In my recent article on Omega Healthcare Investors
While MedPAC's choice of phrasing invites a frightful scenario in which the government severs the artery on all reimbursements, the "freeze" refers to the annual cost-of-living adjustment, not base payments. And currently, the recommendation is just that. Moreover, such a policy, if adopted, seems reason enough for only the briefest pause.
Great news, checkup complete, yes? Not quite.
With narrow operating margins, skilled nursing facilities (SNFs, for short) are the Costco
Depending on an individual facility's revenue mix, a year or two of stagnant Medicare rates could squeeze already razor-thin operating margins dangerously close to zero. Under these conditions, SNFs could choose to deny admittance to Medicare-covered patients in favor of the privately insured, but one has to wonder whether such a tactic would come at the expense of overall occupancy.
So, was my generally positive investment thesis on Omega misguided? I don't think so.
First of all, MedPAC took a similar stance toward 2009 payments, but ultimately, Medicare payments to SNFs were increased 3.4%. Second, if a freeze does become policy, the worst I foresee is that Omega may have to give its facility operators a pass on annual lease hikes. Finally, Medicare policy would be able to turn a blind eye toward inflation for only so long before the entire nursing home system threatened a collapse. Congressional support for such policies would quickly become political suicide.
At the end of the day, Omega should be able to maintain its healthy cash dividend, despite possible short-term policy contortions. Health care REITs with high debt-to-EBITDA ratios (above 5), such as Nationwide Health Properties
For more on the broader health care sector:
Fool contributor Mike Pienciak does not hold shares in any company mentioned. Costco Wholesale is a Motley Fool Inside Value and Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days.