Skilled Healthcare: Achy breaky head

Providing skilled nursing care for elderly people is all about compassion, but the business of it is mean-hearted. That makes it tough on Skilled Healthcare Group Inc. (NYSE: SKH), who, try as it might, has an industrial-strength headache that will be hard to shake.

While not as dismaying as the aging process itself, the late-life care industry is a dumbfounding maze of government programs, bureaucracies, regulations, licenses, litigation, labor shortages and costs, costs and more costs. There are enough risks in Skilled Healthcare’s annual report to be listed alphabetically. The scariest are under “M” — Medicare, Medicaid, and Medi-Cal, California’s Medicaid program.

The president’s proposed 2009 budget seeks to reduce spending on Medicare by $183 billion over five years. The budget, sent to Congress in February, would freeze payments to skilled nursing facilities and reduce payments to these facilities by $17 billion over five years.

That’s bad news for Skilled Healthcare: Medicare generated 37% of its 2007 revenues, and Medicaid supplied 31%. Medicare has often been revised, offering no firm footing for revenues in the future. “Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on our revenues, financial condition and results of operations,” the company said in its 2007 annual report issued in late February.

Skilled Healthcare also expects continuing cost containment pressures on Medicaid outlays for skilled nursing facilities, both in the states in which it operates and by the federal government. The cuts may be direct decreases in reimbursement rates or in rule changes that limit the beneficiaries, services or providers eligible to receive benefits.

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