The recently released Commission of Audit (COA) report was charged with identifying wasteful practices and potential savings in the Australian federal budget. The trio of Mr Abbott, Hockey and Corrman are set on reducing government spending, and have floated the idea of a medicare co-payment of up to $15. On top of that, the COA has suggested changes to the aged pension and mooted "improvements in childcare payments."
The COA "proposes changes to Age Pension eligibility including a comprehensive means test (including for some recipients part of the value of the principal residence) as well as tighter targeting arrangements." The Age Pension is projected to cost over $72 billion in 10 years' time. Since many pensioners are in fact very wealthy (if you include the value of their home), it seems an unnecessary weight on the taxpayer. However, I think it is unlikely the government will have the guts to face-off against the supposed right of retirees to take from the taxpayer while living in a $1 million home.
If these changes do occur, likely beneficiaries will be the owners of retirement villages and nursing homes. Nursing home operator Japara Healthcare Ltd (ASX: JHC) would benefit if seniors are encouraged to liquidate the family home. However, to my mind Ingenia Communities Group (ASX: INA) is a much better bet. The company is well run, pays a decent dividend and owns a range of retirement villages. It has been investing in increasing occupancy and capacity, and I believe that there would be greater demand for its retirement villages if pensioners were encouraged to sell up. I think if the changes do occur, it will encourage an orderly retreat from the family home, rather than a move to a nursing home.
For many retirees, the number one cost of living is medical expenses. "Co-payments for all Medicare funded services are proposed" by the COA, which also argues that the pharmaceutical benefits scheme should be changed so that "all users pay at least some contribution to the cost of medicines." These changes – if they proceed – will have profound impacts.
Co-payments for visits to the GP will have the effect of reducing visits to the doctor, as is presumably intended. ABC News reports that Australian Medical Association's Dr Steve Hambleton predicts that such changes will increase hospitalisations. "If we put barriers in front of primary care," he says, "we actually may see patients not attend [and we will then have to] divert them into more expensive care, which could be ambulance or hospital…"
Potential losers in this arrangement include diagnostic and general practice healthcare companies with a concentration of operations in Australia, namely, Primary Healthcare Limited (ASX: PRY) and Capitol Health Ltd (ASX: CAJ). I believe that tailwinds associated with the ageing population will override the introductions of co-payments, and these businesses will still grow. Having said that, Capitol Health is trading on a trailing P/E of 35, and a reduction in MRI scan volumes could definitely slow their growth. Furthermore, Capitol Health owns non-hospital MRI scanning clinics. Often, patients are referred to these clinics by GPs – if they miss the GP and end up in hospital, they are more likely to have their scan at the hospital instead.
The obvious winner from these changes would be Ramsay Health Care Limited (ASX: RHC) which is unlikely to have any negative consequences from the budget. Indeed, the owner and operator of private hospitals would benefit from an increase in hospitalisations, just as it benefits from private health insurance. The founder of Ramsay Health Care, Mr Paul Ramsay, has just passed away, but he and his companies have been major and prominent donors to the Liberal Party.
Finally, the COA has recommended that the paid parental leave scheme be reduced somewhat, with the savings directed to childcare. This is a positive development, because at least that way money is spent encouraging women back to work. Key beneficiaries of this development are Affinity Education Group Ltd (ASX: AFJ) and G8 Education Ltd (ASX: GEM). On the whole, G8 has made much better acquisitions, having recently announced the acquisition of seven childcare centres at about four times projected EBIT, approximately in line with the majority of their acquisitions. However, both companies are increasingly paying higher prices for centres, and an increase in government subsidies may be only temporary. While the short term looks good, I'm wary about the long-term prospects – what one government gives, another may take.
Foolish takeaway
It looks a lot like the healthcare sector will be a loser from the upcoming budget, although I expect Ramsay Health Care will do very well out of it. Furthermore, it seems highly likely that the childcare centre operators will benefit, as will Ingenia Communities. These companies all enjoy tailwinds – double income families drive demand for childcare and the ageing population drives demand for healthcare. It may pay to be prepared for the budget, but as the politicians are currently reminding us, the commission of audit is not the budget, so the prudent path is to simply wait and see. The commission of audit also suggests the budget will impact retailers, telcos and IT companies, perhaps more profoundly than the companies mentioned above.
