Rumour mill working overtime on Wesfarmers’ next big acquisition, page-23

Long, but great article from Intelligent Investor below. The key point is that the cap on public hospital funding, which will benefit HSO.

Key points:

• Commonwealth government seeking to control costs.
• Public Hospitals funding capped at 6.5% going forward (funding had been increasing at 8.0%).
• Expects incentives to drive people to Private Hospitals to increase over time to ease pressure on public system and funding.
• Also, expects changes to payment model from fee-for-service to “value-based” to reduce premiums and utilisation of hospitals. While a negative for HSO, it is unlikely to significantly offset the deluge of elder private hospital admissions.

Source: https://www.intelligentinvestor.com.au/private-healthcare-stocks-have-a-new-ally-government-1872421
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For those who forgot to mark their calendar, the Medicare Benefits Schedule Review Taskforce closed its most recent public consultation period on July 21st. The review is part of an enormous overhaul of Australia’s healthcare system to ensure that funding goes to those services that reflect best practice and to stop the overuse of procedures and services that have little clinical benefit. The Government is hell-bent on getting the most bang for its buck – and you can’t blame it. The crux of the problem is that government healthcare spending has tripled over the past 30 years. Costs have grown at 8% a year over the past decade, well above inflation, and things will only get worse as the baby boomers enter retirement and the population ages. While that’s a big problem for society, it also creates opportunity for investors. To relieve pressure on the public health system, the Government uses various financial incentives and disincentives – such as the private health insurance rebate and lifetime health cover loading – to funnel as many people as possible towards the private health sector. That should ensure private health insurers Medibank Private (ASX: MPL) and NIB (ASX: NIB) see plenty of growth in policyholders – and we expect those financial incentives to become stronger over time. The Government can’t afford for the tide to move in the other direction. What’s more, private hospital operators Ramsay Health Care (ASX: RHC) and Healthscope (ASX: HSO) also have the deck stacked in their favour because the Government has reduced funding for public hospitals. As of July 1st, Commonwealth hospital funding increases are now capped at 6.5% a year. Even with a push for improved primary care, curtailing hospital admissions is difficult. If costs continue to grow at 8%, public hospitals will hit their funding caps. State governments will need to foot a larger share of the bill or more services will need to be outsourced to private operators. We’re already seeing this in action. The NSW Government has partnered with Healthscope to build and operate the new Northern Beaches Hospital. When it opens in 2018, the hospital will take both private and public patients under a 20-year deal worth around $2bn. We expect more of these public-private partnerships over time. It seems inevitable that a growing number of patients will be funneled towards the private health care sector. The question now is whether the earnings growth that should follow this will be offset by the efficiency-finding Medicare reviews. The competitive dynamics between companies could also lead to very different outcomes for investors. Private health insurers provide more than half of Ramsay and Healthscope's revenue, and their members account for the vast majority of hospital visits. But insurers and hospitals are on opposite sides of the negotiating table: the hospital wants the highest prices possible, while the insurer tries to reduce its claims expense. Medibank and NIB are pushing for the industry to shift from a fee-for-service payment model to ‘value-based’ reimbursements focused on patient outcomes, which is increasingly used in other countries with significant success. This would benefit insurers by reducing unnecessary claims and helping to keep premiums affordable – but it could lead to lower utilisation rates at hospitals. That’s exactly what the Government wants, so we suspect it’s only a matter of time before policy shifts in that direction. Lower utilisation, however, is unlikely to offset the deluge of elderly patients hospitals will receive thanks to the aging population. There is one clear way for investors to profit from an increasingly privatized healthcare sector: value the businesses conservatively, don’t speculate on short-term price movements, and patiently wait until the market offers you those companies at a sensible price.