Shares of Estia Health Ltd (ASX: EHE) have been absolutely crushed today following a government review into the sector.

The shares were trading more than 20% lower at $2.52 approaching 1pm AEST, down from a closing price of $3.15 on Friday, although they did trade as much as 30.8% lower at one point this morning at $2.18.

Today’s crushing blow came after the Australian Government clarified what fees aged care operators such as Estia could charge their residents. Notably, Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Limited (ASX: REG) will also be impacted by the changes, with their shares plunging 21.3% and 16.7%, respectively.

One such clarification surrounds what are referred to as ‘Capital Refurbishment Fees’. It also said that fees for items such as maintenance inside and outside the aged care home were not permitted, together with ‘any repairs or refurbishments necessary because of normal wear and tear’ and capital costs. You can read the update here.

As quoted by The Australian Financial Review, Bank of America Merrill Lynch analyst William Dunlop said:

We understand that the capital charges of $15 per day charged by Regis Healthcare, Estia Health and Japara Healthcare are similar to those fees examples listed above…

“A layman’s reading of the department of health guidance and the referenced legislation clearly suggests these types of fees are not permissible under legislation. As a result, we are removing them from our Regis, Estia and Japara earnings forecasts.”

The shares have been downgraded by analysts around the country, resulting in sharp sell-offs this morning.

Thus far, Estia hasn’t issued an official comment to the ASX or investors, but Japara Healthcare has reportedly said it will review the situation, according to the AFR.

Indeed, the update from the Federal Government is only the latest in a string of setbacks for Estia Health which has seen its share price cut nearly in half since Friday 26 August.

First, the company reported earnings results that were below earlier guidance provided by management, while it also issued a somewhat weak earnings guidance for the 2017 financial year. To make matters worse, Estia’s founder and non-executive director Peter Arvanitis resigned from his position suddenly whilst also dumping more than 17.7 million shares in the business at a significant discount to the market price.

It’s not a good look for Estia Health or the other aged care providers, and investors would be wise to avoid the situation and simply watch from the sidelines for now.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.