Primary, Sonic And The Government’s Latest GP Policy Offering

This story features SONIC HEALTHCARE LIMITED. For more info SHARE ANALYSIS: SHL

-Difficult co-pay decision for PRY
-Macquarie upgrades SHL
-MBS freeze a headwind for PRY
 

By Eva Brocklehurst

The Commonwealth government has scrapped its budget-time proposal of a $7 co-payment for GP visits in favour of a $5 cut to GP reimbursements for non-concessional adults, giving GPs the option of recovering the payment from the patient. The changed proposal, should it be implemented, means the impact of a co-payment is diluted. This of particular relief to Sonic Healthcare ((SHL)) while Primary Health Care ((PRY)) faces a more difficult decision on whether to absorb the reimbursement cut to preserve its identity as a provider of low-cost health care. The government also proposes freezing the Medicare Benefits Schedule fee through to July 2018. A co-payment for pathology and imaging services has also been scrapped.

In terms of the co-payment, with the majority of Sonic's clinics already paying an additional amount, Macquarie believes there will be little impact to volumes from an increase by $5. With the threat of co-payments largely out of the way and a falling Australian dollar Macquarie has upgraded Sonic to Outperform from Neutral. The stock has tracked sideways in recent months and the broker now believes the risk/reward equation has become favourable.

Goldman Sachs observes the overwhelming proportion of patients (80%) are bulk-billed by their GP. Since 2006, GPs who bulk bill have lost ground to those who charge a co-payment. Medicare reimbursements rates have risen 2% whereas in comparison co-payments have risen 9%. Another statistic Goldman Sachs highlights is that while children's visits to the GP have been broadly flat over the past decade, at the other end of the age scale pensioners rates have increased sharply. Under this proposal the broker does not expect any material change in GP per capita visits from either children or pensioners.

The other main measure, freezing the MBS fee, is a more significant announcement, as it means a headwind for medical centre earnings, particularly for Primary, where this division makes up 41% of earnings compared with only 9% for Sonic. Primary's revenues are derived almost exclusively in Australia and largely from the government via the MBS. The freezing of the schedule along with a recent pathology cut drives downgrades to Macquarie's earnings forecasts for Primary. The broker envisages a longer-term risk to the company's bulk-billing model, given the increased desire of the government to push more health care costs onto patients. Credit Suisse's view of the changes and how they will affect the two companies is similar, but the broker considers the proposal is uncertain and makes no changes to earnings or investment ratings at this stage. Credit Suisse rates both stocks Underperform.

The proposal does not require legislation to make the changes but may be subject to a motion in the Senate and could be voted down, Citi notes. There are positives in the proposal for both Primary and Sonic and the broker considers the announcement a likely catalysts for a re-rating of Primary, for which the broker has a Buy rating. Goldman Sachs takes an opposing view, with a Sell rating, believing the freeze in the rebate is negative in isolation for Primary. While the cut to reimbursements is likely to be negative, it remains to be seen whether the company absorbs this cut, or introduces a co-payment as an offset. Primary's share of the GP market has grown over the past decade and its doctor productivity is around 40% higher than industry levels.

 Citi does not believe the announcement is as significant for Sonic and envisages good valuation support for the stock in a generally expensive sector. Goldman Sachs also considers the impact on Sonic is likely to be modest. FNArena's database contains five Buy ratings, two Hold and one Sell for Sonic Healthcare with a consensus target of $18.63, suggesting 7.1% upside to the last share price. Primary Health Care has four Buy, two Hold and two Sell ratings with a consensus target of $4.97 and signalling 10.1% upside to the last share price.

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