Health Stocks Hit By Worries Of Debt Deal Impact On Medicare

Health-care stocks took a broad hit Monday on concerns the U.S. debt-limit compromise will lead to reduced spending by Medicare, squeezing a source of revenue that fuels hospitals, health insurers, medical-device companies and other firms.

Under the terms of the debt deal announced Sunday, reductions in Medicare payments to health-care providers would automatically take effect if Congress fails to adopt deficit-reduction measures hammered out by a committee later this year, or if that committee can't find enough savings. Medicare benefits, however, are supposed to be left intact.

The potential for less Medicare spending followed news from Friday that Medicare is planning to sharply cut reimbursement rates for nursing-home operators. Those cuts have investors "waking up to the fact" that health-care spending "will be in the crosshairs" in the next few months as the debt deal provisions progress, ISI Group analyst Joe Ruggieri wrote in a research note.

Hospital stocks felt the impact, with industry heavyweight HCA Holdings Inc. (HCA) recently trading down 7.2% to $24.77. Elsewhere in the sector, Universal Health Services Inc. (UHS) sank 8.2% to $45.69 while LifePoint Hospitals Inc. (LPNT) slipped 5% to $35.23.

The industry--already on the hook for $155 billion in Medicare and Medicaid savings over 10 years under the U.S. health overhaul law--warned against further cuts.

"Funding reductions for hospital services translate into decreased access for our nation's seniors," said Rich Umbdenstock, president and chief executive of the American Hospital Association, adding the Medicare program should be exempt from automatic cuts.

"Cuts to Medicare funding for hospital care could overload emergency rooms, shut down trauma units and reduce patient access to the latest treatments," Umbdenstock said.

The cuts aren't guaranteed, since the committee of lawmakers is charged with finding a $1.5 trillion deficit-reduction package in a second round of cutting under the overall plan. Additionally, lawmakers have to pass the debt deal.

CRT Capital analyst Sheryl Skolnick noted the cuts would be limited to 2% of the Medicare program's cost and "could have been much worse." She felt investors overreacted to the news.

But health-care investors weren't in a buying mood Monday. Stocks throughout the managed-care sector shrugged off a strong second-quarter report and guidance raise from Humana Inc. (HUM), sinking on worries about fallout from Medicare cuts. Health insurers provide coverage through plans tethered to the government program for seniors.

Humana shares were down 2.3% to $72.87 in recent trading while UnitedHealth Group Inc. (UNH) sank 3.8% to $47.73. Cigna Corp. (CI) shares fell 4.2% to $47.66.

Medical-device stocks were also lower Monday, with declines for many big companies outpacing the slumping broader market. Device makers negotiate with hospitals to sell pricey items like defibrillators and replacement knees, and their product prices are already under pressure from aggressive hospital bargaining.

Medtronic Corp. (MDT), the biggest stand-alone device maker, declined 3.3% to $34.86. Heart-device competitor St. Jude Medical Inc. (STJ) fell 3% to $45.11.

Shares of hospital bed maker Hill-Rom Holdings Inc. (HRC) dropped 8.3% to $34.21 in recent trading. Its decline was more linked to Medicare's announced reimbursement cut late Friday, although Piper Jaffray said the market's reaction was unwarranted due to Hill-Rom's minimal exposure.

The government agency that runs Medicare said it planned to cut reimbursement rates to nursing-home operators by 11.1% in the next fiscal year, sending shares of companies like Sun Healthcare Group Inc. (SUNH), Skilled Healthcare Group Inc. (SKH) and Kindred Healthcare Inc. (KND) into a steep dive Monday. Sun Healthcare shares lost more than half their value.

Drug makers also were included in Monday's sell-off, although to a much lesser degree due to limited direct exposure to shrunken hospital payments. Merck & Co. (MRK), Pfizer Inc. (PFE) and Sanofi-Aventis SA (SNY) posted modest declines.

-By Jon Kamp and Peter Loftus, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

(Melissa Korn contributed to this article.)

Hill Rom (NYSE:HRC)
Historical Stock Chart
From May 2024 to Jun 2024