Shares of Omega Healthcare Investors (OHI), CareTrust REIT (CTRE), and Ensign Group (ENSG) are under pressure on Tuesday following a proposed cut to Medicare reimbursement for skilled nursing facilities. Additionally, the Biden administration's decision to take a first step toward requiring minimum staffing levels in nursing homes appears to be hurting the stocks.

MEDICARE REIMBURSEMENT: The Centers for Medicare & Medicaid Services, or CMS, has proposed a payment rate update to nursing home reimbursements for fiscal 2023, which includes a 4.6% cut related to the Patient-Driven Payment Model. The proposed rule also seeks feedback on establishing minimum staffing requirements for nursing homes as directed by the Biden administration. According to Bloomberg, the agency plans release a proposal within a year.

In a research note following the news, Stifel analyst Tao Qiu highlighted that Part A SNF payments would decrease 0.7% in fiscal 2023, with CMS proposing to increase rate by 3.9% and recalibrate Patient-Driven Payment Model payments with a 4.6% cut. The analyst thinks the proposed rule fell short of investor expectation of mid-single-digit rate growth and a delayed or phased-in PDPM cut, and the net cut creates additional revenue headwind for the industry. This, along with pullback of government relief, would exacerbate financial conditions and increase operator stress before fundamentals could fully recover from the pandemic, Qiu added. Although he expects a higher market basket increase when the final rule comes out in late July, current proposal has negative implications for skilled nursing facility operators and healthcare REITs owning SNF assets, and could possibly reduce asset pricing. The analyst thinks strong operators such as Ensign Group would be able to cope with upcoming changes better and capitalize on industry weakness to grow its portfolio through acquisitions.

PRICE ACTION: In Tuesday afternoon trading, shares of Omega Healthcare Investors and Caretrust REIT have dropped about 4% each to $27.52 and $17.85, respectively, while Ensign's stock has slipped 3.5% to $82.44.