Cost-Cutting Measures Needed for Entitlement Programs

As Harry talks about the U.S. governrnment’s massive debt problem, it’s almost funny how unfunded entitlement programs are nearly an afterthought. “Oh yea, and we’re behind the 8-ball on those, too.” It’s just ludicrous.

With Medicare costs forecast to double in the next 10 years, reaching $1 trillion per year by 2022, it seems there’s no getting around the idea that these entitlement programs won’t remain, in their current form, in our lifetime.

And with no way to “grow ourselves out of the problem,” the equation will be balanced by cost cutting measures. Exactly what these are is still a far-distant question that has yet to be touched with a 10-foot barge pole. Washington will barely even acknowledge that our entitlement programs are in trouble!

Of course, that’s not completely fair. In 2011, the Centers for Medicare and Medicaid Services (CMS) took steps toward lowering the cost burden on taxpayers.

But I think they made a grave mistake.

What they did was cut payments to skilled nursing facilities by 11.1%. This put a real squeeze on the operators of these facilities, many of which are publically traded companies.

Take The Ensign Group (NASD: ENSG) as an example. This Californrnia-based company offers skilled nursing, rehabilitation and home health services in 11 states. When the CMS cut 2012 payments by 11.1%, Ensign watched its stock drop 73%. Take a look…

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As I mentioned, I think the CMS got it all wrong. Sure, we need cost-cutting measures to make our healthcare entitlement programs affordable for the long haul.

But I think skilled nursing facilities are a solution to the problem because they offer a low-cost alternrnative to expensive hospital settings where the same care is given but at a much inflated price.

I expect skilled nursing facilities to gain in popularity and use as it becomes more obvious how they can help the governrnment cut costs. These still aren’t the best stocks to invest in, mainly because they’re at risk of further payment cuts in the future.

Consider instead real estate investment trusts (REITs) that specialize in leasing space to these operators. These are better cash flow investments and even if the skilled nursing facilities to which they rent space get squeezed again, rent will be the first bill they pay each month.

If you haven’t done so already read the Survive & Prosperissue on “The Solution to the U.S. Debt Problem.”