Healthcare providers have been sought out as defensive investments since the global financial crisis took hold. However, long term drivers such as Australia’s ageing population, growth in population generally and the impact of technology innovations creating new types of treatments and procedures are expected to see the sector rated as a growth engine in its own right. For investors, timing, as in all things, will be key.
For a sector with seemingly bright prospects, 2013 begins with regulatory uncertainty dampening enthusiasm in a number of sub-sectors.
What impact will the 2013 federal election have on M&A activity?
While party platforms have the potential to impact earnings for operators, if a Coalition government is elected:
- aged care policy is the most likely to stimulate M&A activity within the health sector;
- Medibank Private Ltd, the government-owned private health insurer (the largest in the country), is likely to be privatised via IPO.
It is unclear when the Coalition will release its platform, and if so what level of detail it will contain. However, The Liberal Party’s policy directions paper, Real Solutions, refers to the Productivity Commission’s Caring for Older Australians report, and commits the party to reducing ‘needless bureaucracy’ in the sector without compromising high-quality care. This suggests a Coalition government would progressively remove supply restrictions on aged care beds and price controls, while retaining safety nets and lifetime caps on user pays contributions.
Several large private aged care providers, including Regis and Lend Lease Primelife have owners who were reported last year as keen to sell.
Less carrot for private health insurance take-up
There is a link between private health insurance coverage and demand for treatments in private hospitals because those treatments are funded to a significant extent by private health insurance policies.
Health insurance, which is already expensive, will become more expensive for many consumers. The Australian Government’s 30% rebate on the cost of private health insurance became income tested on 1 July 2012. Entitlement to rebates now depends on income. Individuals earning $84,000 or more in 2012-13, or couples in families earning $168,000 or more in 2012-13 will pay increasingly more for private health insurance.
Large numbers of policy holders pre-paid their premiums for the 2012-13 year, so the full impact of means testing on both take up and down-grading of policy coverage won’t be known until consumers start receiving premium notices for the 2013-14 year. A policy stick remains – uninsured high income earners pay a higher Medicare levy surcharge, but consumers can avoid this by downgrading their cover.
While the financial impact is yet to flow through private hospital results, it is not expected to be positive so investors in Australian businesses providing health insurance, private hospital services and ancillary services such as dentistry, optometry and physiotherapy should carefully analyse revenue assumptions in forecasts and business plans.
Aged care – consolidation on hold?
Australia’s aged care sector has also experienced regulatory intervention designed to contain growth in government spending in the medium term. It is now 2 years since Australia’s independent Productivity Commission recommended that the industry be progressively deregulated to promote greater choice and innovation for consumers.
While long term demographics look good, and the baby-boomers’ desire for choice and high quality service is matched by capacity to pay, investors are expected to remain cautious.
The most recent government announcements further entrench the system as centrally planned with rationing of supply of funded places and caps on prices in key service lines. For the first time, price controls on accommodation bonds have been introduced. Bonds, now to be known as refundable accommodation deposits, must be pre-approved by government if the face value is to exceed $406,037 (which will be indexed). The Department of Health and Ageing estimates that approximately 12% of bonds will require approval. Neither the indexation formula nor the basis on which approval is to be given or withheld have been published.
Notwithstanding uncertainty over government’s approach to indexing and approving the most expensive refundable accommodation deposits, businesses providing home and community care will begin to benefit from increased funding allocations. Government has announced a doubling of home care packages over the next 10 years.
Key areas for legal review for investors include:
- Investment of bonds: The current policy goal for accommodation bonds is to provide operators with capital to invest in residential and flexible aged care infrastructure. Operators must balance their right to use bonds as capital for permitted purposes with their obligations to comply with prudential standards relating to liquidity, records and governance.
Bonds may only be used as permitted under legislation. For example, for capital expenditure, to invest in financial products, to repay debt incurred for capital expenditure, to repay debt incurred before 1 October 2011 if the debt was incurred to provide aged care or to meet reasonable business losses incurred in the first 12 months of operation.
- Labour terms: aged care is employee intensive. Correct classification of employees and alignment of rostering practises with award requirements needs to be checked. Scoping the potential to extracting greater efficiencies through improved management and rostering practices can also present opportunities.
- Casuals: Home care businesses often have a high proportion of casual staff which raises the issue of whether they are truly casual or permanent employees. If truly permanent, then there is a risk of claims for entitlements linked to permanent work.
- Safe work-place: Home care businesses create heightened risks for directors associated with providing a safe work-place for employees. These businesses involve significant logistics and see staff spending a lot of time driving in cars and also entering private homes to deliver care. Risk assessments leading to sophisticated mitigation strategies are important in this sector.
Partnerships between operators and capital providers
In Australia, religious, charitable and other not for profit operators have significant market share among private hospital and aged care operators.
Many of these businesses enjoy scale, highly engaged staff, trusted brands and significant operational capability. These operators also have ambitions to grow and would be capable of executing those plans, but are constrained by limited access to capital.
It would be important, however, for operators and capital providers to assess cultural fit before proceeding too far down a track involving a live project. The primacy of mission for not for profit operators should not be underestimated. However, while it is central to not for profit and faith based organisations to pursue projects which alleviate disadvantage, most operators will also pursue a portfolio approach because the sustainability of the organisation relies on generating acceptable returns from many of their business activities.
Scope exists for collaboration such as:
- Greenfield and brownfield developments for private hospitals and aged care facilities;
- Joint ventures to provide home and community based care including hospital in the home services.