Fiscal prudence is in vogue again in Washington, D.C., and the president and Congress are scouring the federal government's nooks and crannies for ways to shave off a few billion dollars in expenditures. Again, as in the past, Medicare is being targeted as a prime candidate for trimming.

The New York Times recently reported that the Medicare Payment Advisory Commission (MedPAC), an influential federal advisory panel, is recommending, among other things, that Congress freeze increases in Medicare payments for nursing homes in 2006. The proposal would block the normal rise in Medicare reimbursements that covers increasing medical expenses for nursing homes.

MedPAC estimates that freezing payments to nursing homes would save $1 billion to $5 billion over five years. The plan may indeed be good news for the government, but it is doubtless very bad news for companies such as Manor Care (NYSE:HCR) and Beverly Enterprises (NYSE:BEV) that provide nursing home services. The last major payment refiguring, the Balanced Budget Act of 1997, hurt long-term care facility operators' earnings badly, and many even slid into bankruptcy.

Fortunately, these cuts have a way of reversing themselves, and it's not as if the need for nursing homes is going to go away. It's best, though, to keep a close eye on the financial performance of various long-term care providers to determine which ones are best equipped to weather the storm. For example, of the aforementioned companies, it looks as if Manor Care has more room to maneuver. Both firms have improved operating margins, but Manor Care's remain substantially higher. In the first nine months of 2004, Manor Care posted operating margins of 9.2%, versus 6.6% over the same period in 2003. By comparison, Beverly's operating margins for the first nine months of 2004 and 2003 were 6.8% and 4.7% respectively.

Investors in long-term care outfits look to be in for a bumpy ride in the near term. They can rest assured that the problems will pass, but in the meantime, they should be on the lookout for the leanest competitors.

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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.