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A jaundiced view of health

WHAT business is worth more than $60 billion a year, is guaranteed to expand at more than 5 per cent, and is substantially underwritten by government? The answer is the healthcare industry.

According to the Australian Institute of Health and Welfare, health spending was up 5.1 per cent at an average $3,153 per person in the year to June 2001. The expenditure now accounts for a highest-ever 9 per cent of total GDP. Federal and State governments pick up roughly half the tab. But the tax rebate introduced a couple of years ago helped boost the proportion of people in private health insurance from 30 per cent to 46 per cent.

Surely somebody is making money out of all this? Not the health funds, evidently. They are crying poor, despite the average 7 per cent hike in premiums approved in February. The biggest of them, Medibank Private, lost $175 million last financial year as a result of rising claims, higher costs and a blanket bath taken in the stock market. Investment income shrank from a positive $26.4 million to a loss of $12.9 million. Medibank, or its advisers, have apparently been dabbling in foreign shares. Managing director George Savvides was refreshingly frank when he said: “We have been lazy and incompetent in not dealing with things that were needed”.

Top of that list was the practice of giving customers discounts for paying their annual premiums up front, long after falling interest rates made this option less attractive to the company. Those discounts are to be scrapped, which means a de facto increase of between 4 and 6 per cent in many customer premiums. It is expected Medibank will be floated on the market next year. Do not get trampled in the rush.

All the health funds embarked on an inappropriate and ill-advised price war two years ago. Now they are lining up like Oliver Twist, asking for more. The probability is they will be granted yet another premium increase of at least the rate of inflation before the end of this year.

The Government is over a barrel. The unthinkable collapse of a major heath insurer could send an army of abandoned patients limping into the crumbling public hospital system.

The latest numbers on private health show that revenue per bed is climbing by 9 per cent annually. That should be good for the listed hospital companies. But it is not yet working out that way.

When Peter ‘Pacman’ Smedley moved from CEO of Colonial to the Mayne Nickless group, he soon discovered there was more to managed care than there was to managed funds. Smedley’s iron-nosed approach enraged the medical profession, and his centralised business plan had to be flung in the dressings bin. Mayne shares have skidded from a high of $7.86 last year to $3.45. That slide helped put the mockers on sentiment among all the heath stocks.

Still, the industry must be almost unique. It operates in a non-cyclical, non-discretionary spending environment that should last forever, given an ageing population and continued medical breakthroughs. Brokers Salomon Smith Barney recommend Ramsay Healthcare as the best exposure. Ramsay is the second biggest hospital group in Australia. It gets half its revenue from veterans’ hospitals, and runs the Hollywood in Perth and Greenslopes in Brisbane. Ramsay shares are off their lows at $3.80, and there has been some bottom fishing in diagnostics leader Sonic Healthcare.

However, investors have lost a lot of money in this sector. The shares of many companies should carry health warnings.

Opportunities offered in the sin stocks

IS the roller coaster stock market driving you to drink? Are you fed up with reading about warm and fuzzy funds that only invest in ‘socially responsible’ companies? Here is one for you. Mutual fund broker Mutuals.com in the US has launched The Vice Fund, which will concentrate on the four main areas of alcohol, tobacco, gambling and the arms industry.

Obviously the theory is, however bad the economy gets, many folk will still drink, smoke and gamble. And there is always a shooting war somewhere. The Vice Fund is loaded up with stocks like Anheuser-Busch, Philip Morris, MGM Mirage and Lockheed Martin.

The promoters may have got off on the wrong foot. In the latest Wall Street dive, a profit warning from Philip Morris proved, pardon the pun, a drag on the market.

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