A BIG reason to be wary of these 3 health care stocks

The Federal Budget has left a cloud hanging over the sector.

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It’s now nearly two weeks since the Treasurer delivered the Federal Budget which has given investors and analysts a chance to assess the effects it will have on individual companies and industries.

One sector which was negatively affected by the Budget was the health sector which is facing a $7 co-payment from patients rather than the ability to provide a bulk billed service.

Three companies which will be affected to varying degrees by the implementation of this proposal are Primary Health Care Limited (ASX: PRY), Sonic Healthcare Limited (ASX: SHL) and Capitol Health Ltd (ASX: CAJ).

Primary, Sonic and Capitol Health provide a mix of GP, pathology and diagnostic imaging services and all will be subject to a $7 co-contribution payment. Early anecdotal evidence suggests there is reason for shareholders to have some concern that a drop in visit volumes could result.

Whilst the legislation has not even been enacted yet, a recent article in The Australian newspaper reported that some GP clinics had already reported drops in visitations due to some patients assuming the $7 payment was already being enforced.

The question for investors is what effect this pricing pressure will ultimately have on demand

For Primary and Sonic the market so far appears to be relatively unconcerned about the proposed changes; their share prices have fallen 3% and 2.4% respectively since the budget was released. These falls compare to the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) which has gained 0.8%. Neither firm has made any official comment on the proposed budget changes, however in the case of Sonic at least (according to The Australian Financial Review) broking house Deutsche Bank has reduced its price target on the stock from $19.25 to $17.50.

Meanwhile the market would appear to be more concerned about the outlook for  Capitol Health; shareholders have watched their shares sink 16.8% since the Budget was delivered. The fall in share price is perplexing given Capitol Health has released a statement to the ASX stating it “welcomed the anticipated changes” and described the “measures as conceptually announced to be broadly positive.”

In explaining why management was comfortable with the co-payment, Managing Director John Conidi from Capitol Health said that “our market-leading low cost structure and best-in-class IT systems will enable us to effectively manage the proposed changes to bulk billing.”

Generally speaking health care stocks are often reliable and steady, however they are also subject to regulation, which means their situation can literally change overnight. While the co-payment may not on its own have a long lasting effect on these three stocks, if it turns out to be the first of many regulatory changes then the reasons to be wary would mount.

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Motley Fool contributor Tim McArthur owns shares in Primary Health Care Ltd.

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