The debt of health care names dropped following proposed regulation by The Centers for Medicare and Medicaid Services (CMS) to reduce Medicare reimbursement for long-term acute care hospitals in fiscal 2007. LifeCare Holdings's 9 1/2% '13 bonds dropped 20 points to 57 and the term loan was down to 90-91 from the mid-90s the prior week. Select Medical Corp.'s 7 5/8 '15 bonds were down seven points to 90 and the term loan was down to 98 3/8 from par, according to a trader.
According to a CMS fact sheet, the proposed rule provides for no increase in the Medicare payment rates to long-term care hospitals for patient discharges taking place on or after July 1, 2006 through June 30, 2007. It is proposing that the federal rate remain at $38,086.04. Payments under the long-term care hospital prospective payment system is updated annually. A JPMorgan report explains that while the base rate is proposed to remain flat with rate year 2006, there is a potential "back door" rate cut proposed by payment methodology changes in the short-stay outlier cases (SSO) parties discharged early which could have a negative impact. CMS estimates that SSO cases represent about 37% of long-term acute care hospital discharges.
David Peknay, a Standard & Poor's analyst, notes in a report that if the regulation is enacted, Medicare reimbursement to these hospitals could fall an average of about 10.4%. LifeCare, Select Medical and Triumph HealthCare Holdings were all placed on CreditWatch with negative implications by the ratings agency.
David Lugg, a director in healthcare ratings at S&P that participated in discussions regarding these credit actions, said the companies may trip covenants in their bank agreements and if the proposal goes through without changes, the effect in cash flow will be dramatic and it would seem impossible for these companies to meet their performance commitments. Calls to the banks that lead the loans for those companies were not returned. A spokeswoman for CMS declined comment. The proposal is subject to a comment period that will last until late March with a final ruling expected to be published in May. One banker said, "The proposal is fairly negative, but it is just a proposal. The industry is going to lobby against it. I think you would expect some ratings changes before the proposal goes into effect, however."
S&P writes that 72% of Select Medical Corp.'s long-term acute care revenues are derived from Medicare and this cut, without considering any actions the company may take, could be about $90 million in revenues or about 25% of EBITDA. About 80% of LifeCare Holding's revenues come from Medicare, so again, without considering actions the company may take, the cut could equal about $30 million in revenues or about 40% of EBITDA. Triumph also receives about 80% of its revenue from Medicare. This cut would equal about $30 million in revenue, or almost 50% of EBITDA. Calls to the three companies were not returned.
Kindred Healthcare, another company potentially affected by the regulation but unrated by S&P, issued an 8K saying that for the nine months ending Sept. 30, Medicare revenue for those hospitals was about $822 million. The company says in the filing it will work with trade associations and other advocacy groups to submit its comments in opposition to the proposed rule during the 60-day public comment period. According to JPMorgan, Kindred has 72 long term acute-care hospitals that represent 36.5% of revenues. The office of Richard Lechleiter, executive v.p. and cfo of Kindred, said he is not commenting on the matter.