THC Biomed (CSE:THC)
Historical Stock Chart

From May 2019 to May 2024

Hospital stocks face a potential risk soon when Medicare publishes its proposed inpatient payment rates for 2010, with some on Wall Street predicting the government may effectively seek little or no increase.

The Centers for Medicare & Medicaid Services could propose the 2010 reimbursement rates as early as next week, providing a first glimpse at the government's plans for payments that can comprise a substantial portion of hospital revenue.

Medicare rates are closely watched for an industry that has struggled in recent years with high levels of uninsured patients and unpaid patient bills, and generally tepid growth in admissions of commercially insured patients. The recession isn't helping, and shares of hospital operators are trading well below their historic valuations, likely pressured by uncertainty over the 2010 Medicare rates.

"We expect this year's proposal will likely look worse on the surface than prior years," Barclays Capital analyst Adam Feinstein wrote recently, although he expects the final rate published later this year to be better than the proposal, as is typically the case.

Pomeroy Research and Soleil Securities Group analyst A.J. Rice on Wednesday predicted that, when the final rates come out this summer, hospitals will receive a 1% to 2% net rate increase, which is smaller than the historic 3% to 3.5% growth. The initial rate could be flat to slightly positive, he said.

Stocks that may be sensitive to CMS' proposed rates, which will come in the form of an "inpatient prospective payment system" rule, include those of Health Management Associates Inc. (HMA), Community Health Systems Inc. (CYH), LifePoint Hospitals Inc. (LPNT), Tenet Healthcare Corp. (THC) and Universal Health Services Inc. (UHS).

While hospital shares are up this week after privately held HCA Inc. previewed its first-quarter results, they remain well off their year highs.

CMS bases its hospital rates on an inflation-related "market basket" update, which may be lower than usual this year because of lower inflation rates.

In addition, industry observers are waiting to see whether the agency makes a substantial downward adjustment for hospital "coding creep." That refers to CMS' expectation that hospital coding of patient conditions tied to changes in Medicare diagnosis groups will result in higher aggregate payments without a corresponding increase in severity of illnesses.

"It is entirely possible that this adjustment could completely offset the market basket increase, thus resulting in hospitals receiving no rate increase in FY10," or even a rate reduction, Feinstein noted, although he expects changes may be phased in over several years.

He predicted the market basket increase itself is likely to be below the 3% to 3.5% increase that hospitals have received in recent years, and that this will be a problem for hospitals only if their inflationary pressures outstrip the market basket rise.

Medicare overall can account for between 30% and 65% of hospital revenue, depending on a facility's location, according to CRT Capital Group analyst Sheryl Skolnick. She considers the key question about the 2010 proposed inpatient rate to be whether CMS will seek to reduce payments to hospitals for coding creep at a faster pace than it already has.

She is also looking for whether the Medicare program does anything else to cut reimbursement or tie hospital reimbursement to quality or readmission rates, or to bundle payments to hospitals for acute and post-acute care.

President Barack Obama, in his 2010 budget blueprint, is seeking savings in Medicare reimbursement to hospitals over 10 years, largely through the bundling of acute and post-acute care payments to hospitals and tying payments to readmissions. Pomeroy's Rice doesn't expect the bundling or readmission ideas to surface in the 2010 inpatient reimbursement rates.

"Will CMS seek to reduce Medicare spending on the backs of already weakened hospitals?" asked CRT's Skolnick. "We'll see."

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com