The Centers for Medicare and Medicaid decided today to cut government payment to dialysis clinics. So why did share prices for DaVita HealthCare Partners (DVA) and rival Fresenius Medical Care (FMS) rise so steeply today?
The agency, which administers government-funded health plans for the elderly and the poor, decided to cut payments to dialysis clinics by less than expected.
DaVita soared 9% to $61.64, while Fresenius rose 7.3% to $34.58.
Medicare is transitioning to a new payment mechanism that effectively preserves the payments to dialysis providers over the next two years. The total cuts amount to less than 1% in 2014 and 2015, in contrast to proposed cuts of as much as 12%, according to The Wall Street Journal.
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Nonetheless, cuts of nearly $30 per treatment over the next two years will flatten out payments "in an environment of increasing expenses," LeAnne Zumwalt, group vice president at DaVita, said in a statement released Friday.
Sounds ominous. Yet Deutsche Bank analyst Darren Lehrich raised his price target on Buy-rates DaVita to $72 from $68. He writes:
While CMS didn’t soften the drug re-basing cut amount from its original proposal, the overall impact from the final rule is better than how we had modeled it for DVA (we assumed Medicare revenue down ~$6/tx in 2014-2015). As such, we are taking estimates up slightly, and we are also bumping our PT to $72 (from $68) on these new numbers (still using 14x cash EPS / 8x EV/EBITDA as target forward multiples). We are not flowing all of the change to EBIT because we are also making a few other revisions/refinements to our model. Having cleared an important hurdle with this rule, DVA shares look attractive, and we are reiterating our Buy.
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