NovaCare Posts Profit Increase, Unveils New Medicare Changes
By RON WINSLOW
Staff Reporter of THE WALL STREET JOURNAL
NovaCare Inc. said net income in its fiscal second quarter more than
doubled, thanks in part to a one-time gain, and it unveiled a strategy
aimed at blunting the effects of changes in Medicare reimbursement that
analysts had worried would curb earnings growth.
Shares of the provider of rehabilitation and employee services surged
more than 9.5% on the news, recovering ground they had lost during
the last two weeks amid investor worries about the new Medicare
policies. NovaCare's stock closed at $13, up $1.125 in composite
trading on the New York Stock Exchange.
The company, based in King of
Prussia, Pa., said earnings for the
quarter ended Dec. 31, including
extraordinary items, soared to
$20.6 million, or 33 cents a diluted
share, from $9.2 million, or 15
cents a diluted share a year ago.
Revenue increased 70% to $398.8
million from $235 million.
Medicare is changing payments to
nursing homes to reimbursement
based on days of service, from one
based on actual costs, a change
expected to reduce payments and
eliminate incentives for nursing
homes to provide high-cost
services. NovaCare doesn't own
nursing homes or receive payments
directly from Medicare, but it
depends on rehabilitation contracts with nursing homes for about $600
million in annual revenue, said Timothy E. Foster, chief executive
officer.
He said that to retain and increase its business with nursing homes, the
company plans to reduce its nursing-home rehabilitative services costs
by converting to programs that rely heavily on group therapy instead of
one-on-one treatment sessions and by using more therapy aides and
assistants instead of licensed professional therapists.
Mr. Foster said the change means that the way services are provided to
nursing-home residents will more closely resemble the model used in its
outpatient rehabilitation business, which caters to people who suffer
sports injuries or who are hurt on the job or in accidents. "We're very
confident we can achieve the same clinical outcomes" with the
less-intensive treatments, he said.
To make the transition, the company took a $23.5 million pretax
restructuring charge in its second quarter. The charge was more than
offset by a $38.1 million one-time gain from an initial public offering
for a subsidiary. The company said that before the effects of the special
items, earnings were $11.8 million, or 19 cents a diluted share, a penny
better than First Call's mean analyst estimate.
Under new accounting standards that went into effect late last year,
companies must report per-share earnings in two redefined ways,
diluted and basic. Diluted per-share earnings are net income divided by
common shares outstanding plus potential common shares from
securities such as options and convertible securities. NovaCare's basic
per-share operating earnings, or net divided by shares outstanding,
were also 19 cents. After the one-time gain and the restructuring charge,
basic per share earnings were 34 cents, up from 15 cents in the year
earlier quarter.
Robert Gold, an analyst at S&P Equity Group, said analysts had feared
the new Medicare per diem rates would lead to lower revenue for
NovaCare, but the company said it is gaining new business from
smaller nursing homes who under the new reimbursement can't afford
to provide rehab services in-house. Federal law requires that such
services be offered to nursing home residents. |
