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Six analysts and top management from seven sector firms examine the Health Care Facilities sector in this special 64-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info386.htm

TWST: And yet, the demand is increasing, and will continue to increase with an aging population.

Mr. Kumpel: Absolutely. The macro fundamentals haven’t changed. There are still 120,000 net new 85 year olds added to the American population each year.

TWST: Jim, what happened in 2000 when the government took another look at the Balanced Budget Act (BBA97) and decided that perhaps the cuts had been overly severe?

Mr. Kumpel: By 1999 and 2000 so many of these companies had declared bankruptcy that Congress was witness to the pain inflicted on the industry. So in 1999, they passed the Balanced Budget Refinement Act (BBRA), which helped to increase Medicare rates to alleviate some of the problems caused by BBA97. Now, the relief was too late for many of the companies which were so far under water already that they still wound up going Chapter 11. But the combination of BBRA and Medicaid rate increases from the states helped to provide a turn in the financial outlook for the survivors.

TWST: Is there another round of givebacks on the horizon?

Mr. Kumpel: There was a round of increases last year. In late 2000, there was the Benefits Improvement and Protection Act, BIPA, which effectively created 5% annualized increases over the course of 2001 and 2002 for nursing home operators. This further improved the financial outlook for the industry. These Medicare rate increases were not linked to any associated cost increases, so the incremental increases almost all should drop straight to the pretax line.

TWST: Have there been similar increases on the Medicaid side?

Mr. Kumpel: Medicaid revenue increases have been more impressive, frankly, than those from Medicare. The Medicare rate increase was more of a source of operating leverage to the downside and is now a source of operating leverage to the upside. But Medicaid rate increases have actually more than kept up with labor cost growth. We saw 6%-9% year-over-year growth for Medicaid rates in 2000. And we’re also looking to see another 7% year-over-year growth in 2001. The primary factor behind that was that a lot of the states tied Medicaid reimbursement to labor cost growth. This provided operators a margin for error. If labor costs grew dramatically, these nursing home companies wouldn’t be squeezed to the bone.

TWST: Do you expect to see the existing companies expand, or to see new companies enter the nursing home arena?

Mr. Kumpel: Here’s the thing. What makes the nursing home arena a little bit different from a lot of other healthcare segments is that Certificates of Need ultimately restrict the development of new nursing home beds. They act as an artificial limitation on supply. So you’re not going to see significant new operators just come in and develop across the country. To some degree that safety valve has been picked up by the assisted living operators. Given the restrictions on developing new nursing homes, there was relatively little in the way of restriction in the form of assisted living operations. Assisted living centers were attempting to deal with increasing long-term care demand and limited supply. You may see, technically, new companies evolve, but they’re not likely to build a slew of new beds. They’re likely to be aggregating existing assets under a different aegis.

TWST: So that’s where Quintiles (Nasdaq:QTRN) and IMS Health come in.

Mr. Kumpel: Yes. IMS Health (NYSE:RX) is probably one of the two or three most consistent year-over-year operators in all of health care, right up with Cardinal Health (NYSE:CAH), I would say. Pharmaceutical Product Development (Nasdaq:PPDI) has been a phenomenal growth stock in health care, up more than 300% in the last 15 months. This company has focused almost exclusively on the product development and the discovery business.

This special issue includes:

1) Health Care Facilities - In an in-depth (12,400 words) Analyst Roundtable, Adam Feinstein, Vice President in Equity Research at Lehman Brothers, Leslie Henshaw, Managing Director at ING Asset Management, Gary Taylor, Vice President of Equity Research at Banc of America Securities LLC, examine the outlook for the sector including, volume trends in hospitals, demographics and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at seventeen sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Investing in Health Care Facilities - In an in-depth (4,700 words) Analyst Interview, James Kumpel, Health Care Services Analyst at Raymond James & Associates, examines the outlook for the sector and shares specific stock recommendations .

4) Specialty Healthcare Providers - In an in-depth (3,500 words) Analyst Interview, Peter Emch, Director-Equity Research at Credit Suisse First Boston, examines the outlook for the sector and shares specific stock recommendations.

5) Hospital Management Stocks - In an in-depth (3,300 words) Analyst Interview, Leo Murphy, Vice President-Senior Analyst at Pioneer Investment Management USA, Inc., examines the outlook for the sector and shares specific stock recommendations.

6) CEO interviews (average 2,500 words). Top management of seven sector firms examine the outlook for their firm and the sector.