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The private hospital sector is under pressure

I’m sure every reader interested in the healthcare industry has seen that the Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) share prices have fallen by 30% and 32% respectively over the past two years.

Some of this fall may be attributable to rising interest rates, causing defensive shares to somewhat fall in value. However, the interest rate hasn’t affected Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD) like that (yet).

The private hospitals are facing much tougher operating conditions than they were a few years ago.

Private health insurance has been growing in price a lot quicker than inflation or people’s wages, making it more unaffordable each year, causing people to drop out. It hasn’t helped that the private health insurance rebate from the Australian Government has been steadily reducing.

If you don’t have private health insurance you’re very unlikely to use a private hospital.

The Government has been quite stingy in recent years in regards to funding increases for healthcare.

A key problem for Ramsay and Healthscope is that there may be more and more lower-costing competition as time goes on. Primary Health Care Limited (ASX: PRY) is now entering the hospital arena – we can see what happened to the IVF sector with low-price competition, Monash IVF Group Ltd (ASX: MVF) and Virtus Health Ltd (ASX: VRT) are much lower.

There is also a growing non-profit sector of private hospitals. Whilst it’s currently small it is getting bigger. We have seen how the non-profit superannuation industry has changed things and now dominates the conversation.

Foolish takeaway

Whilst private hospitals have long-term ageing tailwinds, the next year or two could be particularly difficult. Ramsay is a high-quality business but its earnings may not go anywhere. So, unless the p/e changes, the share price won’t do anything either.

If Ramsay goes below $50 I’ll think again about buying, but for now I will just be monitoring the situation.

The ageing population tailwinds are very attractive, which is why one of these top shares is very attractive to me.

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Motley Fool contributor Tristan Harrison owns shares of Ramsay Health Care Limited. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia has recommended Monash IVF Group Ltd, Ramsay Health Care Limited, and Virtus Health Limited. 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 Scott Phillips.

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