No doubt these cuts will affect the Aus. pathology business to...

No doubt these cuts will affect the Aus. pathology business to some extent, but fortunately this contributes only 28% of group revenue and likely even less in FY16 even before these changes occur at the start of FY17. The radiology business is also only 10% of revenue.

Also for radiology the bulk-billing incentives are not being removed, just being applied in a more consistent way relative to general practice and reduced slightly for MRI services. For pathology although they are being removed, bulk-billing incentive items only ever applied to children under the age of 16 and Commonwealth concession card holders (same for radiology), so the vast majority of people getting blood tests are not eligible for these incentive items anyway. Further in general practice it is less common to order blood tests for kids under 16 than adults too.

These changes will affect all pathology operators, but ultimately only benefit the largest companies with the greatest scale eg. SHL. I think we will see more reduction in collection centres and more realistic lease payments to medical centres and people will need to drive further to get blood tests in some areas.

In the long-term the government is trying to battle the tsunami of increased utilisation in healthcare. An ageing population will make this very difficult due to the necessity for blood tests as people get older and get ill and for health monitoring purposes. These long-term tailwinds will continue regardless of government tweaks, which occur almost on a yearly basis and have not stopped SHL's growth to date. Ultimately I feel that governments will need to accept health care expenditure will need to be a higher proportion of GDP for structural and demographic reasons.

Also, I think as medical diagnostic technology advances, be it in specialised tests or genetics, having a high quality exposure to this sector is still a defensive position to take. Patients maybe more willing to pay out of pocket for tests not covered by Medicare and this may counteract these cuts and improve revenue and margins.