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Co-Payments 2.0

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Co-Payments 2.0

Last week The Australian reported St John of God plans to introduce a co-payment of up to $50 for pathology services in response to the Government’s proposed rebate cut. In attempting to reduce the rate of reimbursement by $1.40 to $3.40 per test, the Government may have inadvertently given the industry power to set prices, and at a much higher level.

While it’s unclear how St John of God will charge this rate, the increase is significant when you consider the Government pays around $20 per test (if more than three tests are required for a patient, the pathologist is reimbursed for the three most expensive tests).

Keep in mind that while pathology is a critical part of delivering health care, volumes are elastic for individual providers because the product is a commodity whose price is set by the Government. When Sonic Healthcare increased its own prices in 2009, volumes subsequently dropped significantly and management reversed the pricing decision.

However, if the entire industry moves to a co-payment model the incremental setter of the price will be the company with the lowest marginal cost. St John of God only has around 3 per cent of the collection centres in Australia, so for it to flag a $50 co-payment is a clear sign that it cannot compete with its larger players and will likely be squeezed from the market even if the proposed reductions do not go ahead. This will increase the market power of Sonic and Primary, who will continue competing aggressively until one remains.

It’s a curious conundrum. The Government wants to contain health spending but it wants corporations to absorb the cuts. Corporations claim the current funding model is unsustainable and so are trialling co-payments for consumers. The Government is against this, despite previously proposing a $7 private charge to see a GP which was subsequently dropped after significant backlash.

Of course, consumers, private health insurers and even healthcare providers are likely to baulk at these charges (which will favour the operator that increases prices least). But even if the proposed rebate cuts are not implemented, this initial decision by the Government appears to have set events into motion that will fundamentally change the industry.

Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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4 Comments

  1. How do you think this bodes for the likes of smaller operators who’ve been consolidating such as CAJ?

    • Higher caution should be exercised with companies that require acquisitions to grow, particularly with debt.

    • There are 5,428 Approved Collection Centres in Australia, of which Sonic has 1,975 and Primary has 2,116.

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