The leaking of a Medicare document Tuesday afternoon had an immediate impact on the stock market and angered federal officials, investors and lobbyists alike.
In what observers describe as a highly unusual development, a complete final draft of an unpublished regulation began to circulate throughout Washington and Wall Street hours before the Centers for Medicare and Medicaid Services (CMS) was to make it public at 4 p.m., after the stock market closed.
Tuesday’s incident was Medicare’s second major leak that produced a reaction in the financial markets in only a few weeks.
Investors in healthcare stocks watch Medicare’s regulations closely. In some industries, the program is their biggest revenue source.
Investors, like lobbyists, politicians and reporters, cherish advance intelligence on impending government policies. But these same people usually cry foul when inside information is available to only a select few.
CMS officials also are outraged over the leak.
“CMS has strict policies against early or selective dissemination of market-moving materials,” Deputy Administrator Leslie Norwalk said in a statement. The Medicare agency “will take actions to ensure that inappropriate disclosures do not occur,” she added.
Norwalk acknowledged the concerns of those who felt slighted because they found out about the rule after the leak.
“CMS intends to provide a level playing field to all market participants when it comes to information that this agency releases regarding payments to providers,” she said. CMS typically issues its payment regulations after the New York Stock Exchange closes.
The Medicare official responsible for acting as a liaison between the agency and Wall Street sought Tuesday to quiet the uproar over the leak.
“Many of you have called or emailed me today on news that a version of this rule was apparently in circulation this afternoon,” Lambert van der Walde wrote in an e-mail sent at 4:15 p.m.
Van der Walde also was upset by the regulation’s unauthorized release, he wrote. “It is personally very troubling to me that a colleague might have allowed this to happen,” wrote van der Walde, who is the capital-markets adviser to CMS Administrator Mark McClellan. Among Van der Walde’s duties is to communicate through regular e-mails with the healthcare industry and investor community about CMS regulations.
Less than two months ago, other internal information about Medicare’s payment rates for hospitals found its way into the hands of Wall Street analysts and investors before the agency made an announcement, The Hill reported last Tuesday.
An April 2 market-research report from Citigroup quoted from a leaked document and advised investors on its impact on hospitals and medical-device manufacturers. Stanford Washington Research Group issued a similar report (though it lacked quotations from a CMS document) on March 29.
CMS and the Securities and Exchange Commission have inquired into the earlier leak. Sources say the Department of Health and Human Services Office of the Inspector General and the Department of Justice may also be involved in looking into the matter.
Norwalk declined to comment on any specific incident but stood by her statement to The Hill last week that CMS officials, “in all instances of improper disclosure, do have some kind of investigation.”
Investors’ responses to the leak illustrate why federal agencies such as CMS guard their internal deliberations over government payments and contracts so closely.
The complex, 658-page regulation that was leaked Tuesday establishes how much Medicare will pay so-called long-term-care hospitals beginning July 1. The facilities receive higher payments than other hospitals because they treat sicker people for longer periods of time.
A proposed regulation published in January called for an 11 percent cut in the hospitals’ payments, which was bad news for the sector and for Kindred Healthcare, its most important player. The company did not respond to a request for comment by press time.
But the regulation that was leaked, and later officially released, Tuesday contained good news for Kindred: the 11 percent cut had been turned into a 3.7 percent cut.
The Street took notice.
Kindred opened on the New York Stock Exchange at $24.47 and hovered close to that value all morning. Starting about 1 p.m., however, its shares began to climb, reaching $25.61 at 2.
Then, in less than 10 minutes, the stock shot up from just over $25 to $27.40, a nearly 10 percent increase in just a few minutes and a 12 percent increase from the open.
Kindred lost some of those gains within minutes as some investors began to sell off shares in anticipation of a likely decline from the sudden high.
The share price dropped by about a dollar until 2:30, the same time Merrill Lynch issued a report explaining the Medicare regulation’s impact on Kindred but giving the stock a “neutral” rating. Volume rose suddenly and the stock went above $26.80. Shares slipped, then rose back above $27.10 by about 3:45 before falling a few cents to close at $26.90. The final share price represented a net 10 percent increase for the day.
The company’s shares opened yesterday at $26.68 and closed at $25.47.
CMS issued a press release summarizing the regulation Tuesday at 4 p.m.
The agency’s director of legislation, Linda Fishman, sent detailed summary documents to the congressional committees of jurisdiction at 5, which was close to the time the agency published the entire document on its website. The regulation is scheduled to appear in the Federal Register on May 12.