period where healthcare is the focus of every debate in Washington, where seniors and their benefits are cast into a negative spotlight,” said Tony Strange, president and CEO of Gentiva Health Services, a publicly traded home care and hospice company, during a conference call days after passage of the budget act.

Gentiva is one of the nine companies—others include dialysis giant DaVita, long-term acute-care company LifeCare Holdings, and inpatient rehabilitation operator HealthSouth Corp.—rated in S&P's report as having “high exposure” to Medicare.

Healthcare stocks oscillated sharply throughout the week, as the Dow Jones industrial average saw four days of 400-point changes. Home healthcare operators hope to avert Medicare reductions or enrollee copayments with proposed legislation that would generate $23 billion over 10 years through fraud prevention and greater oversight.

A sell-off of HealthSouth prompted a conference call last week by Jay Grinney, the company's president and CEO, who called the markets' response to the Budget Control Act “way overdone.” Ginney released projections for two deficit-reduction scenarios and said the company did not panic on news of the deficit compromise. “Make no mistake, we didn't like the prospect of further payment cuts because we already faced reduced Medicare payments from the Affordable Care Act, but we didn't panic either,” he said.

HealthSouth based projections for Medicare reductions under the deficit reduction “supercommittee” on prior proposals, such as the National Commission on Fiscal Responsibility and Reform, because new deficit reductions must be presented to Congress by Thanksgiving, Ginney said, “which obviously is not a lot of time.”

HealthSouth would see an estimated impact in 2012 of $7 million on adjusted earnings before interest, taxes, depreciation and amortization.

The “worst case” scenario—default cuts should the deficit-reduction committee efforts fail or fall short—would have an impact of $32 million in 2013 on adjusted EBITDA, he said.

S&P called the deficit fix potentially “toxic,” in particular for the companies, including HCA and Kindred Healthcare, that rely on Medicare for more than 30% of their revenue.

“The U.S. debt crisis has put a fire under the government's efforts to slow growth in healthcare spending,” S&P said in one of two reports released last week that offered grim outlooks for Medicare payment to providers.

HealthSouth is expected to receive a 1.1% increase to its prospective payment rates in 2012, the report noted. Hospital operators appear to be particularly vulnerable, the report said.

“Because the hospital sector represents the single largest category of healthcare spending, we believe the federal government's efforts to manage the U.S. deficit could lead to significant reimbursement cuts in this area,” analysts wrote.

For Ardent Health Services, Capella Healthcare, HCA, Health Management Associates, Iasis Healthcare Corp., LifePoint Hospitals and Vanguard Health Systems, Medicare accounts for 30% to 50% of revenue, the report said.

Ed Fishbough, a spokesman for HCA, said in an e-mail he could not speak specifically to potential Medicare cuts so early in the process, but the company would monitor developments through two major trade groups.

Separately, Moody's Investors Service called Medicare reductions “inevitable” in coming years and warned hospitals could see credit ratings drop “in the absence of significant expense reductions and productivity gains.”

The payment squeeze follows slower growth in hospital admissions that began with the Great Recession, as well as weaker demand for outpatient surgeries, visits and emergency room care that began in 2009, Moody's said.

Medicare accounted for 43% of revenue for the median hospital in Moody's not-for-profit portfolio. Managed care made up 22% of revenue and Blue Cross payments another 16%. Medicaid was the source of 11% of revenue.