Baby-Talking Medicare

Pediatrix might not be the obvious play on an updated Medicare bill. After all, what would a neonatal-care company have to do with health benefits for the elderly?

It turns out that the same reimbursement rates that Congress grants doctors through Medicare set the benchmark rates for Pediatrix’s physician contracts. So the amount PDX charges for its Medicaid and commercial medicine services will be partially influenced by the Medicare bill. That means the 1.1% pay increase planned for doctors in 2009 should work its way to PDX.

Pediatrix manages the largest group of neonatal, or newborn, specialists in the country. The company buys up independent practices and takes over all the management, contracting and back-office functions. PDX manages 22% of all the neonatal intensive-care units in the country and is the number-one service provider to neonatologists in the U.S.

Beyond the Medicare play, there’s another long-term, secular growth trend here: As sad as it sounds, more and more births require admittance into a neonatal intensive-care unit. And the number is projected to go higher.

Cramer said Wall Street’s overlooking both of these factors, and that’s at least part of the reason the stock has dropped so much over the past couple of months – to $48.49 from $70 in May. Certainly, PDX’s earnings miss and lowered guidance hurt the stock. But Wall Street’s assumption that birth rates will decline as a result of bad economic decisions isn’t as important as the increase in neonatal care.

The earnings miss took the fluff out of the stock, Cramer said, and the long- and short-term outlooks have brightened for Pediatrix. So the 8% growth Wall Street’s expecting is low. He’s predicting 13% for 2008. That would put PDX’s multiple at 17 times price to earnings, making the stock worth $62, up 28% from Wednesday’s close.

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