Who is the biggest Medicare beneficiary? After an announcement by the Centers for Medicare and Medicaid Services, or CMS, on Friday, investors holding a handful of health care stocks can claim the honor.
While the market expected CMS to either cut Medicare payments or hold levels steady, it plans to actually increase reimbursements for hospitals -- and soften the blow of one dreaded part of the Patient Protection and Affordable Care Act, commonly referred to as Obamacare. The promise of more money from Medicare translated to more than $1.5 billion added to market caps for five top hospital stocks in just one day. Here's what happened.
No sequestration woes here
While the sequestration deal agreed upon by the president and Congress impacts several areas, Medicare payments will go up rather than down. Acute care hospitals will receive a 0.8% bump in reimbursement beginning in October.
Why would anyone get excited over what seems like a minuscule raise? Some were expecting as much as a 1% cut from Medicare. Also, there were a few more goodies thrown into the mix by CMS.
Obamacare included a mandatory cut that CMS has softened considerably with the proposed reimbursement. Although the American Hospital Association, or AHA, lobbied for the legislation, the group was relieved by CMS's action. AHA Executive Vice President Rick Pollack said, "We are pleased that in today's rule CMS has used its discretion to dampen the impact of certain congressionally mandated policies."
CMS also plans to raise the incentives that it will pay to top-performing hospitals under the Value-Based Purchasing Program. These incentives will now be 1.25%, or around $1.1 billion.
Some investors benefited greatly from the proposed Medicare reimbursement increase. Shares of Tenet Healthcare (NYSE:THC) surged nearly 7%. Tenet's market cap, in turn, rose around $290 million.
Shares of HCA Holdings (NYSE:HCA), the largest private operator of health care facilities, jumped more than 5%. HCA's market cap moved up by $965 million or so on Monday.
Meanwhile, the second-largest hospital chain, Community Health Systems (NYSE:CYH), saw its shares rise nearly 4%. This increase translates to a higher market cap of more than $150 million.
The fun wasn't just limited to the big three hospital operators. Lifepoint Hospitals (NASDAQ:LPNT) stock jumped 5% on the CMS news, reflecting a $109 million market cap expansion. Likewise, Vanguard Health Systems (UNKNOWN:VHS.DL) shares climbed 5%, bumping its market cap up by $55 million.
If we only include these five hospital stocks, the prospect for higher Medicare reimbursements added around $1.5 billion to investors' portfolios in one day. If you own any of these stocks, you might want to send your Uncle Sam a thank-you note.
Flip side of the coin
While the news from CMS was enthusiastically welcomed by investors, there were a couple of negatives that didn't get as much attention. One thrust of Obamacare was to reduce readmission rates through financial penalties for hospitals that incurred too many readmissions. The maximum penalty under this program will increase from 1% to 2%, which will hurt some hospitals.
Also, some hospitals won't particularly like one of the CMS changes. Disproportionate share hospital payments -- given to hospitals that serve high numbers of low-income patients -- will be cut to 25% of current levels.
Overall, though, this latest announcement from CMS was clearly great news for many hospital operators. These stocks have performed very well since the Supreme Court upheld much of Obamacare, but several have lagged behind the overall market recently. They should be poised to resume positive momentum now.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.