In the past 12 months,  the S&P/ASX 200 Health Care (Index: ^AXHJ) (ASX: XHJ) index has surged more than 14% higher. That compares to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rise of just over 4%.

The contrast over the last five years is even more dramatic, with the health care index up 170% versus the broader ASX 200’s rise of 23%.

Clearly, the long-term tailwinds of an ageing population and the increasing spend of both government and public sectors on health care is benefitting plenty of companies within the health care sector.

But threatened cuts to government funding for pathology and diagnostic imaging has seen the following three companies hammered over the past year.

Capitol Health Ltd (ASX: CAJ), Primary Health Care Limited (ASX: PRY) and Integral Diagnostics Ltd (ASX: IDX) have seen their share prices plunge by 80%, 16% and 6% respectively in the past 12 months and it’s probably fair to say they are cheap at current prices. But are they a Buy?

Capitol Health was forced to suspend its dividend to conserve cash after reporting a net profit after tax of just $2.2 million in the six months to end of December 2015, despite revenues rising 57% to $77.4 million. The company’s full 2016 financial year results probably won’t be great either, but recent acquisitions and partnerships could see the company turn around in 2017. One thing to watch is the company’s $77 million of net debt. Any further financial difficulties could see Capitol Health forced to raise capital at a big discount.

Primary Health Care has already had somewhat of a turnaround after selling a number of its non-core assets amid rumours of a potential takeover. Asian-based Haitong Group took a 5.8% stake in the business in March, while China-based Jangho Group had taken an 11.7% stake. Jangho acquired Vision Eye Institute in 2015 and Primary’s medical, pathology and imaging centres could tie in nicely with Vision Eye’s ophthalmic centres and day surgeries.

Integral Diagnostics operates mostly in regional centres but is still growing strongly despite the recent headwinds. The company also announced the acquisition of Western District Radiology and the remaining 50% of South West MRI in May 2016 which will add to further growth from 2017. But the company is unlikely to meet its prospectus forecasts given the headwinds.

Outlook

Short-term uncertainty remains over the federal government’s plans for funding – although the previously-announced cuts were put on hold until January 1, 2017, to allow for an independent evaluation to be carried out.

However, the long-term tailwinds still exist and there’s a push to reduce and prevent hospitalisation for an increasingly ageing population.

Foolish takeaway

The risks still remain but, those Foolish (capital ‘F’) investors willing to take a long-term punt might want to consider taking a closer look at the three companies above.

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Motley Fool writer/analyst Mike King owns shares in Capitol Health. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.