Australia | Apr 23 2014
-GP co-payment likely positive for Primary
-Pharma co-payment likely negative for Sigma
-Changes unlikely on medical insurance
-Lifting retirement age?
By Eva Brocklehurst
There's speculation the Australian government will go ahead with a $6 co-payment for visits to the GP, to be announced in the May budget. According to media reports this co-payment would be capped at 12 visits per year, making a total out-of-pocket cost of $72 per person.
UBS believes the devil will be in the detail. Savings for the government are envisaged to be around $750m over four years and the broker assumes the preferred implementation measure is allowing GPs to retain the co-payment while the government freezes indexation of the medical benefits schedule payments. The impact of the mooted changes would be most significant for stocks such as Primary Health Care ((PRY)) and Sonic Healthcare ((SHL)). Primary bulk bills 100% and the co-payment would provide a material pulling forward of revenue that would have otherwise taken over three years, in UBS view. Sonic already has a significant level of co-payments, which would continue, but is expected to implement the co-payment where it was bulk billing.
BA-Merrill Lynch expects, given the mix of earnings, that Primary has more exposure than Sonic to any GP reform and pathology claw-back that may be instigated in the budget. The broker expects the government will introduce new measures to either shift part of the cost burden to patients via the co-payment, or revise the way service providers are reimbursed. If the latter is enacted the broker cautions that, given the high fixed cost leverage in health care, the impact on earnings often ends up being worse than estimated.
Implementing such budget measures is not expected to require legislation. UBS observes the Audit Commission seems to favour a price signal to access Medicare, with exceptions for the chronically ill and elderly. The broker suspects the recommendations, due in several weeks, will be more controversial than the final budget outcome. Moreover, the government will need to consider reforms that don't require legislation, given it will not control the Senate. UBS suspects a tiered payment structure would combine with the co-payments, such that the government would pay GPs less for consultations with non concession card holders. Changing the GP reimbursement structure is a powerful option because, not only does it reduce visits, it also could reduce utilisation of those health services such as pharmaceutical, radiology and pathology.
UBS estimates a modest GP utilisation decline of around 3%, if the co-payment goes ahead, with a flow-on effect on the above three services. The broker believes the current pathology agreement, which has some two years to run, does offer the industry some level of protection, given it provides for a fixed sum, with 5% growth of a base rate. Should the industry maintain its current run rate, UBS estimates it will overspend the FY14 budget and a top-up would need to be negotiated This may be reviewed or considered in the context of any GP co-payment arrangements.
Pharmaceutical co-payments may be raised, which Merrills notes has traditionally been the area for budget savings given the large representation in the health budget and the rate of growth. Despite the fact previous reforms have not yet run the full course, Merrills believes, if a raising of the co-payment occurs, it could have a material impact on consumption and hence a direct impact on Sigma Pharmaceuticals' ((SIP)) wholesale revenue. UBS quotes the health minister saying that current legislation around pharmacy ownership will not be changed with this government. This means Coles ((WES)) and Woolworths ((WOW)) will remain excluded form the community pharmacy sector.
The government is unlikely to reverse its stance on denying radiology indexation of medical benefits rates, but UBS considers that reduced GP visits could have some negative implications for the utilisation of radiology. On average there are 10 radiology tests for every 100 GP visits. Still, the broker suspects patients who defer/cancel GP visits following reimbursement changes would be unlikely to be carrying ailments requiring radiology services. Applying the same methodology to pathology, the broker assesses 13 patients require pathology for every 100 GP visits, but they would also be less likely to cancel a visit to the GP following reimbursement changes. At a worst case scenario the broker estimates a 1.4% negative impact on the pathology benefits pool.
Two potential positive catalysts for the private hospital sector and private health insurance are unlikely in this budget, in UBS' opinion. This includes means testing of premium rebates, which were introduced by the prior government and the current government promised to reverse. This reform is likely to be preserved for when fiscal conditions permit. The other catalyst would be expanding the base for the private health insurance sector to allow insurers to cover out-of-hospital costs and out-of-pocket expenses. The intention to sell Medibank Private via IPO in FY15 is positive for the industry, in UBS' view, and this offers some protection for the health insurance industry – read nib Holdings ((NHF)) – as it is less likely to government would make policy changes that may adversely affect the sales process.
In terms of the recent discussion regarding lifting the retirement age to 70 from 65, Merrills thinks this has implications for participation in health insurance. Cover reaches a peak at 59% in the 60-64 year-old bracket and then starts to fall away. If the retirement age was lifted, the broker see benefits to extending health insurance participation and with it the potential market for Ramsay Health Care's ((RHC)) private hospitals from an extra 28,000 insured.
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