Health Care Winners and Losers: HealthSouth

Shares of rehabilitation program operators HealthSouth (HLS Quote) and RehabCare Group (RHB Quote) rose Wednesday after a Deutsche Bank analyst raised his opinion on the stocks.

RehabCare shares reached an annual high after analyst Pito Chickering upgraded his view of the sector to "Positive" from "Neutral," and upgraded both RehabCare and HealthSouth to "Buy" from "Hold." Chickering said he has become less concerned about the effects of the Obama administration's proposal to "bundle" together Medicare payments for acute and post-acute health care services.

The administration proposed the idea in March as part of an effort to reduce costs and improve coordination of services. The proposal led to concerns that rehabilitation program operators, skilled nursing facility operators and long-term care hospitals would get smaller payments and have to change the way they do business.

Chickering said he now believes the bundling proposal will be "substantially watered down," perhaps becoming a voluntary pilot program for two or three years starting in 2013, including skilled nursing facilities, long-term care hospitals and inpatient rehabilitation facilities.

The analyst said RehabCare and HealthSouth are positioned to gain market share, improve margins and make acquisitions in late 2009. He said the bundling proposal could help the companies if they encourage hospitals to discharge more patients to them.

At the close, shares of St. Louis-based RehabCare rose $1.14 to $24.45, after setting an annual high of $25.48 in the afternoon. Shares of Birmingham, Ala.-based HealthSouth picked up 80 cents to $14.10. Competitor Kindred Healthcare (KND Quote) closed at 13.54, 69 cents higher. Chickering said RehabCare will do well because of its strength in the skilled nursing business, improving results from its long-term care hospitals and potential new acquisitions. He raised his price target on the stock to $28 per share from $19. HealthSouth's second-quarter results could be better than expected due to greater patient admission volumes and stronger profit margins, he said, and management may raise its profit forecast. He said an arbitration between HealthSouth and accounting firm Ernst & Young is approaching completion and could be finished in the fourth quarter.

Chickering raised his price target for HealthSouth to $16 per share from $12.