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Medicare reductions may hurt Integrated Company's stock is put at risk by threat of federal cuts


Integrated Health Services Inc. may still be a good long-term investment, but the company's vulnerability to changes in government reimbursement makes its once high-flying stock a much higher risk right now, analysts say.

Owings Mills-based Integrated plunged $4.125 Friday and fell $1 more yesterday, closing at $21.75.

The tailspin began when Chairman and Chief Executive Robert N. Elkins told analysts Friday that federal legislation slashing the budgets of Medicare and Medicaid could cut the company's expected 1996 earnings by as much as 25 percent and dampen its growth in later years.

Whether the stock has bottomed out is anybody's guess. Analysts are reluctant to speculate until Congress and President Clinton negotiate an agreement on reductions in these giant health programs for the elderly and poor. The president has promised to veto the legislation passed last week, which would cut a total of $452 billion in the next seven years.

"Until we get an answer on what's going to be implemented in Washington and the net effect on providers in this industry, it is very difficult to say whether Integrated stock is under- or over-valued," said D. Scott Mackesy, an analyst with Dean Witter Reynolds.

The uncertainty extends to the whole post-acute and subacute health care industry, which will have to adjust to changes in reimbursement, no matter what reductions the government finally enacts.

"I think it's going to definitely put incredible pressure on providers to look at new avenues for cost containment," said Susan Hargrave, a former official of Integrated who operates an executive search firm, Health Care Plus Inc.

But Integrated faces more questions in the short run than companies such as Manor Care Inc. of Silver Spring.

"I would say that, on balance, Manor Care is a less risky investment than is Integrated because of its lower reliance on Medicare payments and subacute reimbursement, and it has a much lower fixed-costs level per bed than does Integrated," Mr. Mackesy said.

One-third of Integrated's business is from Medicare; Medicaid accounts for nearly one-quarter, said Kurt Funderburg of Ferris, Baker Watts Inc.

The company's reliance on government funding was extremely profitable for several years, as Integrated grew from Dr. Elkins' dream into the leader of a burgeoning industry that specializes in lower-cost alternatives to expensive hospitals.

Integrated provides a range of services, including home-health care, but relies heavily on treating patients in specially equipped wings of nursing homes that are filled with large numbers of Medicare and Medicaid patients.

The importance of government funding to the company is no secret.

And investors' concerns about looming congressional budget cuts have been increasing for months, helping knock the stock price down from its 52-week high of $42.50 last February.

Still, Dr. Elkins' comments Friday came as a surprise to many investors and analysts.

"I think what sort of shocked everybody is, it could have such a large impact on earnings next year," said Mr. Funderburg, who has been more optimistic about the company than some other analysts.

Despite the uncertainty, the company has considerable long-term promise, Mr. Funderburg and some other analysts say.

Although company officials refused to comment yesterday, their last annual report describes a "tremendous growth opportunity" in contracts with private managed-care companies.

Even the company's short-term prospects may improve.

"I personally think that Integrated was kind of painting the worst-case scenario and it could end up being a little better" than Dr. Elkins indicated, Mr. Mackesy said.

So far, however, most investors don't share his optimism.

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