Cautious on Two Hospice Providers

On April 21, 2009, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule to update the Medicare Hospice Wage Index for FY10. Payments to Medicare participating hospices are estimated to decrease by approximately 1.1% in FY10.

The decrease in the hospice payments reflects a 3.2% reduction in payments due to the phase-out of a temporary adjustment used in calculating the wage index, partially offset by an estimated 2.1% increase in the hospital market basket indicator of costs.

According to CMS: “The elimination of this adjustment with a 2-year phase-out would result in more accurate payments and save Medicare $2.9 billion over five years. The proposed phase-out would include a 75% reduction for FY 2010 and ultimately eliminate it in FY 2011. As such, hospice expenditures are estimated to be about $13B in 2010 for more than 3,000 for-profit and not-for-profit hospices across the country. “ This proposed rule also solicits comments on a number of potential policy changes for the future.

Chemed Corporation (CHE) through its Vitas subsidiary is a major player in the hospice industry, and recently reported 1Q09 net income of $19.3M (up 21.9% y/y), which included a retroactive pricing adjustment that related to 4Q08 estimated at $0.05 per share associated with the American Recovery and Reinvestment Act of 2009.

Despite relatively stable growth of the Vitas division, we believe reimbursement risk remains high at this point and maintain our Hold recommendation at current levels.

Odyssey HealthCare (ODSY) is also major provider of hospice services in the U.S., with a presence in 30 states. The company is expected to announce 1Q09 financial results on May 6, 2009. We currently rate the stock with a Hold recommendation.