Cuts in Healthcare Spending

On Saturday June 13, 2009, President Obama announced new Medicare and Medicaid spending cuts aimed at reducing government spending by an additional $313 billion over 10 years to pay for healthcare reform. The amount will be in addition to the $635 billion “downpayment” included in his FY 2010 Budget.

The actual breakdown of the $313 billion proposed cuts includes: $110 billion in productivity adjustments to Medicare payment updates; $106 billion in reduced hospital subsidies for treating the uninsured as coverage increases; $75 billion from Medicare Part D drugs; and, $22 billion from “Other.”

The President added that these measures would extend the solvency of Medicare’s Hospital Insurance Trust Fund by seven years to about 2024, and reduce beneficiary premiums for physician and outpatient services by about $43 billion over the next 10 years. As Congress continues to draft legislation, it remains to be seen whether the government will take a position or gain the necessary support for a “public fund” option.

We currently rate both our hospital operators, Community Health Systems Inc. (CYH - Analyst Report) and Universal Health Services Inc. (UHS - Analyst Report), with Hold recommendations. Nonetheless, our preferred exposure in the sector would be in UHS given its relatively well-diversified revenue mix and the growing contribution of higher margin behavioral services.