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Why the Estia Health Ltd share price collapsed today

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Estia Health Ltd (ASX: EHE) saw its share price crash down 9% today to $4.80, but ther share price did sink as low as $4.61 in early trading.

Estia Health develops and operates residential aged care facilities around Australia, although most are located in Victoria, South Australia and New South Wales with 6 sites in Queensland.

The company has seen its share price sink more than 33% so far this year, with ongoing concerns over cutbacks to government funding for aged care. The federal government announced $1.2 billion of cuts over four years to aged care in the May 2016 budget.

We also recently reported on other concerns analysts have particularly aggressive accounting and acquisition strategies that could come back to haunt Estia Health and other aged-care operators down the track.

Then there are private equity companies selling their stakes in Estia, adding further downward pressure to the share price. And not to forget short sellers doubling their positions in recent weeks, although still at a relatively low 3% of outstanding shares.

But to top off the downward pressure, The Australian today claims the Department of Health is set to audit Estia as one of several aged care providers to be put under the microscope.

As The Australian reports, concerns have been raised about Estia’s practice of reclassifying residents of newly purchased facilities into higher care categories, which then attracts extra government funding.

Aged care Minster Sussan Ley has reportedly told the media publication that as many as one-fifth of industry claims for aged care funding instruments had been ruled to be too high.

“There is no hiding away from the fact that the residential aged-care budget will blow out by a further $3.8 billion in the next four years without action to address inconsistencies in the way claims are currently made,” she says.

Despite the news, fellow aged care operator Japara Healthcare Ltd (ASX: JHC) has seen its share price rise 3.2% to $2.56, although Regis Healthcare Ltd (ASX: REG) share price is down 1.7% to $4.54. They too could be in line for an audit.

Foolish takeaway

We wrote last week that aged care operations are highly complex and unless investors have a deep understanding of the industry and its practices, most would be better off avoiding the aged care operators.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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.

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