The introduction of a $5 co-payment on GP (doctors) visits has led to suggestions that bulk billing is dead, which could spell trouble for Primary Health Care Limited (ASX: PRY) as its business model is based on this. So how is this measure likely to affect the company?
The measure is widely expected to lead patients to delay or even avoid visiting GPs. This would imply reduced volume for the industry, and hence lower revenue for all players.
The government is also looking to extend the freeze on rebate indexation to four years till June 2018. The last time there was a freeze in rebate indexation was under the Howard government between 1996 and 2003. This prompted bulk bill doctors to switch to private billing, with bulk billing felling from 80.6% to 68.5% during the period.
On the face of it this sounds very negative, but it is actually a great opportunity for the company to gain market share.
The Doctors Reform Society predicts private billing GP fees will exceed $100 within two years under current changes – which means the out-of-pocket expense will reach a whopping $67.95. If this is indeed true then it is highly likely that existing private billing patients would opt for bulk-bill doctors.
Also, many in the medical community have predicted that the changes will push more patients to visit the emergency department of the general hospital system. Whilst patients can save $5 to see a doctor in this fashion, the fact that 1) the wait time will be horrendously long & 2) there will be no continuity in care as they're likely to be seen by a different doctor each time means that seeing a GP is likely to be money well spent.
Further it is plausible that not all doctors that convert to private billing will survive in that new form. According to the Australian Medical Association, average out-of-pocket expenses borne by patients for a GP visit are around $28 – equating to GP fees of around $60. However increased competition could lower this amount, even though the association suggests that the adequate price for GP service should actually be $75. Without the higher volumes under bulk billing, it is unclear if these GPs can remain profitable under private billing.
In this situation one possible scenario is for doctors to exit the profession. However this is highly unlikely given it takes at least eight years of education & residency to become a doctor, and they're unlikely to enter another profession that is as financially and personally rewarding. This presents a great opportunity for Primary Health Care to hire additional experienced doctors in their large scale centres as well as snap up more medical centres on the cheap.
The third change the government is looking to introduce is a further reduced rebate for consultations less than 10 minutes. Large medical centres like Primary's have been criticised for quickly churning patients to improve margins. This is unlikely to be a major issue for the company as their average patient time is 14 minutes and 18 seconds – based on observations it conducted over a year in a centre with twenty doctors.
So far the analysis has centred on the company passing on the $5 rebate cut to patients, but this choice actually rests with the GPs. It needs to be noted that pathology and imaging services are sourced from GP referrals, a key reason why the major players in these markets operate their own network of medical centres.
Given the impressive margins of the company's medical centre operations, it could opt not to pass on the rebate cut to patients. Not only will this allow the company to grab an even larger slice of the bulk billing market, but it could also increase market share in its pathology and imaging businesses by boosting their volumes.
Foolish Takeaway
It is unclear if there will be further changes to the co-payment proposal, or how strongly GPs – especially bulk billed, will be affected. However it would appear that Primary Health Care is well placed to grow its medical centre and associated businesses in a co-payment environment. With a P/E of 14.6x it should at least be on your watchlist.
