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Eight analysts and top management from eight sector firms examine the healthcare facilities sector in this special 73-page Healthcare Facilities issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info547.htm

TWST: Adam, for the most part, have the cuts in reimbursement that were implemented under BBA97 been fully restored?

Mr. Feinstein: They haven’t been fully restored. The industry would tell you that it still needs additional funding to be restored, arguing for more reimbursement givebacks. Remember this is a very political business — you will never hear the lobbyists or the trade group suggest things are going well. However, our sense is that Medicare spending is growing again and hospitals stand to benefit from that. One of the things you always have around this time of year is the early rumblings out of Washington and what Congress and the President are going to do with the budget. This creates “noise” with some new rumor every day about a proposal to give money or take money away. However, my sense is that Medicare will continue to be an accommodating payor.

TWST: Adam, for a couple of years now, the healthcare insurers have been successful in obtaining premium increases from employers, which have spurred the hospitals to demand and receive better pricing. How long can this continue? How long will employers agree to higher premiums?

Mr. Feinstein: It goes back to what I was saying earlier, that employers had to offer more generous benefits, following the backlash from the mid-1990s restrictive benefits. However, increased “choice” leads to increased “costs.” The increased utilization trends are driving increased costs, leading to higher premiums for payors (who in turn pass through those rate increases to hospitals). Thus, the environment today is very similar to the early 1990s — we are in the midst of a “health care cost crisis” again. However, the consumer does not know about this since he/she is not paying for these rising costs; however, seniors are paying for drugs, leading to an increased push to lower drug costs (this is all the rage in Washington). Thus, the problem now is that consumers have gotten used to the current environment, characterized by freedom of choice with respect to accessing the system and paying for a small percentage of premiums (with the employer subsidizing the benefit). However, we are in a recession again, regardless of what they are telling us in Washington.

TWST: Kemp, how do you view the outlook for the rehab companies?

Mr. Dolliver: I think rehab PPS is going to work well for the vast majority of providers. This is the one area of post-acute services that wasn’t an inflation balloon during the 1990s. In fact, payment per discharge was generally flat to down in the late 1990s, which is in sharp contrast to the payment trends in home health and skilled nursing that were, quite frankly, growing out of control. As a result, the PPS for rehab was designed to be budget neutral. Because of the lead time between the passage of The Balanced Budget Act of 1997 and some of the tweaks that were put into the PPS in subsequent legislation, such as BBRA and BIPA, providers have a pretty good handle on how the system would play out. I agree that HealthSouth should get higher reimbursement. I know we’ve tortured those numbers to death. RehabCare (NYSE:RHB) is a smaller, indirect play in this group. In contrast to the perception out there, most acute care hospitals will get higher reimbursement under PPS. To the extent that hospitals either stay in or get out, I think it’s going to be more a function of how they can use their existing capacity if they are capacity constrained. RehabCare is interesting as a value name, but there are some challenges in their healthcare staffing business, so I think you need to be patient if you are going to play the stock. They throw off a lot of cash, their model doesn’t require much capital spending, and they have a debt-free balance sheet.

This special issue includes:

1) Healthcare Facilities - In an in-depth (13,700 words) Analyst Roundtable, B. Kemp Dolliver, Managing Director at SG Cowen Securities Corp., Adam Feinstein, Vice President in Equity Research at Lehman Brothers, John Hindelong, Managing Director of Credit Suisse First Boston, Frank G. Morgan, Managing Director at Jefferies & Company, Inc. and Michael Yellen, Senior Portfolio Manager at AIM Capital Management Group, examine the outlook for the sector including earnings guidance, stock performance and share specific stock recommendations.

2) Hospitals & Healthcare Facilities - In an in-depth (3,500 words) Analyst Interview, Gary Taylor, Vice President, Equity Research at Banc of America Securities LLC, examines the outlook for the sector and shares specific stock recommendations.

3) Assisted Living & Healthcare REITs - In an in-depth (5,200 words) Analyst Interview, Jerry L. Doctrow, Managing Director, Equity Research at Legg Mason Wood Walker, Inc., examines the outlook for the sector and shares specific stock recommendations.

4) Long-Term Care & Specialized Service Providers - In an in-depth (6,700 words) Analyst Interview, Matthew Ripperger, Vice President and Equity Research Analyst at JP Morgan, examines the outlook for the sector and shares specific stock recommendations.

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