Why the LifeHealthcare share price is sinking

The Lifehealthcare Group Ltd (ASX: LHC) share price has dropped 36% since reaching a high of $3.92 in mid-2015, currently trading around $2.50 per share.

So why have shares been hammered so hard? Over the same period, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down just over 12%, so that explains some of the falls, but not all of it.

The biggest risk investors see is that a new review into the prices for prostheses by Health Minister Susan Ley will result in consumers paying lower prices for medically implanted devices such as pacemakers, but hurting the companies that supply them such as Lifehealthcare and Paragon Care Ltd (ASX: PGC).

Medibank Private Limited (ASX: MPL) has claimed that as much as $800 million is wasted on overpriced devices with some products such as pacemakers costing double or more if it is delivered in a private hospital, rather than a public hospital. The health insurance industry has demanded the government take action over surging medical costs if it is unwilling to approve their request for 2016 premium increases.

A working group has been established to review the prostheses list and expected to propose a new price-setting process.  The group has been charged with ensuring that purchasing is more competitive and efficient, and that the benefits of lower prices through competition are passed onto consumers.

Lifeheathcare’s margins are right in the middle of that, as it sources its products from manufacturers and then markets them to surgeons and hospitals.

Ms Ley has asked all players involved in the medical devices supply chain to come up with a better model for prostheses reform that will maintain strict safety requirements and deliver better access and affordability to consumers.

Foolish takeaway

It’s too early yet to say what the impact on Lifehealthcare and other medical device suppliers, hospitals and insurers will be (if at all), but it seems some investors have already been spooked and are selling their shares early. Personally, I’ll be waiting to see what Lifehealthcare says about the issue before making a decision.

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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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