Health care providers look set to see revenues from pathology and diagnostic imaging fall, after the federal government announced plans to cut it spending on those services by $639 million over four years.
In its mid-year economic and fiscal outlook (MYEFO), the federal government says it has reduced cash payments including,
"Removing bulk billing incentives for pathology services, aligning bulk billing incentives for diagnostic imaging services with those that apply to general practitioner services and reducing the bulk-billing incentive for magnetic resonance imaging (MRI) services. This measure is expected to reduce cash payments by $197 million in 2016-17 ($639 million over four years to 2018-19)."
MRI services will see bulk-billing fall from 15% of the scheduled fee to 10%. The government says bulk-billing incentives for diagnostic imaging will continue to apply for pensioners and children under the age of 16.
Primary Health Care Limited (ASX: PRY), Capitol Health Limited (ASX: CAJ), Sonic Healthcare Limited (ASX: SHL), Integral Diagnostics Ltd (ASX: IDX) are most likely the most affected ASX-listed companies.
Primary had revenues of $938 million and $339 million from pathology and imaging in the 2015 financial year respectively (FY15). Sonic saw $1.2 billion of revenues from laboratory/pathology in Australia and $414 million in imaging in FY15.
Capitol Health and Integral Diagnostics are much smaller businesses, with Capitol earning $110 million in revenues from diagnostic imaging and Integral Diagnostics $160 million in FY15.
However, investors also need to be aware that not all revenues are affected by bulk-billing. Roughly half of Integral's revenues are already not bulk-billed – so won't be affected by the government's budget announcement. In contrast, Capitol Health says its model is predominantly bulk-billing.
It's not yet set in concrete of course and changes will take effect from 1 July 2016. The government also has yet to finalise its Medicare Benefits Schedule (MBS) review – the outcome is expected sometime in 2016.
Foolish takeaway
It appears the market was expecting a much bigger cut to spending on pathology and diagnostic imaging, with the share prices in a number of the above companies rising. Markets always seem to factor in an almost-worse case scenario – which often doesn't occur.
