Hospitals and Nursing Homes Brace for Medicare Cuts

Hospital and nursing home managers are reaching for the aspirin again. No matter who wins on Nov.6, most Democrats and Republicans agree in principle that federal spending on Medicare and Medicaid will need to go under the knife, above and beyond the cuts written into the 2010 health-care overhaul.

Illustration by Andrew Joyce

While history suggests its hardly a sure thing that the two parties will reach a deal, even the possibility of one is a risk for institutional health-care providers. Thats because there arent a lot of other places to find savings. Congress has so far proved unwilling to slice doctors pay. Big Pharma makes for a good populist target, but prescription drugs are less than 10percent of total Medicare and Medicaid spending. That leaves hospitals and nursing homes.

Hospitals will get $450billion next year from Medicare, the program for the elderly, and Medicaid, the program for the poor. Thats almost half their total funding, according to federal projections. Nursing homes will get $89billion, equal to 55percent of their revenue. Losing any of that money will hurt bottom lines and test business models.

Illustration by Andrew Joyce

Brookdale Senior Living (BKD), Kindred Healthcare (KND), and Sun Healthcare Group (SUNH), the three largest operators of nursing and residential-care facilities by revenue, declined to answer questions about their preparations for possible future cuts. So did HCA Healthcare (HCA) and Community Health Systems (CYH), the countrys largest hospital companies. In conversations with investors, however, executives have laid out a number of possible strategies.

Hospitals in particular are about to lose as much as to 2percent of their Medicare revenue under the so-called sequestration bill, passed by Congress in return for raising the debt ceiling in 2011. Those cuts may become a dress rehearsal for dealing with further reductions down the road. At a conference hosted by Morgan Stanley (MS) in September, HCAs president of operations, Samuel Hazen, said his company would try to cope with the cuts to Medicare, which in 2011 contributed almost one-third of revenue, in part by driving harder deals with suppliers, which make up about a quarter of HCAs spending.

Those who have worked to diversify their business, like HCA, will feel less of a blow. There is a lot of activity right now in the consulting side, HCA Chief Financial Officer R. Milton Johnson said at the conference. HCAs Parallon Business Solutions subsidiary handles purchasing, payroll, IT, and other functions for other hospitals. Tenet Healthcare (THC), the third-largest U.S. hospital company, has a consulting arm that offers a similar menu of services. The unit, called Conifer Health Solutions, logged a 45percent jump in revenue in the first half of 2012, compared with the same period last year.

Nursing homes, for their part, are pursuing more options. The chief executive of Brookdale, Bill Sheriff, told investors in the companys most recent earnings call that Brookdales expansion into hospice care and outpatient services such as physical therapy has made an attractive additional contribution to revenue, in spite of governmental rate reductions. Similarly, Richard Lechleiter, chief financial officer at Kindred, said in an August earnings call that his companys home health and hospice services are continuing to grow pretty aggressively. Revenue from those lines of business tripled in the first half of 2012, to $57.3million, from a year ago.