UPDATE 2-Healthcare stocks hammered on US debt-ceiling pact

Mon Aug 1, 2011 4:13pm EDT

* Fears that debt deal will lead to Medicare spending cuts

* Hospital, home health companies, insurers hit hard

* Pfizer, Medtronic also fall as uncertainty weighs

* Skilled nursing companies among worse decliners (Adds further analyst comments)

By Lewis Krauskopf

NEW YORK, Aug 1 (Reuters) - Healthcare stocks sold off sharply on Monday on fears that the debt-ceiling deal to be voted on by the U.S. Congress would lead to cuts in healthcare spending for the Medicare program for the elderly.

Hospitals and other healthcare service providers that rely on Medicare reimbursement sustained losses of well over 10 percent, with HCA Holdings Inc (HCA.N) and Gentiva Health Services (GTIV.O) among them. Health insurers also tumbled, with the largest, UnitedHealth Group Inc (UNH.N), down as much as 8 percent at one point.

Companies that run skilled nursing facilities were the biggest losers overall, as they also were hit with targeted reimbursement cuts from the agency that oversees Medicare. Skilled Healthcare (SKH.N) fell over 40 percent, for example.

While Monday's sell-off centered on the fallout from the debt-ceiling deal, the rising cost of healthcare has long been an issue for governments around the world, made worse by recent economic crises that have reduced tax revenues.

With the U.S. government borrowing about 40 cents for every dollar it spends, attempts to reduce soaring healthcare costs are only likely to increase over the next few years.

"The health care sector had done well because of the burgeoning population of the baby boomers," said Marc Pado, a U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "It had been a gold pin factor that had been pushing a lot of the health care stocks up. But this is definitely a blow that sets them back."

Shares of drugmakers such as Pfizer Inc (PFE.N) and medical device manufacturers such as Medtronic Inc (MDT.N) also fell up to 2.5 percent and 4 percent, respectively, on Monday.

According to the deal reached in Congress, a bipartisan committee is set to find a further $1.5 trillion in savings, beyond an initial $900 billion.

If the committee cannot agree on at least $1.2 trillion in savings, automatic cuts kick in starting in 2013. Medicare would face cuts under this scenario. [ID:nN1E76T0AF]

"There's a lot of uncertainty about the Super Commission and the Medicare cuts, which is why everything is cratering," said Ipsita Smolinski, analyst at Capitol Street in Washington. "People didn't think Medicare would be included (in the cuts). And now they're trying to absorb that... plans and providers could get cut in the second round."

NURSING CUTS A HARBINGER?

The prospect of government cuts, coupled with the lack of clarity over their extent, struck analysts as similar to the uncertainty wrought by the U.S. healthcare reform law debates that whipsawed the sector for more than a year before a bill passed in 2010.

"There's this completely pessimistic view at the moment from portfolio managers all over the Street about reimbursement visibility and the outlook for every single healthcare segment," Jefferies & Co analyst Arthur Henderson said. "You've got emotional selling going on here."

The debt-ceiling impact was compounded by Friday's announcement by the Centers for Medicare & Medicaid Services (CMS) that it would cut payments to skilled nursing facilities by 11 percent. [ID:nL3E7J12T8]

"This is essentially the worst-case scenario," Leerink Swann analyst Jason Gurda said in a research note. "This cut will wipe out a significant portion of their earnings, and will also likely cause debt covenants to be broken."

Investors feared the skilled nursing cuts would be a harbinger of broader cuts to come, said Tim Nelson, a senior healthcare analyst with Nuveen Asset Management.

"The whole sector is down," he said. "People are just afraid that healthcare will be in the crosshairs of this new committee."

Oppenheimer & Co analyst Michael Wiederhorn said significant cuts to all providers, including hospitals and home health companies, seemed likely.

"With the open-ended nature of this legislation, and the potential for large cuts to healthcare spending, we believe healthcare services will be one of the losers," Wiederhorn said in a research note.

Still, some analysts called the sell-off a knee-jerk reaction and saw buying opportunities among some of the beaten-down shares.

"It's not a doomsday scenario," said Newton Juhng, an analyst with FBR Capital Markets. "It's a tough day, and you are losing some investors who are choosing not to remain in the space. But longer term, the volume trends are still there."

Jefferies' Henderson cited dialysis company Davita Inc (DVA.N), which was off 4 percent, and pharmacy benefit managers, which include Express Scripts Inc (ESRX.O), among the oversold stocks.

"What you have today is everyone saying, 'Everything is on the table, so we're clearing out,' " Henderson said. (Additional reporting by Ransdell Pierson and Ashley Lau in New York, Anna Yukhananov in Washington, Toni Clarke in Boston and Shravya Jain in Bangalore, Editing by Tim Dobbyn, Dave Zimmerman and Bernard Orr)

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