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Budget 2017: This healthcare company sees upside in Medicare, imaging changes

Glenn Freeman  |  11 May 2017Text size  Decrease  Increase  |  

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The Federal Budget should have a positive effect on Australian healthcare companies, with the changes to Medicare rebates and pathology and imaging bulk-billing a shot in the arm for the sector.


While the banking sector has hit out at what it sees as "bank bashing" by the government, several healthcare companies are likely to benefit from the changes.

Budget 2017 has proposed the lifting of a freeze on the indexation of the Medicare Benefits Schedule. It has also outlined a plan to bring back the bulk-billing incentive for diagnostic imaging and pathology services, and the increase in the PBS co-payment and related changes.

"We will legislate to guarantee Medicare and the PBS with a Medicare Guarantee Bill. This new law will set up a Medicare Guarantee Fund to pay for all expenses on the Medicare Benefits Schedule and the Pharmaceutical Benefits Scheme," said Scott Morrison, Treasurer of the Commonwealth of Australia, in his Budget speech on Wednesday night.

"An additional contribution from income tax revenue will also be paid into the Medicare Guarantee Fund to make up the difference. The Bill will provide transparency about what it really costs to run Medicare and the PBS, and a clear guarantee on how we pay for it."

Morningstar's senior equity analyst covering healthcare, Chris Kallos, sees the changes as a significant positive for Primary Health Care (ASX: PRY), which runs a portfolio of medical businesses providing radiology and pathology services.

"Reintroduction of indexation raises our underlying revenue growth assumption for Primary's medical centres to 2.5 per cent, comprising 1.5 per cent from indexation and 1 per cent organic growth," Kallos said.

"Our 1.5 per cent indexation rate compares with our anticipated resumption of 2.5 per cent at an industry level, given current challenges for Primary Health Care in recruitment and retention of GPs in the medical centre division."

The government's previously planned cuts to bulk-billing incentives for pathology and diagnostic imaging were announced in December 2015, in the Mid-Year Economic and Fiscal Outlook, representing a $650 million adjustment for the industry.

Treasury's announcement on Wednesday night confirmed Kallos' earlier scepticism about these planned cuts, which were not reflected in his previous modelling of Primary.

"We weren't convinced that these would pass, and hadn't incorporated this approximately $50 million hit to Primary's EBIT into our modelling, but we view the measure as enhancing earnings certainty," he said.

Under the changes, indexation for practitioner rebates will be phased in over three years: general practitioner bulk-billing incentives from 1 July 2017; standard general practitioner and specialist consultations from 1 July 2018; and specialist procedures and allied health services from 1 July 2019.

The government will resume indexation of targeted diagnostic imaging services from 1 July 2020.

"However, according to industry bodies, this amounts to about 13 per cent of all radiology services currently covered by Medicare. As such, we are not changing our diagnostic imaging forecasts at this point," Kallos said.

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Glenn Freeman is a senior editor at Morningstar.

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