Healthcare stocks fell broadly Monday on fears that the debt-ceiling deal to be voted on by Congress would lead to cuts in healthcare spending for federal programs such as Medicare.
Healthcare service providers that rely on Medicare reimbursement fell sharply, and the shares of drugmakers such as Pfizer Inc. and medical device manufacturers such as Medtronic Inc. were also off.
Hospital companies Community Health Systems Inc. and HCA Holdings Inctumbled 9 percent and 10 percent respectively, while health insurer UnitedHealth Group Inc. dropped 6 percent.
According to the deal reached in Congress, a bipartisan committee is set to find a further $1.5 trillion in savings, beyond an initial $900 billion.
If the committee cannot agree on at least $1.2 trillion in savings, automatic cuts kick in starting in 2013. Medicare, the widely used federal health program for the elderly, would face cuts under this scenario.
"There's a lot of uncertainty about the Super Commission and the Medicare cuts, which is why everything is cratering," said Ipsita Smolinski, analyst at Capitol Street in Washington. "People didn't think Medicare would be included (in the cuts). And now they're trying to absorb that... plans and providers could get cut in the second round."
With the United States government borrowing about 40 cents for every dollar it spends, attempts to reduce soaring healthcare costs are only likely to increase over the next few years.
"The healthcare sector had done well because of the burgeoning population of the baby boomers," said Marc Pado, a U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "It had been a gold pin factor that had been pushing a lot of the healthcare stocks up. But this is definitely a blow that sets them back."
The Centers for Medicare & Medicaid Services, which oversees the Medicare program, stands to gain more authority to make cuts from the new committee, said Tim Nelson, a senior healthcare analyst with Nuveen Asset Management.
Nelson pointed to Friday's announcement by CMS that will cut payments to skilled nursing facilities by 11 percent — a development that sent companies such as Kindred Healthcare and Skilled Healthcare down more than 20 percent on Monday — as a potential harbinger of broader cuts to come.
"The whole sector is down," Nelson said. "People are just afraid that healthcare will be in the crosshairs of this new committee."
Oppenheimer & Co analyst Michael Wiederhorn said significant cuts to all providers, including hospitals and home health companies, seemed likely.
Home health companies Gentiva Health Services and Almost Family Inc were down 12 percent and 9 percent, respectively.
"With the open-ended nature of this legislation, and the potential for large cuts to healthcare spending, we believe healthcare services will be one of the losers," Wiederhorn said in a research note.
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