The Best And Worst Of August 28

The biggest gainer in the U.S. markets on August 28, 2008, was Ambac Insurance (NYSE:ABK), which closed up $2.18 to $7.42. The biggest loser was Cyberonics (Nasdaq:CYBX), which fell $4.65 to $20.45.

The Gainer
Ambac Insurance is a bond insurance company that guarantees principal and interest payments to bondholders in exchange for premiums by issuers. The company originally insured mainly municipal bonds that traditionally had low default rates, but recently began to insure bonds with higher risk. This has led to questions regarding whether the bond insurance industry has enough capital to withstand the higher claims for these high-risk instruments.

The stock rose after competitor MBIA Insurance (NYSE:MBI) announced an agreement to reinsure $184 billion of municipal bonds issued by Financial Guaranty Insurance Co. MBIA is expected to net $741 million in the deal. The news heartened investors who have been pessimistic on the ability of Ambac and MBIA Insurance to survive the current environment, particularly after they were downgraded by the ratings agencies and lost AAA ratings. (Guru Warren Buffett is making this sector popular. Learn more about it in When Things Go Awry, Insurers Get Reinsured.)

The Loser
Cyberonics is a medical device company that designs and manufactures implantable products for the treatment of neurological disorders. Its main product is the Vagus Nerve Stimulation (VNS) Therapy System, which delivers intermittent electrical pulses to nerves in the brain for the treatment of epilepsy. The system has also been approved to treat chronic depression.

The stock fell sharply after reports that the Centers for Medicare and Medicaid Services (CMS) held an advisory panel meeting to discus possible reimbursement cuts in government payments to providers for using Cyberonics products. The size of the proposed cuts discussed was 52%, to $6,200 from $14,000. The government says that they have been overpaying for the wires or "leads" that connect the device to the brain, when they are incorrectly coded as the more expensive nerve stimulator device.

The company gave a hint of this possible reimbursement cut earlier in the week when it held a conference call in conjunction with its first fiscal quarter earning release. The company discussed the proposed reimbursement rates from CMS for 2009, and noted that the rates "would reduce the reimbursement that [its] customers receive from CMS for the implantation of leads." During the call the company used different amounts for the reimbursement cuts than the ones discussed at the advisory panel meeting, citing a revision to $6,700 from $10,000.

Cyberonics provided several factors that would mitigate the effect of this reimbursement cut on company revenues:

• Although 25-30% of its cases are reimbursed with the CMS rates, this translates to only 3% of revenues since only the leads are affected.
• Management believes that CMS used erroneous data in calculating its proposed reimbursement rates.
• Proposed rates are typically revised prior to final adoption.
• The proposed rates, if adopted, are still above the company's average selling price for the products.

Federal and state governments are large payers of heath care services in the U.S., and decisions on reimbursements typically have a large impact on the revenue of companies in the Health Care sector. Health Management Associates (NYSE:HMA), an owner of hospitals, received 53% of its revenue from Medicare and Medicaid programs in 2007. Community Health Systems (NYSE:CYH), another hospital company, received 39% of its revenues from these providers in 2007.

To learn more about these programs, check out What's The Difference Between Medicare And Medicaid?