Primary Health Care Limited (ASX: PRY) was one of the companies that analysts considered to be the most impacted by the new $7 co-payment for routine GP appointments and tests announced in the recent Federal Budget. Primary operates four divisions: Medical Centres, Pathology, Imaging and Health Technology.
6% fall in two weeks!
The Medical Centres, Pathology, and Imaging segments are likely to be impacted by the co-payment, and investors are worried. The result has been a 6% fall in the share price over the last two weeks to $4.49, a level not seen since early 2013. Some post-budget analysis considered that the co-payment will reduce volume for providers such as Primary, however the payment will coincide with a $5 reduction in the existing rebate under the Medical Benefits Scheme (MBS), so the net gain for Primary will be $2 per appointment.
Budget Impact
I believe that Primary will see out this challenge with minimal impact to profitability due to the larger trend in healthcare spending. The government is increasingly focussing on preventative techniques, including diagnostic and imaging services, as a way of minimising overall healthcare expenditure. Primary is well placed to benefit from this trend, with 50% of earnings coming from its diagnostic division that includes radiology and pathology.
Longer term, Australia's aging population will ensure medical spending increases with inflation and Primary is introducing some innovative remuneration packages to boost profitability.
Risks
Unfortunately, due to the services provided by Primary, it is exposed to government regulation and funding cuts. This is unlikely to change as the majority of Primary's services are government funded and may constrain profit growth in coming years.
Big Dividend
Analysts expect the company to grow revenue in the low to mid-single digits over the medium term and show earnings growth above that through better utilisation of facilities and incentivising practices to boost fees. Meanwhile, Primary maintains a payout ratio of around 60% of earnings, which will give investors a yield of over 5% next year.
