Both Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) shareholders have experienced a wild ride over the last 12 months with the federal government’s proposed changes to Medicare payments.

With reporting season just around the corner it is worth looking at which company presents investors with better long-term value.

Sonic Healthcare Limited

Sonic Healthcare is an international medical diagnostics company, offering laboratory medicine/pathology and radiology services to the medical community. It provides services in eight countries: Australia; New Zealand; the UK; Germany; Switzerland; Belgium; Ireland; and the USA.

Sonic health

Source: Sonic Healthcare Company Presentation

3 Pros

  • Significant overseas exposure, currently 59% of revenue comes from outside Australia
  • Guidance of EBITDA growth of >25% forecast for full-year FY 2016
  • Strong earnings growth in USA, Germany, UK, Switzerland, Belgium

3 Cons

  • 41% of income derived from Australia and open to changes to Medicare
  • Adverse effects of exchange rates to bottom line
  • Muted regulatory changes in the US regarding healthcare funding

Primary Health Care 

Primary Health Care is a healthcare company providing services to medical and health professionals through its network of medical centres and pathology centres across Australia.

primary health

Source: Primary Health Care Company presentation

3 Pros

  • Strong underlying demand with ageing and growing population
  • Reduced government spend supports corporatised model as lowest cost provider
  • Not affected by exchange rate movements to any significant degree

3 Cons

  • Heavily reliant on Medicare funding and as such susceptible to funding changes
  • High level of goodwill on the balance sheet
  • Historically low return on equity (ROE) at less than 10%

Foolish takeaway

Despite what the federal government may desire, healthcare costs are set to rise for the foreseeable future. As we have seen by the success of the ALP’s Medicare scare campaign it is almost impossible for governments to make large changes to the funding of healthcare services.

While this may not be great news for Australia’s budget, it may make life for healthcare providers such as Sonic and Primary more predictable over the next few years. While I believe this to be the case I have chosen personally to invest in Sonic Healthcare for its overseas exposure, growth prospects and smaller reliance on Medicare funding.

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Motley Fool contributor Alan Edmunds owns shares of Sonic Healthcare Limited. 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.