Why Home Health Providers Hit a Brick Wall

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of home health providers Amedisys (NASDAQ: AMED  ) , Gentiva Health Services (NASDAQ: GTIV  ) , and LHC Group (NASDAQ: LHCG  )  swooned as much as 28%, 20%, and 15%, respectively, following a public proposal by the Centers for Medicare and Medicaid Services, or CMS, late yesterday that in-home health care reimbursements be cut by 1.5% in 2014.

So what: The bad news for the sector is that the 1.5% haircut is only the half of it. The proposal also calls for up to a 3.5% annual haircut in reimbursements from 2014 to 2017 for the national standardized 60-day episode rate. With Amedisys garnering more than 80% of its revenue from Medicare reimbursements and Gentiva Health more than 90%, you can clearly see why the sector has hit a brick wall. To add salt to the wound, RW Baird downgraded all three companies to "underperform" from "neutral."

Now what: The home health care sector represents quite the conundrum for investors. On one hand, the CMS is intent on cutting government reimbursement to for-profit companies that thrive off Medicare, which is all a part of the coming implementation of the Patient Protection and Affordable Care Act, commonly known as Obamacare. Simply put, the government can't keep paying out more money each year and appears to finally be drawing a line in the sand. Then again, an aging population of baby boomers is going to be a boon for the industry over the next two or three decades. For now, I'd suggest keeping to the sidelines and allowing the guidance for all three companies to do the talking in their upcoming quarterly reports.

Craving more input? Start by adding Amedisys, Gentiva Health Services, and LHC Group to your free and personalized watchlist so you can keep up on the latest news with the company.

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