Mr. Morgan: The overall outlook is really a mixed picture, depending on which subsector you are talking about. I think the hospital sector should continue to post good results into 2010. Volumes haven't been as bad as the market had expected, and commercial pricing remains solid with good visibility. Medicare pricing for 2010 came in better than the initial proposal, and certainly the cost controls have been good. Free cash flows are improving as cap ex spending has started to abate slightly as a result of what's going on in the not-for- profit sector. On the skilled nursing side, I think there are more headwinds for the fundamentals going into 2010. Their final update for fiscal 2010 was a -1.1% for Medicare pricing, thanks to a 3.3% budget neutrality haircut to their market basket. And depending on what happens with health care reform, the update might be even more negative at around -3.3%. There is growing concern certainly over Medicaid budgets and the potential fallout for SNFs. Longer term, Medicare or CMS will be refining the RUGs' reimbursement system. That being said, it's more important than ever that SNFs drive higher acuity in their Medicare census. So longer term, I am confident SNFs will be able to refine their clinical focus on medically complex patients. Once again, a lot of headwinds for this sector, but a lot of it's already priced into the stocks. The inpatient rehab hospital side continues to perform well, and the market fundamentals have stabilized with providers having adjusted to the 60% rule. And for now providers will see their first market update in a while with a 90-basis-point increase for fiscal 2010. Obviously, this update is also in jeopardy depending on the fate of health care reform. Finally, the behavioral facility sector continues to enjoy strong fundamentals. There's still a significant supply/demand imbalance after a 40% reduction in industry capacity that goes back to the mid-1990s, when we had a period of explosive capacity growth. The sector has minimal exposure to uninsured and high bad-debt expenses, and the forthcoming Mental Health Parity Act could provide incremental volumes to the sector in 2010.
Tickers included in this excerpt: CYH, LPNT, PSYS, THC
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.