Oz Health Care Providers On A Solid Footing

This story features SONIC HEALTHCARE LIMITED, and other companies. For more info SHARE ANALYSIS: SHL

-Pathology growth robust
-Health insurers most attractive
-Private health sector growth assured
 

By Eva Brocklehurst

Australia's government may have changed ship in September but in the health care sector private provider relationships with the public sector appear on firm ground, underscoring brokers' revenue projections for the year ahead. Moreover, little risk is seen to health insurance levels or the consumption of health-related services, given the population continues to age.

August Medicare data has revealed 12-month growth in total pathology benefits was 6.2%. Given the volatility in the monthly Medicare data, tracking market share movements is problematic but Citi suspects Primary Health Care ((PRY)) is gaining market share at the expense of Sonic Healthcare ((SHL)) and Healthscope. GP benefits growth continues to remain strong and this is supportive of Primary, given the relatively high level of operating leverage in its medical centre business.

Rolling 12-month growth in diagnostic imaging benefits was 7.0%, in line with the FY13 growth of 6.9%. Pathology fee cuts are likely in the second half of FY14 to bring outlays back in line with the revised targets agreed under the Pathology Funding Agreement. Healthscope noted during its FY13 results that discussions with the government for pathology fee adjustments have already commenced. Citi factors in a 1% funding cut in Primary and Sonic forecasts, starting in January 1 2014, half of which is offset by cost reduction initiatives.

The August growth rates across these services was robust, in Credit Suisse's view, and this augurs well for both Primary and Sonic in the short term. The key item for the broker is the funding agreement, as spending was 4.2% ahead of the agreed cap in FY13. The quantum of any fee cut remains difficult to predict because of the recent change in the federal government. For Sonic, in particular, there could be a bigger headache coming from the US market with regard to both volume and price. In Australia, GP attendance growth is robust but Credit Suisse questions whether a changing workforce demographic – a large proportion of GPs working fewer hours per week – could produce difficulties in sustaining the current operational metrics.

Where Credit Suisse urges caution is in interpreting Medicare data. The data is extremely volatile and broker believes it is important to rely on trends rather than monthly figures. Medicare is not the only provider of revenue for pathology providers. Other sources include patient co-payment, third party and workers compensation claims, veterans payments and privately billed tests for which there is no scheduled fee. In terms of funding outlays, not all Medicare payments go to private providers. A hospital lab providing the tests/service can also receive the funds.

On most income measures, the health insurance segment is more attractive than hospitals but it's hard to foresee any major problems overall, in Macquarie's opinion. The measures Macquarie uses to compare the two include return on investment capital (24% versus 12%), 10-year earnings growth (16% versus 10%) and the potential for a capital windfall (significant versus zero). Macquarie conducted an analysis of the sector and found variability across hospitals was also significant, with Ramsay Health Care ((RHC)) well ahead of the industry average on most metrics.

It has been speculated that insurers are taking issue with excessive price demands from hospitals but Macquarie doesn't expect any pressure in this area will be lasting. Hospitals generate pre-tax returns on capital of only 11.6% and costs are already comparatively low and slow-growing compared to the public hospital system, or indeed OECD peers. The relationship with the government means regulatory risk for hospitals is low and the expanding private system helps promote savings, given the government pays around 27% of the cost of private volumes as opposed to 100% in the public system. Hence, Macquarie continues to expect the private system will receive a disproportionate share of future growth in health care volume.

Macquarie thinks it's unlikely that the drivers of Australian health care growth will fade away. The population continues to age and become more health conscious. Affording that health care could be a concern. Health insurance policy inflation has averaged 6.5% since 2002 and, in the current weak economic climate, affordability issues are often raised. The 2012 removal of the rebates for holders of private insurance whose income was above revised limits and the indexation of the rebate for those who still receive it made affordability more of an issue, but it's still not major in Macquarie's analysis. Whilst there is evidence that means testing drove some policy downgrading, the quantum of the impact was relatively small. Hence, the broker is not worried about affordability and policy downgrades. Policy inflation above the CPI cannot continue indefinitely but on the other hand there is little risk of widespread downgrades. This is because of low policy churn and low price sensitivity.

On another aspect of the sector, CSL ((CSL)) has revealed some developments in product approval. The blood products provider has progressed with Hizentra, a 20% immunoglobulin therapy that is subcutaneously delivered, having been granted approval for the treatment of primary and secondary immunodeficiency by Japanese regulators. CIMB views the market opportunity as incremental and less than US$100m while uptake is likely to be protracted, given the modest estimated patient population and parochial nature of the Japanese market. Together with slowing earnings growth and a developing haemophilia portfolio, which has greater earnings volatility,  the broker believes the upside is limited for the stock at current trading levels.
 

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